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Irish Independent: OIL – the slickest way to get a gushing profit

Feb 16, 2006
Is investing in this valuable resource as much a no-brainer as it seems?
OIL prices are at near record levels, American President George Bush has admitted his country is addicted to oil, and a slew of oil majors have produced billion-euro profits in the past few days.
In light of this, investing in companies such as BP, Shell or ExxonMobil could be considered a bit of a no-brainer. These oil majors have a higher valuation than Ireland's gross national product.
In other words, big oil could be the slickest investment around at the moment.
These oil majors have a higher valuation than Ireland's gross national product.
The attraction of investing in oil companies takes on an added dimension when you consider that five of the largest oil companies in the world – BP, Shell, Chevron, ExxonMobil and Total – are planning to give back to shareholders a staggering $250bn between dividends and share buybacks in the next two years.
According to international investment house Sandford Bernstein's Neil McMahon: “The years 2005-2006 could well prove to be the peak of profitability because they are having to spend their money on shareholders instead of reinvesting in oil projects that will yield production and revenue in the future.”
So, in the short-term, big oil could be a good bet.
Right now, with oil prices sky-high, the profits of the industry are mind blowing. In the past few weeks BP has reported fourth quarter profits of $4.43bn and a full-year profit of $19.31bn, up from $15.4bn the previous year.
Royal Dutch Shell has just reported annual profits of $22.9bn, up from $17.6bn in the previous year.
Chevron Corporation has pumped out $14.1bn in profits, jumping from $13.3bn in the year before. Similiarly, ConocoPhilips gushed out $13.5bn, up from $8.13bn.
ExxonMobil topped the lot with 2005 profits of $36.1bn, compared with $25.3bn in 2004.
However, despite these jumbo profits, shares in the oil giants fell back last week.
Shell and BP alone have produced annual profits of $42bn, and surprisingly, investors reacted with disdain when they announced the record results last week. BP shares fell back because its downstream business (which refers to refining and marketing of oil) is seen as structurally weak. In the case of Shell, investors have not forgiven it for overstating its reserves in 2004.
So what are the prospects for some of these companies in 2006?
Shell Last year Shell discovered six large fields known as 'big cats' in nations including Norway, Nigeria, Australia and Malaysia, according to Credit Suisse.
Big cat exploration projects are those where Shell hopes to discover at least 100m barrels.
In January, the company said its venture with Petronas Carigali, a unit of Malaysia's state-owned oil company, and ConocoPhilips made its fourth oil and gas discovery offshore Malaysia.
Shell began producing crude from Bonga in Nigeria in November after two years of delays boosted costs to $3.6bn from an original budget of $2.7bn.
It is aiming to add reserves through projects such as Bonga and a gas venture on Sakhalin Island, instead of with acquisitions.
Even with rising spending on equipment, continued high oil prices may allow Shell to reward shareholders, experts said.
Analyst at JP Morgan Chase & Co, Gordon Gray said in a recent note: “We believe Shell has the capacity to return around $10bn in buybacks in 2006, even with its increased capex (capital expenditure) burden.” He rates Shell “outperform”.
The shares are trading at GBP17.93, with the company having a market capitalisation of GBP122bn.
BP Dublin investment house Dolmen sees the oil sector as the top pick for 2006 with BP the pick of the bunch.
A substantial share buyback programme, good dividend yield and strong free cash flow yield make a compelling valuation argument for BP, according to Dolmen.
BP could give back as much as $56bn to shareholders over the next two years, international analysts have estimated.
Merrill Lynch rate the shares a “buy” with a price target of GBP7.30. The shares are currently at GBP6.44.
Exxon Mobil One of the top performers among the Dow Jones Industrial Average members, ExxonMobil is riding high on the back of the oil price spike. The shares are currently at $59.43.
Earnings for all of 2005 jumped to $36.1bnn, exceeding the US record of $26.3bn set by MediaOne Group in 1998, as rising demand and hurricanes lifted energy prices.
Full-year revenue was $371bn, pushing ExxonMobil past Wal-Mart Stores as the largest US company by sales.
“Exxon keeps coming up with these monumental quarters,” said Joe Ancona, an analyst at Burns Gustus & Co in Florida. Mr Ancona rates ExxonMobil shares as a “buy”.
“You've got to stay on this bucking horse,” he said.
But be warned – there are no guarantees that the big majors will deliver for shareholders.
It needs to be noted that record oil prices are reflected in the share prices.

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