The oil industry: an investor s view

Transcription

1 The oil industry: an investor s view Chris Wheaton Oil Council, June 2013 Finding Petroleum, June 2014 Understand. Act.

2 Agenda A shareholder s view of the energy industry - A review of the last decade- yes, it really has been that bad - What shareholders are concerned about now and why - Some suggestions on the problems and how we fix them

3 Exxon as an example of >10 year trends Trends are clear: higher costs, higher tax, higher capital employed, lower returns on shareholders capital, less cashflow going to shareholders Exxon s Upstream capital employed $48bn 2003, $153bn 2013 = 3x increase which is why most oil companies have comfortably underperformed most other investments- e.g. European energy equities index up 21% in 11 years (03-13) versus +55% for Stoxx600 and oil price +300% (source: Bloomberg) and Exxon s better than average! ExxonMobil: upstream economics breakdown % 90% 80% TAX 70% 60% 50% PRODUCTION COSTS 40% 30% CAPEX 20% 10% SHAREHOLDERS 0% Source: Exxon Financial & Operating reviews ; AGI analysis

4 Industry and shareholder responses Industry responses: it s not our fault, the oil price did it Build scale at project level- but this hasn t worked for big oil Use more technology- but this appears to have increased costs not cut them Shareholders Antipathy / hostility to energy industry because it has not delivered competitive returns to equity investors for a long time = higher implied cost of capital, reduced capital availability Only redeeming feature of energy is dividends which are better than market averages and shareholders expect them to stay that way- dividends have become uncuttable Even oil services as an industry has not delivered consistent profit/cashflow/roce and has been very cyclical = volatile

5 Why this failure? Three factors stand out across the oil & gas industry (and by extension the oil services industry too) irrespective of size, geography or asset base: Complexity The oil industry says the oil industry is different Herd mentality, groupthink What s worked instead? Mid/small size oil companies Focus on one/few types of assets

6 The three factors: 1) Complexity Complexity kills people, cashflow, profit, RoCE - so kill complexity before it kills your business Getting bigger increases complexity so the Oil industry can t grow its way out of its problems- this would be the classic response in other industries (think Mining in , Airlines, Automotive in ). Megamergers have already happened and have not delivered for shareholders. Maybe smaller is quicker/cheaper/safer/better? Technology isn t necessarily the solution, either- maybe appropriate tech is better than high tech? Oil services industry not always been paid for its innovation either- so nobody is winning out of complex solutions to complex problems

7 The three factors: 2) The oil industry is different NO IT ISN T!!!!! Oil has to make an adequate return for its equity investors just like every other industry in the world or be starved of capital, or be forced to cede to National Oil Companies with a lower cost of capital (who will increasingly get OFS companies to manage assets) No other industry would work backwards from the price of its output (in this case, hydrocarbons) in an attempt to justify the costs of its inputs (i.e. capital and operating costs) particularly when the oil price can t continue to rise forever My thesis: 21st century oil has to be a manufacturing business ( OAM: Oil as Manufacturing ) - Manufacturing = standardisation, repetition, low unit cost, supply chain and logistics become competitive advantages. Capital employed including working capital control and minimum time-to-cash all matter too. - The success of shale is based on this entire premise- low-cost repeatable wells which get cheaper over time and which have low latency and quick payback times - The paradox: the highest cost developments (e.g. offshore) are least likely to be thought about this way - A lot of oil industry management are sceptical this approach can work. Can we test it? How about getting a manufacturing executive to run an oil company? - Do oil companies even have the right asset base to be able to act this way even if they wanted to? - and is it possible for an exploration process to work like this?

8 An example from the Automotive industry VW s MQB platform- VW claiming potential to achieve big savings, be more flexible and quicker to market Lessons for the oil industry? Need for common standards for equipment and solutions Supply chain has to become less local More long-term partnerships between OFS industry and oil companies- maybe some work has to be brought back in house? Source: VW investor presentation 19/05/11 Less silo mentality within companies- explorers have to work with developers, developers with operators to make best decisions at earliest point in time

9 The three factors: 3) Herd mentality and groupthink Oil industry no different from fund management here - A long lead time industry which has never heard of game theory?! - Industry surprisingly insular for a high-tech industry- oil companies appoint from within (and almost exclusively from within Upstream), don t learn enough from other industries - Shareholders not good enough at influencing thought processes or encouraging diversity of thought Great examples of groupthink - TMT bubble , equity markets 2007, 2008, Angola 1994, US shale gas , Canadian oil sands North Sea , West Africa Australian CBM to LNG 2007, conventional LNG pretty much anytime - What next? US shale oil? Next time you make an investment decision ask yourself- am I doing anything different from peers, and if not, what could that mean?

10 Conclusions Shareholders have been last in the queue for cashflow and profits, dividends are uncuttable = capex becomes the swing factor between oil price and dividends. NO MORE BLANK CHEQUES for project cost overruns and unlimited capex Oil as manufacturing (OAM): Can you turn your business or asset into a manufacturer not producer of hydrocarbons? This should improve business performance and reduce cost of capital too. Herd mentality- the risks of groupthink are real, so ask am I doing anything different from peers, and if not, what could that mean? Stop cogitating, start cooperating. This industry needs common approaches- standards, techniques, equipment, supply chains- to similar problems. The split between OFS and oil companies needs to be rethought Do something different if you always do what you ve always done, you ll always get what you ve always got, because more of the same won t deliver the energy needed to fuel the world for the next 50 years.

11 Disclaimer Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. This is a marketing communication issued by Allianz Global Investors Europe GmbH, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (