Majors seen surviving on $12/bbl oil while independents struggle

Global recession means the oil price may be about $12/bbl for some time, but integrated petroleum companies could still show growth in earnings. This is the view of the London branch of Commerzbank AG, which says that, at $12/bbl for Brent crude, integrated companies still look like a fair value for investors, but independent exploration and production companies look much weaker. "If we are facing a global recession rather than a few local difficulties," said Commerzbank, "then we may have to

Sept. 21, 1998

2 min read

Global recession means the oil price may be about $12/bbl for some time, but integrated petroleum companies could still show growth in earnings.

This is the view of the London branch of Commerzbank AG, which says that, at $12/bbl for Brent crude, integrated companies still look like a fair value for investors, but independent exploration and production companies look much weaker.

"If we are facing a global recession rather than a few local difficulties," said Commerzbank, "then we may have to live with a $12/bbl oil price for rather longer than we are currently forecasting."

The bank said that, if the price of oil remains at $12/bbl (Brent) on average during 1998-2000, integrated companies could show an earnings per share growth of 2-5% by improving volumes and costs.

For some independent European E&P firms, however, the outlook at $12/bbl is bleak. The bank said many new projects for independents generate no positive net present value (NPV) at $12/bbl and below.

"We calculate NPVs 30-70% lower at $12/bbl than at $15/bbl," said Commerzbank. "The biggest falls are in the highly geared companies: Saga (Petroleum AS, Norway), Lasmo (plc, London), and Premier (Oil plc, London)."

The bank identified Cairn Energy plc, Edinburgh, and Monument Oil & Gas plc, London, as the least-affected independents, because of their low debt and price-protected gas contracts.

"While $12/bbl, with short periods down to $10/bbl, is a plausible scenario in a world recession," said Commerzbank, "we do not believe that prices will fall much below $12/bbl for a sustained period, for three reasons.

"The industry average player would need a $7/bbl price to cover its cash costs, but there is a significant tail of fields with much higher costs that would start to shut down below $10/bbl.

"At around $10/bbl, substitution from alternative fuel sources such as coal and gas would be evident. In the longer run, prices below $12/bbl are insufficient to support new exploration ventures at current industry cost and taxation levels."