Investors sense opportunities in Big Oil

Investors sense opportunities in Big Oil

Investors are gaining confidence - up to a point - that 2018 will be the year of oil stocks, Reuters reports.

While shares in top energy companies have risen since mid-2017, they have failed to keep step with recovering crude markets, opening up a historically unusual performance gap. Big oil stocks have also underperformed broader equity indexes.

Uncertainty over whether the crude rally can stick and fears that advances in electric vehicles will undermine longer-term demand for oil still overshadow the sector.

But a brighter outlook for oil prices compared with the slump of 2014-15 - coupled with a revival in energy companies’ profits and cash generation after three years of brutal cuts - could mark a turning point, according to investors and a string of global banks.

“2017 was a challenging year for investors but there are now real opportunities in the energy sector,” said Olivia Markham, portfolio manager at BlackRock Commodities Income Investment Trust. She expects oil prices to rise gradually by 2020 as supplies tighten due to a dive in investment in recent years.

UBS, RBC and JP Morgan have put out strongly positive outlooks for the sector in recent weeks, while Barclays analysts predicted on Thursday that earnings for the European integrated oil stocks could grow 20 percent from the third quarter.

Optimists point to developments like Shell’s (RDSa.L) raising in November of its cash flow outlook to $30 billion from $25 billion by 2020, assuming prices at $60 a barrel.

“Annus Mirabilis. Highest free cashflow in a decade bodes well for 2018,” Bernstein said in its outlook for European oil majors.

Figures for last year are grim, due largely to a dismal first half. The MSCI world energy index .dMIWO0EN00PUS, which tracks top oil stocks, gained just 1.3 percent even though Brent crude hit 2-1/2 year highs. Europe’s oil and gas sector.SXEP, which includes Shell, Total (TOTF.PA), BP (BP.L) and Eni (ENI.MI), was the worst-performing in the region.

Oil majors’ shares typically move in step with prices of the crude that they extract, but that correlation broke down last year. Since June, the MSCI index has gained 20 percent but Brent LCOc1 shot up 50 percent to around $68 a barrel, after OPEC and other major producers agreed to cut output.

The majors are set to cut spending on oil and gas exploration for a fifth year in a row in 2018, determined to maintain the capital discipline they imposed during the slump.

With production from U.S. shale deposits expected to increase sharply, scepticism remains over whether crude can stay at current levels.

“There’s little conviction on the oil price sustainability both from the market and from the oil majors because no one is touching capex plans or investment. Everyone is waiting to understand what’s going on,” said Angelo Meda, head of equities at Italian fund manager Banor SIM.

As well as slashing spending, the majors made tens of thousands of staff redundant and sold off assets to adapt to lower oil prices which, despite the recent gains, remain far below levels above $100 in 2011-14. Such savings have led to sharp increases in earnings in recent quarters.

Whether the sector can extend the share rally and close the performance gap in 2018 depends on a belief that majors can still prosper should oil prices fall back again.

“From here it’s a question of whether or not investors think something has really changed in the industry, that you can still have earnings improving even if the macro doesn’t help you out,” said Peter Hackworth, oil equity analyst at Goldman Sachs.

As well as the strong cash flow generation at the European majors, early signs of capital discipline among U.S. explorers and producers also point to a better picture for the sector this year.

Goldman predicts big oil firms will return 13 percent in 2018, ahead of a forecast 9 percent rise in the Brent price.

One crucial component in winning back investors’ confidence is a return to paying dividends fully in cash. Offering the option of taking dividends in stock has saved the majors billions upfront but diluted their earnings per share.

Shell and BP have both made enough revenue in recent quarters to boost their payouts. Goldman Sachs estimates most big oil firms will have scrapped scrip dividends or made share buy-backs which offset the dilution in the next 12 months.

Average dividend yields of 5.5 percent will be more than covered by cash flow this year, Hackworth said.

But not all investors have yet accepted the message that current payout levels will continue.

“The market is still discounting these dividends as unsustainable whereas today, right now, they are sustainable. So I think the market is overreacting,” said Eric Moore, European income fund manager at Miton, who has been increasing his oil holdings in the past year.

Moore’s fund holds BP, Shell, Statoil (STL.OL), Eni and Premier Oil. (PMO.L)

Analysts have also been revising up their earnings forecasts since October after sharp downgrades earlier in 2017. Any uptick in mergers and acquisitions - noticeably absent as the majors concentrated on restructuring rather than purchases during the slump – could also boost the sector.

Investors remain wary that oil demand may peak due to eventual mass adoption of battery-powered cars and more curbs on fossil fuel emissions by industry to meet environmental targets.

“Electric vehicles and government policies on carbon have led investors to question the longer-term outlook for oil,” Blackrock’s Markham said.

Some are hedging their bets, buying shares in battery companies and chipmakers involved in making electric cars while lessening their exposure to pure oil plays.

But the shift to cleaner energy doesn’t necessarily mean investors are dumping the oil majors. Many are sticking with them but favoring companies which put more emphasis on renewables.

Nick Davis, European income fund manager at Polar Capital, said he prefers Total, which is investing more in gas as well as venturing into battery and solar power.

But in the shorter term, and with the electric vehicle picture still unclear, stocks do not yet fully price in these risks, analysts said.

Evercore ISI analyst Doug Terreson said cash preservation remains the key for investors focusing on returns more than growth. For him, BP, Shell, Chevron (CVX.N) and ConocoPhillips (COP.N) offer the best proposition in 2018, he said in a note.

“The historical investment model which assumed that higher oil prices would always lead to higher share prices in energy appears disrupted. It failed in 2017 and will again in 2018, in our view.”

Baku Higher Oil School honors memory of victims of Khojaly genocide (PHOTO)
Baku Higher Oil School honors memory of victims of Khojaly genocide (PHOTO)
Mine explosion kills one in Azerbaijan’s Sugovushan
Mine explosion kills one in Azerbaijan’s Sugovushan
Myanmar police issue arrest warrants for celebrities for endorsing strike movement
Myanmar police issue arrest warrants for celebrities for endorsing strike movement
Loading Bars
UK watchdog looks to 'open banking' apps to help boost competition
Georgian mobile operators see decrease in total revenues for 2020
Georgia plans to build hanger in Telavi airport for private jets
Chevron to buy out Noble Midstream in all-stock $1.32 billion deal
Azerbaijani State Security Service shares grief of death of Turkish servicemen
Azerbaijan eyes to start employment promotion activities in liberated areas
Armenia once again demonstrates that it is far from sound thinking - Azerbaijani Foreign Ministry
Initiated by Mehriban Aliyeva, Heydar Aliyev Foundation makes new contribution to protection of world and religious heritage in Vatican (PHOTO)
Azerbaijan's MoD shares footage from Aghdam's Taghybayli village (VIDEO)
Kazakhstan offers Uzbekistan to consider launching production of Kazakh COVID-19 vaccine
Mehriban Aliyeva appointed as first deputy chairperson of New Azerbaijan Party
First website of sign language dictionary to be developed in Azerbaijan
Trans-Caspian Fiber Optic Cable Project discussed at “Kazakhstan-Azerbaijan: New Opportunities for Cooperation” event (PHOTO)
Turkey’s activity on Turkmenistan’s state commodity exchange in Feb. 2021
Iranian parliament approves increase of salaries
Baku International Sea Trade Port expanding co-op with in Netherlands
Azerbaijan's internet provider eyes to expand coverage of communication services
Trade takes up largest share in total turnover of Georgia's business sector
Volume of Azerbaijani Depository Center's Feb. 2021 bond payments revealed
Volume of business sector turnover up in Georgia
Italian companies eye returning to Iranian energy market
Azercell reveals the “Victory Year”s results
Main share of industrial production volume in Baku accounts for extractive sector
Azerbaijan records decrease in Jan. 2021 population's bank deposits
Five impressive facts about OPEC+ meeting
Total amount of transactions on Turkmen state commodity exchange for Feb. 2021
Kazakhstan to hold auctions for selection of flexible generation projects
Azerbaijan's police officers find munitions in liberated Shusha (PHOTO)
Iran reveals COVID-19 data for March 5
Reliability of Azerbaijani data center confirmed by int’l certification institute
Iran receives third batch of Sputnik V vaccine
Iran's Energy Exchange announces products to be on sale on March 6
Azerbaijan confirms 175 more COVID-19 recoveries
Kazakh Kazatomprom to hold additional auction on its solar energy assets
Turkmenistan considers promoting expansion of partnership opportunities within ECO
Hungary eyes increasing medicines supply to Uzbekistan
Azerbaijani PM expresses condolences to Turkish VP over helicopter crash
Azerbaijan's Minister of Economy highlights country's progress in terms of economic freedom
Australia resumes postal communication with Turkmenistan
Azerbaijan holds auction for public property facilities
Volkswagen core brand to accelerate electric vehicle shift
Kazakh airlines launch new flight to Uzbekistan
Uzbekneftegaz, Gazprombank co-op to increase hydrocarbon production
Investment in development of Chabahar Port continues
Britain starts formal countdown in 'final chapter' of Libor
Volume of food products sold in trade network of Azerbaijan’s Baku city increases
Maritime India Summit-2021 celebrates ‘Chabahar Day’
Egyptair to replace Sinai Air on Tel Aviv - Cairo route
US experts visit war-torn areas of Azerbaijan's Tartar (PHOTOS)
Three possible scenarios on economic dev't regarding COVID-19 crisis in Georgia
Kazakhstan reports increase in overall 2020 trade with Greece
Precious metal prices in Azerbaijan down
Small solar photovoltaic station launched in Uzbekistan’s Tashkent region
Kazakh National Bank shares data on money transfers via payment systems for 2020
Azerbaijan's Internet provider increases contribution to country's educational sphere
PASHA Bank talks possible development of 'neo-banks', information security in Azerbaijan
SOCAR becomes main supplier of Lithuanian gasoline to Ukraine
Azerbaijan to study underground water resources through satellite images
Kazakhstan discloses target volume of electricity generation for 2021
Fidelity Investments Inc acquires shares of Bank of Georgia
Deposits dev’t of Turkmenistan’s Uzynada field to increase oil, gas condensate production
Kazakhstan's only lowcoster launching direct flights to Turkey
Azerbaijan names amount of compensations paid to closed banks' depositors
Georgia reports 390 new COVID-19 cases for March 5
Russia documents 11,024 COVID-19 cases in 24 hours
Turkmenistan plans to drill new wells at North Goturdepe field
Public catering turnover for January 2021 in Baku drops
Kazakhstan to commission several new petrochemical plants
Kazakhstan preparing concept for further Kashagan field dev't
Uniper increases natural gas sales
Uniper sees €160 million increase in adjusted net income y-o-y
International Fund for Agricultural Development helping Georgia modernize agriculture sector
Uzkimyosanoat, Shell talk modernization of Uzbekistan’s chemical enterprises
Kazakhstan’s Almaty Power Stations JSC opens tender for electrical work services
Kazakhstan boosts trade turnover with China in 2020
President Ilham Aliyev delivers speech at congress of ruling party (PHOTO)
With OPEC+ restraint in place during April, upward pressure on prices to continue
President Aliyev sends condolences to President Erdogan regarding helicopter crash
Uzbekistan, Belarus agree on increasing permits for road transport of goods for 2021
Rosselkhoznadzor allows number of Uzbek companies to import tomatoes to Russia
Saipem to take part in green hydrogen hub creation in Italy
Kazakhstan announces 2021 oil production plans
Average monthly salary in Baku in 2020 grows
Azerbaijan shares footage from Fuzuli's Yukhary Rafadinli village (VIDEO)
US congressman Steve Cohen issues statement on Khojaly tragedy's anniversary
Kazakhstan to start partial sales of petroleum products through commodity exchanges
Turkmenistan defines tasks for "Single Window for export-import operations"
Kazakhstan to increase oil extraction volumes within OPEC+ agreement
Kazakhstan’s KazTransOil opens tender for wells servicing
Azerbaijan's Aghdam - now huge field of ruins, BBC report says (VIDEO)
Southern Gas Corridor CJSC's needs for cash in 2021 to be fully covered by proceeds from projects
Azerbaijani currency rates for March 5
Uzbek chemical production company to buy technological equipment via tender
Azerbaijani oil prices on the rise
Creator of Tukish 'Bayraktar' UAV talks General, who died in helicopter crash
Uzbekistan reveals its COVID-19 data for March 5
Ceyhan terminal transships over 36 million tons of ACG oil since early 2021
Oil prices surge as OPEC+ extends output cuts into April
Uzbekistan’s fiscal policy to continue supporting economic recovery - Fitch Ratings
Azerbaijani FM extends condolences to Turkey over helicopter crash
All news