• Home
  • News
    • People moves
    • Africa
    • Asia
    • Australia
    • Canada
    • Caribbean
    • Domicile
    • Europe
    • Latin America
    • North America
    • Middle East
    • US
    • US
    • UK
  • Products
    • Funds
    • Pensions
    • Platforms
    • Insurance
    • Investments
    • Private Banking
    • Citizenship
    • Taxation
  • Fintech
  • Regulation
  • ESG
  • Expats
  • In Depth
  • Special Reports
  • Directory
  • Video
  • Advertise with us
  • Directory
  • Events
  • European Fund Selector
  • Newsletters
  • Follow us
    • Twitter
    • LinkedIn
    • Newsletters
  • Advertise with us
  • Directory
  • Events
    • Upcoming events
      View all events
  • European Fund Selector
International Investment
International Investment

Sponsored by

Sharing Alpha
  • Home
  • News
  • Products
  • Fintech
  • Regulation
  • ESG
  • Expats
  • In Depth
  • Special Reports
  • Video
  • Alternative

Adapting to lower for longer oil prices

  • Viola Caon
  • 23 September 2015
  • Tweet  
  • Facebook  
  • LinkedIn  
  • Send to  

Pascal Menges, portfolio manager of the Lombard Odier Global Energy fund gives his outlook on the oil market.

At current oil prices, investors have every reason to wonder whether the major oil companies can generate profits. In reality, the majors can barely generate free cash flow and so they have to rely on debt to cover their dividend obligations. Some have chosen to pay dividends in shares which, de facto, correspond to a regular capital increase.

Related articles

  • Barings positive on global oil stocks for 2017 following OPEC cuts
  • Oil price expectations and a house of cards
  • Oil: Can recent gains be sustained?
  • AXA IM: Five reasons to take a look at junior energy stocks

In the near term, for some of them, the brunt of the fall in the oil price has been smoothed by strong refining margins and trading profit thanks to the prevailing contango in the oil price future curve.

If this reverses in the last quarter of this year, the majors’ weakness will be even more glaring. With lower-for-longer oil prices dividends are unlikely to be sustainable. Large corporations must then, we think, cut costs and defer projects even more aggressively than the most recent announcements. Several companies, we believe, have inappropriate project portfolios with too-high breakeven costs, such as oil sands, ultra-deepwater and Arctic drilling.

That means that such portfolios will have to be re-tooled, either through lower cost solutions and/or Mergers & Acquisitions.

The picture from the US shale sector is patchy. Some shale sector companies have very attractive geologies while others are in marginal geological trends. In addition, corporate structures may pose challenges with growing financial debt.

In general, we would expect those with the best geologies and solid balance sheets to come out stronger from this downturn. We have seen massive improvements in cost and efficiencies. Contrary to long cash-cycle projects such as deepwater or oil sands for example, cost deflation in US shale has been as large as 30% (source). These dynamics illustrate the manufacturing nature of the US shale and how costs can be driven down thanks to the learning curve. This is in stark contrast with conventional fields.

This said, the very best of US onshore companies have managed to rapidly drive down costs and reach cash flow neutrality. This is very different from oil majors where such a rebalancing is likely to take years… if ever. We believe this means that investors should focus on short-cycle business models, like US onshore companies.

12
  • Tweet  
  • Facebook  
  • LinkedIn  
  • Send to  
  • Topics
  • Alternative
  • Lombard Odier Investment Managers (LOIM)
  • Commodities
  • United States of America
  • Currency

More on Alternative

Janus Henderson Investors launches multi-strategy UCITS fund

  • Alternative
  • 03 June 2020
Law firm comments Esma shorting policy amid Coronavirus crisis

  • Alternative
  • 19 March 2020
Columbia Threadneedle suspends dealing in retail property fund

  • Alternative
  • 19 March 2020
AMX adds two to Irish operations

  • Alternative
  • 18 March 2020
Sweden ditches amortisation requirement in response to Coronavirus

  • Alternative
  • 18 March 2020
Back to Top

Most read

FCA issues warning on cyrptocurrencies as Bitcoin volatility continues
FCA issues warning on cyrptocurrencies as Bitcoin volatility continues
DeVere launches equity fund with Columbia Threadneedle Investments
DeVere launches equity fund with Columbia Threadneedle Investments
SharingAlpha's 2020 top rated funds by category revealed
SharingAlpha's 2020 top rated funds by category revealed
Guardian WM is reborn as Skybound WM
Guardian WM is reborn as Skybound WM
HNWIs in SE Asia cite lack of financial knowledge as greatest concern: report
HNWIs in SE Asia cite lack of financial knowledge as greatest concern: report
  • Contact Us
  • Marketing solutions
  • About Incisive Media
  • Terms and conditions
  • Policies
  • Careers
  • Twitter
  • LinkedIn
  • Newsletters

© Incisive Business Media (IP) Limited, Published by Incisive Business Media Limited, New London House, 172 Drury Lane, London WC2B 5QR, registered in England and Wales with company registration numbers 09177174 & 09178013

Digital publisher of the year
Digital publisher of the year 2010, 2013, 2016 & 2017
Loading