ConocoPhillips set the tone on Wednesday, reporting a near trebling of
earnings for 2010, to $11.4bn, with ExxonMobil, Shell and others still to
come.
The integrated oil majors sail serenely on, as supertankers tend to. Yet BP’s
calamity in the Gulf of Mexico , a rising regulatory burden, stubbornly high
costs, and relatively poor shareholder returns suggest the sector could do
with a dose of innovative thinking.
Returns investors
Returns for investors in oil and gas companies have been consistent but hardly
stellar given near $100-a-barrel oil. Of the largest, only Shell has clawed
back to the sector’s May 2008 share price high.
ExxonMobil is 16 per cent off that peak, and BP is 24 per cent below.
Integrated oil companies trade between 7 and 14 times current earnings; for
pure exploration and production groups and oil services companies the
multiples go up to 20 times.
The sector is actually ticking the right boxes in pursuit of returns for
shareholders. Cash generation is impressive, dividend yields are comfortably
covered and the pace of disposals picked up markedly in 2010. Oil and gas
companies sold about $40bn of assets, to independent E&P operators or
national oil companies. That will continue:
ConocoPhillips is selling some of its North American assets and Eni has
indicated it wants to sell its stake in Portugal’s Galp. As Credit Suisse
notes, such moves achieve current market values on often under-appreciated
assets.
Separating downstream
Yet it all smacks more of portfolio management than of restructuring. If Big
Oil wants to boost returns, it should pursue Marathon’s option of separating
upstream from downstream.
Deutsche Bank estimates that European oil companies, for example, trade at a
30 per cent discount to their sum of-the parts valuations. How about some
radical ideas this reporting season to accompany those rivers of cash?
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