The price of oil has quadrupled over the last five years but neither BP nor Royal Dutch Shell has outperformed the FTSE 100 index over this period.
Next week will see the latest quarterly results from the two oil giants in the FTSE 100, BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB). BP reports on Tuesday and Shell on Thursday.
No doubt there will be the usual gnashing of teeth about the size of profits and various calculations made about how many pounds per second each company is making.
However, both companies have a profit margin of less than 10% after tax -- hardly excessive -- and their combined profits from their worldwide operations is roughly equivalent to the money government takes in fuel duty and associated VAT. But that’s enough politics. We’re here to review the companies’ investment credentials.
Surprise
One thing that may surprise many people is that although the price of oil has quadrupled over the last five years, the shares of both BP and Shell have performed the same as the rest of the FTSE 100. Although both firms have raised the prices they charge, their costs have risen dramatically too, meaning that their profit margins have remained more or less the same as they were five years ago.
On the production front, things have not been that bright either. BP’s daily production rose from 3.6 million to 3.8 million barrels of oil equivalent from 2003 to 2007. Shell’s production fell from 3.9 million to 3.2 million over the same period.
So which companies have been making the most money from the oil boom? The latest FT500 survey of the largest quoted companies made interesting reading in this regard. The top four slots were occupied by oil producers and they also accounted for eight out of the top fourteen slots.
But it’s the recently privatised oil companies are changing the investment landscape. While ExxonMobil is the largest company in the world, it’s being hotly pursued by PetroChina, Russia’s Gazprom and Brazil’s Petrobras, who currently occupy second, third and fourth slots respectively. Petrobras has seen its shares soar from $5 five years ago to almost $60 today.
The dominance of oil among the largest listed companies in the world is even more remarkable when you consider that the national oil companies of Saudi Arabia, Iraq, Iran, Mexico, Venezuela and many other leading producers aren’t quoted companies, and therefore don’t appear on this list.
When you look at oil and gas reserves, nationalised and recently privatised companies have an even bigger stranglehold, holding fourteen out of the top twenty positions.
Reserves
At current production levels, BP has enough reserves for thirteen years but Shell has just ten. Both companies have struggled to replenish their reserves in recent years and are increasingly looking at other forms of energy to reduce their dependence on oil and gas. Indeed it’s hard to find any mention of reserves when you look at Shell’s financial statements -- it’s not a figure they’re keen on publicising.
Neither company is a basket case though, which seems to be what their current share prices are implying.
Both are valued on just seven times profits for 2008 which seems overly harsh even given their reserves predicament. Shell has a forecast dividend yield of 4.5% while BP can boast 5.3%. Oil prices may fall back of course, and they have a little already from their recent highs, but it’s hard to argue that either company is overly expensive at the moment although this analysis is admittedly simplistic.
While big oil looks like reasonable value, adventurous investors will find there are even more attractive prospects in tiny oil. Some companies look vulnerable as they may find it difficult to raise the funds they need to carry on operations, but there has been an indiscriminate sell-off in the recent stock market plunge.
As well as benefiting directly from higher oil prices, minnows are finding more oil due to more advanced exploration techniques, often on properties discarded by the majors as too small for their own purposes. Previously uneconomic deposits, in deeper waters for example, have also become financially viable.
On The Fool’s discussion boards, mid-cap oil companies such as Soco International (LSE: SIA), Dana Petroleum (LSE: DNX) and Tullow Oil (LSE: TLW) have been favourites for some years now, and many smaller oil companies are regularly appraised on the oil and gas sector board. For these companies, it’s often whether they find oil and in what quantities, rather than the oil price, that is the key determinant of their share price in the long term.
Although I suspect the easy pickings from oil have already been plucked, there’s still enough value in the sector to make it worthy of investors’ attention at the moment.
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