Falling Oil Prices May Hit Exxon, Oil Majors Hard in Coming Quarters
Exxon Mobil (NYSE:XOM) and other vertically integrated oil majors such as Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP) and BP (NYSE:BP) may see their revenues decline in the next few quarters, as growing concerns over the slowing pace of the global recovery and production from Libya easing supply concerns have led to oil falling to $76 this week. [1] [2] The bearish sentiments were strengthened by news of rising U.S. crude inventories and falling GDP growth estimates from analysts. Revenues from the sale of oil and natural gas liquids (NGLs) are an important source of income for oil majors.
We have a $93 price estimate for Exxon Mobil which implies a 30% premium to its current market price.
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Growth concerns spark fall
Many analysts have cut their GDP growth forecasts in light of the continuing escalation of the sovereign debt crisis in Europe. This in turn has affected the demand outlook for crude oil as slow growth may result in demand erosion.
Earlier this week Goldman Sachs cut its 2012 forecast for Brent crude to $120 from an earlier estimate of $130. [1] Oil prices have seen a decline since July and are now at the lowest point in over a year. A Bloomberg survey showing that U.S. inventories for oil rose last week is not helping oil prices either. Oil majors such as Exxon Mobil and BP have reported growing revenues in the previous quarters largely because of the high oil prices. We estimate that the crude oil and NGL business of Exxon Mobil contributes over 50% of its stock price.
If oil prices continue on their downward trend, our outlook for the average selling price for crude oil may be revised downwards, resulting in a downside to our price estimates for these companies.
Libya production on track
Another important reason for the decline in oil prices has been the partial restoration of Libyan oil supply. The country is expected to raise its production to about 500,000 b/day by the end of the month after its output declined to as low as 45,000 b/day in August due to political turmoil. [1] National Oil Corporation chairman Nuri Berruien said that Libya aims to restore its production to 1.7 million b/day in about 15 months, which could result in further declines in the price of light sweet crude.
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Notes:- Oil Drops a Third Day as Goldman Cuts Forecast for Brent Crude, Bloomberg [↩] [↩] [↩]
- Energy Puts at Two-Year High as No Bottom Seen in Crude: Options, Bloomberg [↩]