Update on Demise of Big Oil: What Goldman Sachs Knows
Venerable Goldman Sachs, seemingly the only private institution to be actually earning money during the current international banking crisis, has issued a contrarian recommendation: Buy Eni, says the investment banker to the rich.That's a good call. Why? Because, among all the Big Oil dinosaurs, Italy's Eni has figured out a modus vivendi with the new power on the block -- the world's national oil companies, specifically Russia's Gazprom.
Big Oil is on the way out -- its reserve base is cratering, and it's been supplanted as global oil king by state-owned companies in Venezuela, Russia, China, Saudi Arabia, Kazakhstan and so on.
But this is a fresh wrinkle: Who will survive in the decades ahead? One can quibble with Eni's methods and associations. But Goldman's call can be seen as a sign of confidence that this flexible company, with its carefully negotiated entanglements with Gazprom, is one model for a re-invented oil major.
I won't be surprised down the road to see an effective or actual merger of the two companies.
Photo: Infomofo
Rights: Creative Commons
Labels: big oil, ENI, Gazprom, goldman sachs, Italy, oil book, Putin, Russia, russia oil
4 Comments:
Steve,
I agree with you by and large on the eventual demise of Big Oil. But I wouldn't -- as a previous post urges -- sell my oil shares just yet. Big Oil's share prices are indeed are based on the volume of reserves, but as you know they they are also based on the valuations of those reserves. Whether or not oil prices deteriorate along with the U.S. economy, they will probably not drop as low as the level at which the current, conservative reserves valuations now stand -- in the range of $50 or $60, or not much above half of current market prices. An adjustment in those valuations could more than compensate for dwindling reserves -- appeasing investors at least, conceivably, until BP-Shell, (post-merger) has encased the European coastline in wind turbines, and ExxonMobil has acquired 70 percent of Africa's fertile soil, thereby monopolizing the value chain linking jatropha plantations to American gas tanks.
Anyway, that's just a quick, hyperbolic counterargument to the investment implications of Big Oil's growing problems.
I'm an American law student learning Russian in St. Petersburg. I plan to be home for the holidays and your book will be waiting for me.
Geoff
Welcome Geoff. If I've got you right, you perceive oil shares as undervalued on average -- as you see it, Wall Street has not factored $90+ oil into the share prices of the various majors, but instead evaluates the companies' reserves at $50-$60 a barrel.
That could be. I personally would differ, since the collective share prices have risen in tandem with high profits, which themselves are a direct reflection of the margin on each barrel.
However, if you are correct that shares are undervalued, then investors indeed should hold their shares.
But if they are fully valued on average, and one is not invested in oil as a dividend play, one has to look at potential growth. And if the reserve base is shrinking, where is that growth?
Come back at me on this. I'm interested.
Thanks again for the note and best, Steve
“[I]f I've got you right....” Indeed, I seem to have skipped some words and doubled up on a few others, but, still, you've got me right. The $50-60/barrel range I pulled from research a few months ago, so it may be outdated. But I recall a couple weeks major investment bank, Credit Suisse perhaps, upgrading Exxon to a buy rating based on an increase in reserves valuation to $75/barrel from $67 or so. And there's this from the AP today (http://www.businessweek.com/ap/financialnews/D8T29KKO0.htm): “Although a number of analysts have adjusted their oil price forecasts for 2008, Gheit notes the average estimate is $75 per barrel.”
Clearly my optimism in Big Oil's investment prospects stems from a prediction of consistently higher prices – not only of oil, but of natural gas – and correspondingly, if not arithmetically, higher profit margins. (All the moreso after last quarter's disappointing results, which pushed down shares for arguably anomalous reasons.) Shares may have risen significantly in the last 18 months, but it seems to me they're still catching up with oil's supply/demand curve.
At the same time, I am right there with you on growth, meaning my optimism also depends on the near- to mid-term denial of analysts that (financially) venerable Big Oil could simply run out of gas. Even an intermittent stream of good news, e.g. Exxon striking a deal with Libya, and Mexico possibly opening its industry to foreign companies, may keep them satisfied. I think that eventually Big Oil's shares will fall because of bleak growth prospects, but in the meantime they'll rise high enough on profits that I would rue a hasty decision to sell.
Finally, let me say that I am not VERY optimistic about Big Oil; a couple events here and there and my opinion would shift. Furthermore, NOCs and their politically palatable (as in, not from the U.S.) partners such as Eni may already be better bets. I'm trying to figure that out, for a host of reasons, and thus I read your post and followed your link. Thanks.
Geoff, as you've seen I've also noted that oil shares perhaps have some upside left. The risk is in trying to predict the peak.
The link you suggested (http://www.forbes.com/feeds/ap/2007/11/21/ap4365076.html)
is really interesting. What to think about the final sentence of Gheit's quote: "Declining oil prices dim the outlook for energy stocks, since their performance usually reflects the direction, not the level, of oil prices." It that's right, one might wonder whether share prices have about exhausted their run, unless of course speculators continue building the bubble far past $100. Thanks again for the note and best, Steve
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