Global Integrated Oils
SECTOR REVIEW
Order of Merit 2009
The world of Big Oil is resetting itself after a crash in the oil cycle last year.
This year we make several observations from the data gathered in the
Integrated Oils Order of Merit.
Observation One: growth prospects appear no better for the coming cycle than
over the last cycle, and for some they will be worse. Big Oil has just completed
a full cycle with no organic growth to show for it, and little in the way of forward
momentum in its Net Asset Value. The coming cycle is likely to be no better for
most, we think, and for some it will be worse.
Observation Two: three year average industry reserve replacement costs
reached $20/bbl in 2008 more than double their level in 2004 and almost four
times their level in 2002. These capital costs are likely to fall somewhat in the
early part of this cycle, but could consolidate in the $15-20/bbl range we think.
Observation Three: upstream reinvestment efficiency has been falling since
2002 and hit a full cycle low in 2008. This will require either lower F&D costs, or
higher cash generation, or some combination of both.
Observation Four: the industry’s downstream returns on capital peaked in
2005, but capex continues to creep up. In 2008 the integrateds allocated 73% of
downstream EBIDA to capital investment versus a five year average of 51%.
This will need adjustment, particularly as the Dark Ages of refining takes hold.
Observation Five: the financial position of the sector is reasonable, but Big Oil
is currently relevering as capital budgets remain relatively high and some
dividend payouts look over-generous for the coming cycle.
Conclusion: much of the Integrated Oil shareholder return of the last cycle was
generated by producing historic low cost assets into a fast rising commodity
price. This effect is now fading as costs and prices (and free cashflows) are
falling into line. In the absence of another super cycle in oil, the integrateds on
average will struggle to produce comparable returns to investors in the coming
commodity cycle, we think.
Executive Summary
After experiencing peak of cycle conditions for the first half of 2008, and a crash in the
second half, the global integrated oil sector is currently resetting itself in preparation for the
next energy cycle.
Capital and operating costs were pushed up to record levels in 2008, and while these are
now falling, they remain high. Three year finding and development costs are consolidating
in the $15-20/bbl range, and are likely to remain there for a while, we think.
Higher costs are cutting into free cashflow, which remains under pressure at mid cycle
conditions. Tax rates rose through the last cycle and are likely to remain higher than
average going forward.
Industry returns on capital will likely come under further pressure in the early part of the
coming cycle as companies continue to add new high cost capital to the balance sheet,
mainly in the upstream. 2009 upstream returns are likely to be the lowest seen in many
years.
The integrateds as a group managed to replace 108% of production in 2008, but the
sector continues to struggle with organic reserve replacement which remains below 100%.
Future rates of upstream volume growth from organic sources are likely to remain at zero,
we think unless there are significant changes in access to resources.
Upstream acquisitions continue and these are adding to resource bases, but at the cost of
near term inflation in finding and development costs. This should normalize out through
the cycle, but at a much higher F&D cost than previous levels.
2008 was a poor year for most in the downstream businesses and the near term outlook
remains very poor. Reinvestment downstream has been creeping up, cutting into the
downstream’s traditional function of providing free cashflow for investment upstream. The
downwards reset of the global oil demand curve plus the addition of new refining capacity
in the Far East mean that some industry rationalization is now inevitable.
Financially the integrateds ended 2008 in reasonable shape, with net debt to capital at
19%. However, the relevering of Big Oil’s balance sheet is continuing through 2009 as
capital expenditure budgets remain relatively high and as some companies continue with
upwardly rebased dividend payments.
Report Navigation
As in previous years, the report is split into 8 sections:
■ Financial Ranking – a quantitative ranking of Big Oil across various metrics
■ Upstream Ranking - a quantitative ranking of the upstream across various metrics
■ Downstream Ranking - a quantitative ranking of the downstream across various
metrics
■ Industry Return Trends
■ Earnings, capex and cashflow trends
■ Upstream industry trends & company performance - reserve replacements,
profitability, reserve life, reinvestment efficiency
■ Downstream industry trends and company performance
■ Appendices : Additional Financial Information and Company Fact pages