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Reserving a Spot in the Shifting Oil World; For oil companies, resource data are too big to ignore. They carry vital clues about what today’s oil majors will look like tomorrow

August 11, 2013, 8:00 p.m. ET

Reserving a Spot in the Shifting Oil World

For oil companies, resource data are too big to ignore. They carry vital clues about what today’s oil majors will look like tomorrow.

LIAM DENNING

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Anyone who watched “Dallas” knows it can be hard to trust oil barons. Yet investors do that every day, particularly on the question of how much oil a baron actually has. While many investors are familiar with proven reserves—which listed U.S. oil companies show in annual reports—executives are also keen to talk up the less-certain barrels beyond these. Despite their more nebulous nature, resource data are too big to ignore. They carry vital clues about what today’s oil majors will look like tomorrow. While there is no agreed definition of resources, energy consultancy Rystad Energy calculates its own estimates. Looking at a sample of 11 of the world’s biggest listed oil companies, there are clear tiers. Royal Dutch Shell,RDSB.LN +1.00% Russia’s Rosneft,PetroChina601857.SH +1.50% Exxon Mobil XOM -0.47% and Petróleo BrasileiroPETR4.BR +2.58% are at the top, each holding roughly between 50 billion and 60 billion barrels of oil equivalent, or BOE, under Rystad’s definition.Next sit ChevronCVX -0.46% France’s Total and BPBP.LN +0.33% with roughly 30 billion to 40 billion BOE each. Then come Eni of Italy, Norway’s StatoilSTL.OS +0.24% and ConocoPhillipsCOP -0.39% all around 25 billion BOE.

Size matters, but the make-up of resources is key.

 

Rosneft and PetroChina must keep expanding abroad. They are homebody elephants with around 90% or more of their resource base in one country or region. It is also relatively mature, with roughly three-quarters already in production, against roughly 30% to 40% for the Western majors.

The two state-backed giants need diversification, both geographically and in terms of project type, suggesting they will be favorites of M&A bankers for some time.

Western majors are relatively spread out geographically. Their issue is focus.

The integrated oil business model is under pressure. As the recent struggle at Hess shows, investors aren’t convinced that scale and integration deliver value—underscored by the majors’ lousy second quarter. Deutsche Bank DBK.XE +0.52%analyst Paul Sankey says the “big-oil business model” makes most sense as a refuge when investors expect a sustained oil-price drop. These days, Exxon and Shell are essentially paying investors to stick around with big dividends and buybacks.

Sanford C. Bernstein holds out one intriguing prospect to keep the integrated major business model relevant. Rising U.S. oil output twinned with a shift in demand growth from the Western to the Eastern Hemisphere have changed how oil flows around the world. This creates trading-profit opportunities for firms with global oil production, refining and logistical infrastructure—and big balance sheets.

Only Exxon and Shell are truly global integrated majors. Despite lackluster valuations, they are unlikely to consider breaking up. Similarly, while BP, Chevron and Total lack scale and geographic spread in refining, they have large, diversified resource bases.

Smaller majors face a strategic quandary. Statoil, Eni and Conoco each has a resource base of less than 30 billion BOE and is heavily weighted to one or two regions. They must either bulk up or break up into more focused, higher-growth firms. Since they are national champions, it is unlikely Eni and Statoil would choose the latter option.

Conoco, however, which has hived off its refining business into Phillips 66,PSX -0.14% could consider a further split. Fully 69% of its resource base was in North America at the end of 2012, according to Rystad. Mr. Sankey at Deutsche Bank sees potential for a focused North American growth stock and a separate company dedicated to international deepwater and liquefied-natural-gas projects. These could be valued more highly as investors have indicated would be the case at Hess andOccidental PetroleumOXY -0.23% too.

Resources are the basis of any oil company. But resourcefulness in how they get packaged and sold to investors is just as important.

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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