Supermajor shares need supersize oil rally

Supermajors probably need several months of rising oil prices before any will be on a very even keel.

An oil price surge is lifting all Big Oil boats, but with shares of only two majors in the black for the year, investors aren’t high-fiving just yet.

So-called supermajors aren’t standing out either. An 8% fall by global oil prices since the start of the year has capped shares of BPChevronExxonShellTotal and ENI. That’s despite all roundly beating first quarter earnings expectations on the back of stringent cost, debt and efficiency measures.

Scoping out potential investment candidates among the biggest oil groups therefore remains a conundrum, even assuming the worst is now behind the oil industry.

In the U.S., for instance, the biggest energy beasts, Exxon and Chevron may be in a mid-cycle sweet spot with sharp profit upswings in Q1 juiced by much-improved margins. Like rivals, they’ve also been helped by oil prices retaining a gain of at least 7% from November lows.

But the lack of traction above $53 a barrel (bbl.) has been frustrating and, as U.S. shale producers aggressively hike even as OPEC considers keeping cuts in place till 2018, there are signs that overall supply will continue to rise for the foreseeable future.

  • The Brent forward curve projects futures no higher than $52.50/bbl as far ahead as Q4 2019
  • The industry’s leading indicator of U.S. production—the Baker Hughes oil rig count—has risen from about 4-5 additional rigs per week at the start of the year to about 7-10 so far in May
  • EIA forecasts U.S. production growth (primarily shale driven) of about 4.5% to 9.3 million barrels a day in 2017
  • In the first quarter, private equity funds raised $19.8bn for U.S. energy ventures, nearly three times the total in the same period last year, according to alternative assets data provider Prequin

Even if oil can stand its ground for the medium term, rising production costs are a further challenge. Halliburton, one of the largest oilfield services companies, warned at the end of April that it could soon raise prices.

It's why supermajors will need several more months of rising oil prices, not just the odd day, to fortify their earnings outlook.  

And that’s before we get to company specific challenges—though there are clearly pockets of strength too.

Oil marks

Exxon’s 4% production fall in Q1 is one of the clearest black marks. It contrasts with BP and Shell, where production rose at a similar moderate percentage amount. BP’s ability to keep the impact of Gulf compensation contained depends on such production ramps, as they will help generate much needed free cash flow. BP in particular needs to avoid Exxon-like slack.

Shell has an additional downstream edge. Its chemical unit doubled net income in Q1 to $836m. That was a cushion during a quarter that saw Shell's oil production sag due to unscheduled outages. Shell is also showing signs of having been distracted by its humongous BG LNG acquisition. It has drifted to the bottom of its peer group on total returns over five years. At least BG is beginning to pull its weight, contributing 19% of Shell’s oil & gas earnings in Q1.

All told, the world’s supermajors continue to face mixed prospects. A more definitive oil price advance would help investors differentiate.

BP beats

For the nearer term, earnings forecasts and price momentum may offer clues.

Expectations on BP remain the most robust. Among analysts monitored by Thomson Reuters there have been no upward or downward forecast revisions since its quarterly earnings at last check. It is partly a function of the high confidence analysts have in their annual EPS forecasts for BP. That confidence far outstrips their faith in BP's rivals, according to separate Reuters data. The opposite applies to Shell, on which analysts appear to be 'catching down'. By Monday, positive Shell earnings forecasts had dwindled since its Q1 results to 36 from 48.

In share price terms, it’s the biggest supermajor, by market value, Exxon, that continues to lag. It was the only supermajor within 5% of its 52-week low on Monday. France’s Total SA outperformed, tracking within 5% of its 52% week high.

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