PA ANALYSIS: Is now the time to go overweight oil majors?

Added 2nd May 2017

The first quarter has proved lucrative for the gargantuan oil companies of Exxon, Chevron and BP. But are their fortunes purely macro-driven or are there other reasons for investors to reconsider the sector?

“And this $40 to $60 window relies on the idea that OPEC maintains some degree of volume control,” he qualified.

One sore spot that is gaining less attention but should give investors pause is the high level of debt in the oil & gas sector.

In BP’s own Q1 2017 update, the firm reported net debt had grown to $38.6bn from $30bn a year ago.

“Every player in the sector from Tullow through to Chevron are still leveraged for a world when oil was $80 per barrel.

“And with a relatively high and growing level of debt, in a lot of instances, these companies are effectively eating themselves to keep their dividends growing,” he explained.

EdenTree Investment Management’s Ketan Patel is also concerned about the high levels of leverage reported by the oil giants.

He said: “Both [UK] oil behemoths are under siege, with BP reporting its highest level of leverage in at least a decade. It is also still working through payments for the 2010 spill in the Gulf of Mexico. Shell is due to report later this week and investors will be keen to understand how the company is managing its debt pile post the acquisition of BG Group.

“The oil price will be a headline that may divert from the real underlying issue of leverage, which will no doubt hamper the ability of both companies to continue delivering dividends for UK income investors.”

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About Author

Kristen McGachey

Senior Reporter

Kristen joined Last Word Media and the world of financial journalism in April 2016, leaving behind a career in a legal publishing firm as a senior researcher turned assistant editor.

This native Angelino initially moved to the UK in 2008 to complete her undergraduate studies at the University of Nottingham. She subsequently obtained a Masters degree in Philosophy with Literature from the University of Warwick.



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