Oil companies are entering a sweet spot

The good times could be set to roll in for the so-called big seven oil companies, suggests a report by Goldman Sachs.

Article updated: 28 March 2018 5:00pm Author: Michael Baxter

Photo of an oil rig

It’s funny, when you Google the big seven oil companies, only six names come up: Royal Dutch Shell, Exxon Mobil, BP, Chevron, and Eni SpA. Except other lists don’t include Eni SpA, but do include ConocoPhillips.

It’s an odd definition, no sign of Gazprom - net income $14.9 billion in 2016, or there are the various oil companies that are state owned, including the soon to be floated, or so we are told, Aramco.

But for investing purposes the normal view of the Big Seven, Six or indeed Eight, if you include Phillips 66, spun out of Conoco in 2012, are the big American and European firms.

Regardless, Goldman Sachs has described the big seven oil companies as entering a sweet spot.

A good crisis

There are two reasons, firstly to utilise a well-known phrase, the oil majors did not let a good crisis go to waste.
Ever since the oil price plummeted three years or so ago, the oil producers have been in crisis - and they responded by making efficiencies, cutting down on costs and taking a long hard look at their likely future - they changed tact.
Of course, for BP, this was a crisis on top of an existing one - the Gulf of Mexico oil spill.

Mind you, look at the share price and it is hard to discern oil companies coming out of a crisis - instead they seem to have left it some time ago. The Royal Dutch Shell share price recently hit an all-time high, for example, although the price did fall sharply in 2014, almost halving over 18 months.

It seems the time to buy, as is so often the case, was the point of maximum pessimism.

The oil majors were also able to increase market share after the oil price crash.

The sweet spot

But Goldman Sachs reckons things are set to get better still.

“We see this as the start of a new golden age for Big Oil’s reborn Seven Sisters,” said analysts led by Michele Della Vigna, at the bank, “(it is) also a favorable environment for returns in the commodity.”

The analytical team also said: that the period 2011-2013 “witnessed the largest number of project sanctions in the history of the oil and gas industry. While those investments are likely to yield low through-cycle returns, all these projects are now coming into production, releasing unproductive capital and providing the industry with the strongest production, cash flow growth in two decades.”

The price

A recent report by the International Energy Agency (IEA) predicted that thanks to shale gas, energy supply would keep pace, may even exceed demand between now and around 2022/2023, but at that point demand would race ahead.

Timing

Getting the timing right is tricky, but if the oil price surges at that point when the oil majors are benefiting from greater efficiency, then the profits should start shooting up.

Goldman seems to be suggesting that this is about to happen, the IEA report rather implies we might have to wait a few more years, although the recent consolidation in the oil industry may be good for the oil majors, even if the oil price remains at the current level for a while.

Still too much complacency

A few years ago, to argue that the convergence of renewables with energy storage, the rise of the electric car and fears over climate change would give the oil price a permanent loss of importance seemed a bit ‘out there’, somewhat absurd.
It no longer feels like that.

If anything, the forces I describe above are unravelling faster than I expected, and I think that within the oil industry itself and among analysts, there is far too much complacency.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.