Earnings update on big oil – production in focus

During the past year, the price of oil has surged 50 percent and has traded between USD 110-120 per barrel for most of 2011. While commodity analysts have been reluctant to hype the oil price going forward, the unrest in Libya and the high emerging market demand have thus kept upward pressure on the price of crude.

In chart 1 we have plotted the oil price development for the last year with the share price performance of Chevron, ConocoPhillips, Exxon, Shell, BP, Statoil, Total and ENI. As can be seen the crude price has outperformed oil stocks.

 Production vs. oil price
The high oil price level has helped boost the profits of oil companies, but what the market often pays more attention to is if the companies can keep up or increase their production. In table 1 we have shown the change in production from Q2 2010 to Q2 2011. As can be seen, only Exxon has increased its production, while the rest have seen production declines of -2% to -16%.

As companies disappoint on the production side, outlooks and future growth possibilities become negative, putting downward pressure on their stock prices. That being said, the majors all trade on fairly low valuation multiples both on Price Earnings (P/E) and Price to Book (P/B). So while welcoming the high oil price and increased earnings, stock performance will definitely be affected by production performance. Remember to keep an eye on the companies’ production guidance in the future!