Why 2017 will be a critical year for energy superpowers
Matein Khalid discusses how the sector would play out
2 017 has been a time of seismic importance for the world’s top oil and gas supermajors. The chairman and CEO of Exxon Mobil is secretary of state in the Trump White House. The Saudi Arabia brokered Opec oil output cut deal in Vienna last November has not broken down, unlike past deals.
The new Saudi oil minister has reaffirmed the kingdom’s intention to resume its role as swing producer in the world oil market as well as its commitment to privatise/list a stake in Saudi Aramco.
Donald Trump has put Iran on notice after its ballistic missile tests and provocative naval operations in the Straits of Hormuz. Fresh US sanctions on Iran will jeopardise Shell and Total’s plans to invest in one of Big Oil’s last growth provinces. Trump has called for a diplomatic rapprochement with the Kremlin despite Putin’s refusal to disgorge Crimea.
Oil prices have almost doubled from their $28 lows in early 2016. Shell, BP and Chevron returned a stellar 35-45 per cent last year while Exxon Mobil was flat. Who will fly among the Seven Sisters in 2017?
The big loser? Exxon Mobil, down 10 per cent, a value trap even at $82. Exxon forecast flat output until 2020 yet management plans to increase its capex budget to $22 billion in 2017. This is insane. Hopefully, Rex is a smarter statesman than he proved as an oilman. The company has predicted flat output until 2020 and plane to increase its capex budget to $22 billion in 2017. Exxon Mobil made a grave strategic mistake with its acquisition of natural gas producer XTO Energy on the eve of the oil crash and blew up tens of billions in commitments to Canada’s high-cost, low-margin oil tar sands. I see no reason why Exxon Mobil deserves its premium valuation of 16 times earnings, a 70 per cent valuation premium to its Big Oil peers. Its $15–$19 billion upstream budgets have produced no output windfalls. Unlike Chevron, it was too late to scale up in the Permian Basin.
True, Exxon’s free cash flow and dividend yield is stable (unlike BP’s seven per cent dividend) and the firm has acquired long life assets in Egypt, Abu Dhabi and Romania but no impeccably-timed deal or executed projects that were bottom line game-changers like Shell’s BG takeover bid in the depths of the oil crash and Chevron’s fabulous Gorgon and Wheatstone Australian LNG assets. Exxon cannot match the output growth metrics of Chevron, Total and Shell. Exxon, once Jersey Standard, the flagship of John D. Rockefeller’s oil empire, is still the largest privately-owned oil and gas colossus on the planet but is a loser’s bet in 2017.
Chevron rose an incredible 34 per cent in 2016 but stumbled in its fourth quarter 2016 earnings release. It missed its EPS forecast despite beating on revenues. High expenses caused a cash flow shortfall. Downstream (refining and marketing) is a problem. Kashagan/ Tengiz has epic cost overruns. Yet Chevron is unquestionably the most successful American Seven Sister, thanks to its exceptional output growth and reserve replacement ratio. Chevron could range trade for a few months but $104 is a cyclical bottom or a four per cent dividend yield. True, the easy money was made in Chevron as its capex budget plunged 40 per cent and the stock market repriced its Australian LNG, Angolan and Permian Basin assets. Chevron trades at 104-120 in 2017.
I was thrilled that Total, the French oil supermajor I recommended three months ago for its cash flow tsunami (slashed capex), Elysee Palace/Quai d’Orsay geopolitical backing, output growth, invaluable Francafrique connections (Gabon, malheureusement!) and attractive value metrics made it a lowrisk, high-conviction money-maker. This is exactly what happened even though the euro tanked below 1.04 in mid-December. Investor angst about the French election could well create another strategic buying opportunity in Total. If le marché gives moi a chance to reenter Total at 42, the trade could finance a spring break trip to La Ville Lumière!
Crude oil prices are poised to breakout higher, despite King Dollar, highs in global inventories and a surge in the US land rig count (shale). The resignation of Iran super-hawk General Mike Flynn changes nothing. Netanyahu was in the White House to discuss tighter sanctions on Iran, not West Bank settlements. Mad Dog Matthis is warming up Nato allies in Brussels for Uncle Sam’s new policy shift on Iran. Washington no longer believes in containment or deterrence. Donald Trump wants regime change in Teheran.