Major International Oil Companies (IOCs) have over the past decade grappled with growth challengesparticularly, the increasing difficulty to reserves addition and profitability. Increasing resource nationalism among oil-rich countries has seen major IOCs’ share of global reserves shrink from about 85% in the late 1960s to less than 17% at present. In addition, available oil and gas acreages have in the main, moved to the more geologically and technologically — and therefore more financially — challenging terrains. In 2009, even when global crude oil prices doubled, most of these IOCs reported severe reduction in earnings, some as much as 70%, due primarily to weak global crude oil demand.
The IOCs’ ability to manage such growth challenges will most likely determine their viability, a key concern for investors. Several crucial strategies for growth have been employed by the companies and a brief sampling of their performances with respect to these strategies is quite informative:
1. Joint Venture
Oil and gas acreages in resource-rich countries are increasingly being domiciled with their National Oil Companies (NOCs) as well as indigenous oil companies. One access route for IOCs to such acreages is through joint ventures with these NOCs and indigenous companies. The synergy brings IOCs’ advanced industry technologies together with NOCs’ vast acreage and financial resources (as in the case of China) as well as lower overhead costs (personnel and matériel). The recent joint venture between BP and OAO Rosneft, one of Russia’s NOCs is expected to explore for oil and gas in Russia’s vast Arctic acreages which are domiciled principally with the state. Though bogged down by legal disputes, it involved a swap of 9.5% share in Rosneft for a 5% share in BP.
According to the energy consulting firm, PFC Energy, among Integrated IOCs, TNK-BP, the joint venture between BP and a Russian indigenous oil consortium had the highest year-on-year (YoY) share price gain in 2010 with 58%. In comparison (Figure 1 below), the second-highest [Conoco Philips (COP) and Cenovus (CVE)] were two non-joint venture companies which at 33%, were 25 percentage points lower; of the seven largest Integrated IOCs by market capitalization, three (BP, Total and Eni) recorded share price declines while two [Royal Dutch Shell (RDS.A)and ExxonMobil (XOM)] had only single-digit increases. TNK-BP also led the previous year’s rankings with a 165% gain.
2. Divestment and Organic Growth
The performance of some subsectors of the oil and gas activity spectrum has been of great concern to Integrated IOCs; in comparison for example, oil and gas companies engaged strictly in Exploration and Production (E&P) recorded significantly higher share price gains (YoY) in 2010 than most of the Integrated IOCs.
Some Integrated IOCs in their restructuring-for-growth strategy opted to shed non-performing and non-core assets; for BP, the exigencies of the Macondo well incident added poignancy to this option while ExxonMobil in the main, has favored divestment of only those assets for which it can get premium prices.
ConocoPhilips which held substantial net proceeds from a US$15 billion divestment program between 2009 and 2010, according to reports recently raised its quarterly dividend by 20% while detailing a capital expenditure (capex) program of US$13.5 billion for the current year. Its organic reserve replacement ratio for 2010 was reportedly 138%. Of the seven largest Integrated IOCs by market capitalization, it had by far the highest share price gain (YoY) for 2010 with 33%. The company’s growth strategy is being regarded by some analysts as the paradigm (although it may still be early in the day).
Chevron has embarked on an aggressive capacity expansion and some of the projects are expected to start yielding substantial returns even sooner. It has put capex for the current year at about US$26 billion, a 20% increase over the previous year. This translates to between 74% and 100% of ExxonMobil’s projected capex figures — which according to reports are between US$26 billion and US$35 billion — and that, with only about half the market capitalization of ExxonMobil. Its share price gain for 2010 was 19%, the second-highest among the seven largest Integrated IOCs by market capitalization.
3. Acquisition
According to the energy research and consulting firm Wood Mackenzie, total global spending for upstream mergers and acquisitions was US$183 billion in 2010, driven largely by unconventional resources and restructuring among Integrated IOCs.
Shell and Total (TOT) made notable acquisitions last year but one of the most notable over the last two years has been ExxonMobil’s of XTO. The synergies included XTO’s vast unconventional natural gas resources and ExxonMobil’s massive financial muscle as well as operational capabilities.
ExxonMobil just reported a reserves replacement ratio of 209% according to Platts, and in terms of barrels of oil equivalent, unconventional natural gas accounted for 80% of that. Massive supplies in the U.S. have kept natural gas prices down and that has in the short term limited the returns on that acquisition. The bet however is for the medium to longer term when a possible change in energy profiles would see much higher natural gas prices. ExxonMobil’s bids for conventional reserves addition in the large Brazilian and Ghanaian offshore acreages have been largely unsuccessful, though parts of the Brazilian acreages are being re-evaluated. The company reported a 7% share price gain (YoY) for 2010.
All said then, three quick points are noteworthy:
First, the success of any growth strategy is not just about a snapshot of share price changes or earnings or the likes, though to many an investor, these often constitute the bottom line. Certain restructuring programs by their very nature may take a few more years than others to bring in desired results; such results when they kick-in, may even entail much higher and sustained growth than others.
Secondly, companies may employ a combination of these growth options and are defined by one, only to the extent that that one holds prominence.
Finally, even with these growth strategies, IOCs still face substantial challenges with respect to reserves growth. Resource nationalism means that these IOCs would still rely — and with the attendant risks — on the same resource-rich countries for access to reserves, whether through joint ventures or the good old (but increasingly less profitable) production sharing contracts and service contracts. Many of these IOCs have had torrid times with host communities or countries (though it must be added that in some cases, they themselves had shirked on their Corporate Social Responsibility, CSR, obligations). The nationalization of IOCs’ petroleum assets under Hugo Chávez in Venezuela typifies such associated risks. Shell’s travails in Nigeria’s Niger Delta region, ExxonMobil’s frustration with the Ghanaian government over the Jubilee assets and BP’s earlier faceoff with the Russian establishment over their joint venture, are further examples. Some IOCs however, have become more adept than others at both crises and relationship management, vital factors in current corporate growth strategies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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