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sector watch
all that glitters isn’t liquid gold
Oil prices may have tripled in the past decade, but big oil companies
have been out of favour with investors for some years now.That’s
because high prices don’t necessarily mean big profits.
Paul Boyne, Manulife Asset Management senior portfolio manager
and co-manager of the St. James’s Place Global Equity Income fund,
points out that the rewards of a rising price to integrated oil companies
are not equivalent to the underlying price movement, because of other
factors. ‘At a higher oil price, contractors and labour want more money,’
he explains. ‘Governments want more money.’
Between 2001 and 2012, Boyne says, Brent rose at an average annual
rate of 16%. But average unit costs over the same period also grew by
16% a year. ‘So where’s the benefit to the energy business from a rising
oil price?’ he asks. Investors are, however, beginning to look more fondly
on oil majors.Their biggest concern has been that, until now, their cash
flows, after capital expenditure, have not been big enough to cover the
dividend.They have still paid decent dividends, but have had to borrow
the money to do so – an unsustainable situation.
‘Managements, led by Total and Statoil, are now saying they will
be more disciplined on the capital expenditure side and will manage
costs better,’ Boyne reports. One way could be via more standardisation
in oil-rig design and manufacture.
Threadneedle’s Thornber points out that, for most of the past 10
years, the big boys haven’t grown production. Shell, for example,
produced 4 million barrels per day in 2000.Today, it’s producing
around 3.4 million barrels per day.Ageing fields are losing production
at 4-5% a year so companies need to find new oil and grow 5%
a year just to stand still.That’s a lot of oil.
He prefers to profit from rising prices by buying smaller exploration
companies. He is also invested in large gas consumers that benefit
from cheap US shale gas – like Dow Chemical.
THE INVESTOR
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