Supermajors have had a great year so far, and their third-quarter results, to be released over the next couple of weeks, are likely to strengthen this impression. But this does not necessarily mean that investors will reward them. Investors have become a lot more careful in the past few years, and chances are they will want to see more proof of post-crisis flexibility and strict cost discipline before stock prices reflect an increase in trust.
On the face of it, Exxon, Shell, Chevron, and their likes have everything going for them: oil prices are higher, free cash flow is coming in at higher rates, and there have even been a few discoveries, most notable among them Exxon’s 4-billion-barrel elephant off the coast of Guyana. But Big Oil still needs to be cautious.
In a recent article for 24/7 Wall Street, its senior editor Paul Ausick noted the heightened prospects of even higher oil prices after a Reuters report revealed that OPEC has been having trouble lifting production by the promised 1 million bpd. From May to September, the cartel’s combined production plus Russia’s had fallen well short of that figure because of production declines in Venezuela, Iran, and Angola, among others. These, the internal OPEC document that Reuters saw, offset some substantial output hikes from Saudi Arabia, Russia, the UAE, Iraq, and Kuwait.
What this means is that there seems to be less spare capacity than optimists believed. This, in turn, means prices are likely to climb further, despite a fresh assurance from Treasury Secretary Steven Mnuchin that traders have already factored in the U.S. sanctions against Iran. Mnuchin’s warning that Washington will insist on importers cutting Iranian crude imports by more than 20 percent most certainly has not helped rein in prices, though its effect has yet to be fully acknowledged.
For Exxon, Shell, and Chevron, as well as the rest of the Big Oil club, higher prices are not something to be too happy about. There are already warnings from economists that Brent at US$80 has dampened demand from some major consumers including India. If the international benchmark adds another few dollars, the impact on demand will be more severe, and any negative price impact on oil demand will affect the supermajors. In other words, oil prices, which boosted the industry’s earnings in the first half of the year and is more likely than not to continue boosting them in the third quarter, could push these lower if they rise enough.
Another thing investors are watching, Ausick noted in his review of Exxon and Chevron’s expected performance, is cost control. This is still big on the agenda of investors - even if Big Oil itself is slowly slipping back into the deep rut of the cycle: spending big when prices are high and cutting costs when prices drop. For now, this return to the industry norm has been very gradual—oil stocks have been underperforming oil prices consistently and companies are wary of scaring investors off—but if prices continue to be strong, risk appetite is bound to increase for both investors and companies.
Big Oil, in other words, is being tested in a context of super volatility in prices brought about by uncomfortable uncertainties surrounding the world’s spare oil production capacity and demand prospects in emerging economies where growth is slowing down. Third-quarter figures might provide some indication as to how things stood at the end of September, but the situation is so dynamic right now they might tell us nothing about the next three months.
By Irina Slav for Oilprice.com