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30-Jun-08
Oil & Gas Majors to Prosper Even if Prices Fall
Major integrated oil companies should continue to perform strongly even if oil prices drop back from current record highs, according to a new industry analysis from Moody’s. However, the majors still face formidable long term challenges.
Moody’s outlook for the global integrated oil industry is stable, reflecting prospects that companies will continue to generate strong free cash flow and maintain relatively modest financial leverage, even if oil and natural gas prices retreat from recent high trading ranges.
These positive factors support the industry’s almost uniquely strong financial profile, but they are tempered by formidable reserves replacement, production growth, cost structure and political risk challenges, Moody’s says.
The report covers ExxonMobil (NYSE: XOM), BP (NYSE: BP), Chevron (NYSE: CVX), Royal Dutch Shell (NYSE: RDS.A), TOTAL (NYSE: TOT), ENI (NYSE: E), StatoilHydro (NYSE: STO), BG Energy, Marathon Oil (NYSE: USX) and Repsol (NYSE: REP).
Price increases have outstripped rising costs, supporting a period of expanding unit cash margins and markedly higher cash returns for the majors, Moody’s says. Between 2004 and 2006, revenues increased on average by 60% and generally at a higher relative rate than full cycle costs. Unit cash margins per BOE were up significantly, almost doubling over the four years, and averaging above $27/BOE in 2006, with the greatest relative margin expansion exhibited by Royal Dutch Shell, ExxonMobil and ENI.
In contrast to the expanding cash margins, the leveraged full cycle ratio has not increased consistently for any company except ExxonMobil and Royal Dutch Shell (the latter from less than 1X in 2004). The full cycle ratio is a cash return measure that indicates the amount of cash generated by a company for each dollar invested
over the cycle.
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