Oil companies adapt to changing environment

21 Feb 2018

Major oil and gas companies are better placed than they have been for some time, with the price of oil now steady and profits on the rise.

Macquarie’s Head of European Oil and Gas Research Iain Reid says companies will also be more resilient to a future drop in the oil price because of measures companies have taken to reduce downstream costs and make refining processes more efficient.

The oil price has been slowly recovering since the February 2016 bottom of $US30 a barrel and Reid expects it will stay over $US50 a barrel throughout 2018.  

He says this stabilisation and growing global demand is giving major oil companies confidence. He points to Exxon Mobil’s activity in Mozambique and Guyana, as well as in the US, which together has added significant amounts of new barrels to its resources - a notable amount even for the world’s largest western publicly-traded oil and gas producer.

The light at the end of the tunnel is getting brighter and it will be brighter still for those who make the right decisions and diversify well.

Most major oil companies are investing heavily in developing new reserves and Total recently announced that it would be raising dividends and buying back shares.

“The majors are in a good position right now,” Reid says.

Opportunities in alternative energy

Despite this, Reid notes there is a general concern among investors about the long-term viability of fossil fuels.

Norges Bank, which manages Norway’s $US1 trillion sovereign wealth fund, may be prevented from investing in oil & gas companies, in order to diversify Norway’s dependence on oil. This was made more striking by the fact the fund originally derived its wealth from North Sea oil.

Similarly, the Rockefeller family – owners of the world’s oldest oil fortune and descendants of the founder of Standard Oil, the predecessor company of ExxonMobil – recently divested its interest in oil companies.

To address this, and prepare for the likely changes in the energy market, most major oil companies are starting to dedicate a percentage of their business to alternative energy.

“Shell is at the forefront of this and says that it will invest up to US$2 billion per annum in renewable energy from its US$25-30 billion capex budget,” Reid notes.

The Anglo-Dutch company has been investing in electricity, including acquiring UK household energy provider First Utility, as well as New Motion, one of Europe's largest electric vehicle charging networks. Other companies have also invested in wind and solar energy, with Total particularly active in solar and battery storage.

Reid expects companies in the sector to perform well in the medium term.

“There was a huge downturn in the oil price but we are coming out of that now,” he says. “The light at the end of the tunnel is getting brighter and it will be brighter still for those who make the right decisions and diversify well.” 

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