31st July 2015
Investors should forget about investing in large oil companies and put their money into small and mid-size energy producers, according to GAM’s Roberto Cominotto.
The collapse in the oil price over the past 12 months has weighed heavily on the oil giants as BP and Shells’ Q2 results can attest.
GAM investment manager Cominotto said that while some of the losses ‘have been offset by higher margins in refining, the growing issue of overcapacity means that this safety net could be short lived’.
‘We fail to see any strong grounds to buy oil majors,’ he said. ‘Large corporations such as Exxon, Shell, BP, ENI and Chevron are still struggling with significant structural problems. Between 2001 and 2014, during which time the price of oil rose from $40 to over $100, these companies recovered decreasing production volumes and return on capital employed subsequently halved from 20% to 10%.
‘Mature or expensive assets remain the key problem, with liquefied natural gas in Australia and offshore oil, in particular, becoming increasingly complicated and expensive to produce.’
He added that in North America the majors only play a ‘minor role’ in the shale oil and gas reserves.
The need to keep shareholders on board is putting a strain on oil companies, said Cominotto.
‘The large oil groups have nevertheless continued to increase their dividends in a bid to keep shareholders on board,’ he said. ‘Even with the oil price at $100, dividends could not be financed by operating cash flows. Instead, they were funded with new debt, issuance of new shares or the sale of participations.
‘Exploration expenditure needs to be drastically cut, but would lead to a significant reduction in production volumes. The big integrated oil groups are therefore likely to continue to trade at low valuation multiples.’
Overall though has said the energy sector provides ‘attractive investment opportunities’ but ‘primarily in mid and small cap producers, which have the lowest production costs in the sector’.
Cominotto singled out American shale oil and gas producers such as Memorial Resource Development, Cardinal Energy or Torc Oil & Gas.
‘These companies can grow even with oil prices at current levels. They can also finance investments and dividends with operating cash flow, and make acquisitions. We also see very interesting investment opportunities in renewable energy, especially in the US solar market and the wind market in emerging economies,’ he said.