The world’s largest oil and gas companies have been turning in impressive results in the third quarter despite the general economic gloom. The profit levels of the majors in particular offered a reminder of the heyday when oil was repeatedly trading at well above $100 per barrel and gas trading at sub $5 per mcf was outside the imagination of most analysts. For Q3 2011 ExxonMobil reported a normalised income of $10.3 billion, Chevron made $7.8 billion and Royal Dutch Shell $6.7 billion. Despite the strong performances, the share prices of the major oil and gas companies has remained dampened by negative economic sentiment emanating from the financial markets, ranging from the fallout from the Eurozone debt crisis to forecasts of another global recession.
Evaluate Energy has focused on the latest quarterly results of 26 of the world’s largest oil & gas companies, which boast a combined market cap of $1.6 trillion. Results reveal that that despite the average post-tax ROACE of the group standing at 12%, the market cap is 5% lower than in Q3 2009 when the ROACE stood at just 8.2% and 1% lower than Q3 2010 when the ROACE stood at 9.9%. An indication perhaps that investors have an opportunity.
The world has undergone significant change over the past 12 months, Q3 2010 was filled with tentative optimism that the global economy had stabilised and the high debts reached in steadying the ship after the credit crisis would be paid off via natural economic growth. In Q3 2011, this optimism seems to have all but evaporated and the diverse range of economic predictions has only served to prove that we really don’t know where the fallouts of the debt crisis and economic stagnation of major developed countries will lead. The performances for the group of oil and gas companies has offered some respite however from the turmoil. An average oil price 18% higher than Q3 2010 led to an increase in earnings of 34%, ROACE is now at 12% versus 9.9% and the average WACC for the group has fallen from 8.7% to 7.8%, as lower interest payments on debt compensated for the increased volatility in the group’s share prices.
Looking at companies in individually, ExxonMobil recorded their third quarter in a row of earnings over $10 billion. Earnings of this magnitude used to be a regular occurrence for the world’s largest publicly traded oil & gas company, until the credit crisis in the fourth quarter of 2008 derailed profits for the whole industry. Worryingly however, production has also dropped for three quarters in a row, and stands 4% lower than in Q3 2010. ConocoPhillips are also producing less than in Q3 2010; the disposal of the company’s investment in Lukoil dropping production by 28% quarter-on-quarter. Despite this drop, earnings were 54% higher at $3.4 billion, proving that in terms of production, quality is more important than quantity, especially when the production is located in a fiscally restrictive country such as Russia.
The premise that oil stocks have been oversold is further exemplified by looking at the dividiend yields and EV/EBITDA multiple for the group. Despite the global share sell-off over the past 6 months, other than Marathon Oil (as a result of their refining & marketing segment spin-off) no company within the group has reduced their dividend programme. Devon, Chevron, Noble Energy and Williams Companes have even taken the step of increasing their dividend payouts during this time. This has led to an annualised dividend yield of almost 3% for the group, which can only be bettered by looking as far back as Q2 2009. The EV/EBITDA multiple, an instrinsic measure of whether a company is over or under-valued has dropped to a ratio of just 3.3. Far below the typical multiple of 5-6.
Refining Earnings Reach Three Year high
Despite teetering on the edge of economic stagnation, refining and marketing earnings are back to pre credit crisis levels. The industry, especially within the US has had to undergo dramatic changes since this time. Back in Q3 2008 the US was faced with a huge over supply of petroleum products as a result of economic slowdown and the culmination of a sustained investment in refinery capacity. Faced with barely economic refining margins significant changes were required, most notably the closure of multiple refineries. As a result of the supply and demand rebalance, refining margins per barrel have reached a 4 year high of $14 and led to Valero Energy and Marathon Petroleum, the two largest independent refinery companies in the US, reporting net income for Q3 2011 in excess of $1 billion.
* Normalised income is a measure of the underlying company net income after adjusting for non-recurring items