Monday, July 28, 2008
"Paradox: Despite the sharp rise in oil prices, bargains are bubbling in major oil stocks. The stock price of major oil companies hasn't kept pace with the price of a barrel of oil, which is now 95% more expensive than 12 months ago. ... But for the long term, the outlook for these stocks isn't rosy, as they face their biggest challenge ever: lack of oil-production growth or even a decline in output. Signs of this have emerged in the earnings statements of recent quarters, making some observers think these companies may not even be around in 10 to 15 years. ... Exxon's P/E has been in the range of 10 to 13 since 2004, its lowest level since the last time oil prices rose, in the late 1980s and early 1990s, with the onset of the first Persian Gulf War. ... Today, 'the majors, on the whole, look pretty cheap,' says Justin Perucki, an energy analyst at research firm Morningstar Inc., who assumes a long-term price of oil at $85 to $95 a barrel for valuing these companies. ... Life has gotten much tougher for the majors in their foreign endeavors. Decades ago, these companies were welcomed for their huge funding and technological and engineering prowess. Today, these companies are facing increasing nationalism in countries such as Venezuela, which are reducing the amount of oil they are willing to give up to let companies such as Exxon come in and drill", Shefani Anand (SA) at the WSJ, 12 July 2008.
SA explains the paradox: the majors "reserves" are all held at the sufferance of "host" countries. No one can predict what royalties or other taxes the majors will face in the future, so the market increases its discount rate on those reserves.