Here’s why oil and gas won’t be the casualty that follows mining
Despite mounting investor concern that the oil and gas sector could be “the new mining”, Berenberg doesn’t harbour such concerns.
Depressed emerging markets, particularly the slowdown in China, slumped gold prices and worry over Fed tapering plans has meant an embattled time for miners.
And while some of the world’s biggest oil companies have recently reported some pretty unattractive earnings following a tough year, as far as Berenberg’s concerned, oil and gas is a very different beast.
For starters, the bank’s research arm said in a note, oil and gas capex is over $1 trillion globally – over three times that of mining.
On top of that, national oil companies – where demand remains more stable – account for 40 per cent of the $640bn capex associated with exploration, production and refining. In mining, this is just 24 per cent.
Berenberg’s Alexander Virgo explains that consumption is driven by more than simple asset creation – like consumer wealth – and there are several supply-side trends which can drive suppliers’ growth, even with belt-tightening at the integrated oil companies.
But the bank does think growth prospects for firms are likely to remain ”relatively limited”, with investors looking for better capital discipline ever since the return on capital employed (RoCE) peaked in 2008.
Massive cost increases, particularly offshore, are seeing companies respond by scaling back capex budgets. Many large firms are experiencing the same problem: it’s costing them more to produce less oil.
Of course, national companies are less sensitive to the need to scale back – they’re not accountable to public market investors, and development of national assets for mutual socio-economic benefits are usually more important to them than oil industry dynamics.
Although fears are high, they are already reflected in valuations, says Berenberg. Current consensus expectations are muted, incorporating a one to two per cent decline in capex for 2014/15.
And Virgo points out that, although this could turn out to be not cautious enough, investors are quick to make a fuss: the Shell and BP capex announcements caused quite a commotion, despite neither of them (nor US peers reporting around the same time) announcing explicit (never mind substantial) capex cuts.