
Given the headwinds being felt by major oil companies around the world, the share price performance since the beginning of last year, while uninspiring, has still out performed the oil price which given the macro economic back drop is all the more surprising.
In the last 12 months the oil majors have had to deal with western government sanctions on Russia following events in Ukraine and the Crimea, and the effects these actions have had on the profitability of their assets based there. Notwithstanding those concerns, the past 12 months have been troubling for oil companies as falling oil and gas prices have put downward pressure on margins, at a time when the companies have for the most part, been looking to streamline their operations. We?ve already seen the effects that the slump in the oil price is having on the oilfield service providers in the US, with both Baker Hughes and Halliburton announcing job losses as the companies see rig counts drop, and margins decline. We?ve also seen WBH Energy, a Texas based shale producer file for bankruptcy. This time last year Royal Dutch Shell CEO Ben Van Buerden announced a significant sharper focus on cost and unnecessary capital expenditure by introducing a 20 per cent reduction in spending in its US operations, while scrapping further expenditure to drill for oil in Alaska. The company also sold a number of LNG assets in Australia as it warned on profits for the first time in a decade, and recently cancelled a $6.5bn petrochemical project in Qatar as a result of the recent weakness in oil and gas prices. Despite all these concerns the shares have outperformed, though that probably has more to do with the buyback program the company has been doing than anything to do with outperformance relative to its peers. The company has been buying back shares on a fairly steady basis over the past 12 months and this undoubtedly will have accounted for the relative outperformance. Given the problems being experienced by its troubled sector peer, BP, the last five years should have been the ideal opportunity for the company to take advantage as its rival wrestled with the fall out of the Gulf of Mexico oil spill on the Deepwater Horizon rig. It is still dealing with the legacy from this and will likely hang over it for quite some time, and is still to some extent causing fluctuations in the share price even now.Michael Hewson is chief market analyst at CMC Markets.
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