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Jeremy Warner: BP and Shell struggle to keep up with Exxon

The Independent

Thursday, 30 April 2009

Outlook Should BP and Royal Dutch Shell redomicile and relist to the United States? The question is largely academic, for it is most unlikely to happen any time soon. Yet London-based oil chiefs sometimes look longingly across the pond at the apparently superior share-price performance of Exxon Mobil.

All three companies have been reporting first-quarter figures this week – BP on Tuesday, Shell yesterday and Exxon today. They all tell much the same story. Profits have collapsed since the oil price-induced boom of a year ago, but with now fast-falling costs there still seems to be enough money slopping around for the payment of decently sized dividends.

BP and Shell operate in dollars, but pay the bulk of their dividends in sterling. The effect is considerably to magnify the size of the sterling payouts, which in both cases are up by more than 40 per cent. Even so, it doesn’t seem to have helped the relative performance of their share prices very much.

Over the past three years, both BP and Shell have done no more than perform in line with the oil price. As a consequence, both share prices are now lower than they were three years ago. Exxon by contrast seems to have been much more successful at capturing the supercharged returns of the sky-high oil price that ruled a year ago. In part this is simply because Exxon is better managed operationally.

The company has also been run for cash, with capital expenditure kept deliberately low right though the boom. The humongous size of the cash generation has enabled the company to engage in an unparalleled buyback programme, which if maintained at the rate of the past four years would mean Exxon would have repaid its entire share capital by 2017.

Both BP and Shell are taking steps to emulate these characteristics. Relatively low levels of spending make you wonder where Exxon is going to find its future growth. All the same, the company remains the pin-up boy of the sector. Yet Exxon has other advantages too, which are nothing to do with strategy and management.

Shell and BP are giants of the UK stock market, collectively accounting for some 20 per cent of its entire value. Despite its massive size, Exxon is a relatively much smaller part of the US market – no more than 3 per cent.

Any UK fund manager hoping to beat the index would be mad to be overweight in either BP or Shell, however promising he thought the companies’ prospects. Such overweight positions are much more feasible for US investors in Exxon. This may sound like a somewhat implausible explanation for Exxon’s outperformance, but it makes a real difference.

Exxon has an intensely loyal following of long-term investors, so the stock is in any case a lot less liquid than the London-listed oil majors, both of whom are bought as much for the purpose of riding the market as their underlying characteristics.

The best performer of the lot is BG Group. BG has a number of things going for it right now. It’s had some exciting finds in offshore Brazil, and it is big in natural gas, a relatively low-carbon energy source expected to gain at the expense of oil in the years ahead. And of course, everyone loves Frank Chapman, the East End boy made good, who runs BG Group. Yet it is also because BG is a relative tiddler in the UK market compared to BP and Shell. This enables overweight positions to be accommodated without breaching allocation limits.

The bottom line is that it is easier and apparently more rewarding to be big in America than it is here, where there are comparative advantages in being smaller. BP and Shell are such giants relative to the size of the UK market that they are like whales in a fish bowl. Exxon has the entire Pacific to swim around in. The Exxon share price seems to be a whole lot healthier for it.

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