Oil majors not the place for rising oil
THE rally in oil stocks since the Opec agreement to cut 1.8 mbpd of oil production for the next six months has been tremendous. As usual, investors only seem to be getting the stock picks less than half right. The stocks that investors should be buying are the lowcost shale producers. Companies focusing on the Permian Basin, Eagle Ford, the STACK and SCOOP in Oklahoma, and the centre of the Bakken have huge advantages to other producers, especially the oil majors that Opec will continue to keep a thumb on.
The weakness of the oil majors is both internal and external. They are subject to short-term challenges and long-term secular trends.
Internally, both Exxon and Chevron have loaded up on debt, not unlike most of the other oil majors. Their idea is that future production and asset sales will be able to pay down that debt. While no projection is foolproof, it is at least questionable that either company will be able to pay down their debt and continue to pay their dividends long-term.
There is a major change in the oil industry. No longer can companies presume to live forever on oil demand. With that reality starting to set in, companies will actually have to pay down their debt, rather than just stretching it out.
Once companies start to run into debt maturities and no banks or investors to finance more debt, they will have very hard decisions to make. That time is coming a lot sooner than anybody expected. While Opec still projects growing oil demand to the 2030s, Royal Dutch Shell suggested that oil demand could start to fall within 5 to 10 years.
Once Exxon and Chevron start to struggle more noticeably, the first thing to go will be more of the non-core assets. The problem is that in an industry that will be in runoff in a decade or two, who will pay much for those assets. The answer is nobody. The last big asset sales are going on right now, and those assets are low cost shale, not deepwater, heavy oil or other fringe assets. Exxon and Chevron are not rich in oil shale assets compared to their total assets.
From my perch, investors in both companies are vastly overestimating the value of those companies’ assets. The massive physical quantity of assets that most oil majors have has become a detriment. Many of those assets will become stranded in the 2020s as electric vehicles become affordable to the mass market and 2030s when EVs dominate new car sales. [Kirk Spano — Seeking Alpha]