Underwhelming. That pretty much sums up the performance of large-cap oil stocks such as BP, Shell and Total over the past decade.
They have suffered a nasty de-rating and seen their share prices lag well behind the oil price. The reasons for their poor performance have been well documented: increased global competition for resources (particularly from national oil companies), declining production rates from mature fields, rising costs and tax takes from host governments.
But there are signs “Big Oil” is starting to address some of the issues that have dogged it for the past 10 years and there are reasons for thinking the sector could outperform.
A key theme to emerge from the recent results season is increased investment in the drill bit, says Morgan Stanley analyst Theepan Jothilingam. “The intent to raise exploration spend and take on more high impact drilling is evident across the group,” he says.
BP is set to double exploration spending over the next few years, he notes, and has struck exploration deals with Rosneft and India’s Reliance Industries.
There remains plenty to do to achieve a re-rating but “Big Oil” does appear to have got the message that it cannot afford to miss the next Santos basin – the giant oilfield off the coast of Brazil. Unfortunately, a step change in drilling success will take time and means “Big Oil” will continue to lag behind the oil price for some time to come.
Since the start of the year, Europe’s oil and gas producers have risen just 8.5 per cent, while the crude price has jumped 25 per cent.
In addition to the problems mentioned above, analysts say that reflects scepticism that the price of Brent will hold at its current level of $115 a barrel; either because the tensions in the Middle East will ease or the oil price spike will tip the developed world into another recession and demand for oil will fall.
That said, “Big Oil” has outperformed smaller exploration and production companies (such as Cairn Energy and Tullow Oil) which are supposedly more geared to the oil price. The E&P sector has struggled to make headway this year, while the FTSE Aim Oil & Gas index has actually fallen.
Richard Slape, analyst at Canaccord Genuity, puts this down to scepticism that the oil price will hold at its current levels and disappointing well updates from companies such as Premier Oil and Heritage Oil. But he notes the last time the E&P sector disconnected from the oil price was in the spring and summer of 2008, and we all know what happened next.
Mr Slape does not think history will repeat itself because, apart from anything else, the wider market as measured by the FTSE All-Share index has been stable rather than falling (as was the case in 2008). But it is obviously a comparison worth bearing in mind.
Over the past 40 years there have been six occasions when the oil price has risen by more than 100 per cent year-on-year, says Citigroup strategist Jonathan Stubbs, and global recessions and/or equity bear markets have been associated with each of these periods.
Fortunately, the oil price remains a long way from joining the “100 per cent club”. For that to happen, prices would need to hit $150-$160 a barrel. Now that could happen, although one would have thought it would be in the interests of Opec countries to prevent it, given the potential consequences.
But if it does, the oil sector is one of the best places for equity investors to be positioned. Oil and gas (followed by basic resources) has been the best performing sector in Europe when oil prices have risen 100 per cent year-on-year, says Mr Stubbs. On average, the sector has outperformed the European stock market by almost 30 per cent in the peak to trough period.
So, there are clear reasons to be positive on the super majors even if they cannot keep pace with oil prices. However, “Big Oil” has some way to go to catch up with the E&P sector. They may have struggled this year but the UK explorers are still 28 per cent above their 2008 peak, even though the price of Brent (in sterling terms) is only 8 per cent higher now that it was then.