AMSTERDAM (ResourceInvestor.com) -- The financial results of the top five oil majors have shown again that the high profits of the last year are a thing of the past. Based on their overall performance, integrated oil majors, such as ExxonMobil [NYSE:XOM], Royal Dutch Shell [NYSE:RDS-A; LSE:RDSA] and BP [NYSE:BP; LSE:BP], have reported lower profit margins overall for the third quarter of 2007.
Analysts already were expecting some lower net profits, but BP’s dreadful results have shocked the market. After reaping revenue windfalls for the last years, most integrated oil and gas majors have been feeling the heat coming from their downstream sector operations. Lower profit margins, higher costs and decreased production volumes have had a negative impact on the total financial position of most.
At the same time, companies such as Shell and BP have been hit by the fact that their overall upstream performance, which most of the current revenues come from, are performing below market averages. Shell reported a crude oil production decrease of 9%, while BP indicated a decrease of 4%.
Increased costs of new projects and continuing lower production volumes have not been countered by the overall crude oil price increases. After several quarters of being the stock markets favourites, the integrated oils are out, attention is currently being focused on the smaller companies active in the sector.
In stark contrast to the performance of the integrated oils, single source operators or pure players (upstream) have been showing the positive effects of current oil market developments. American, European, Asian and Arab players have reported record profits, largely based on the fact that they don’t have to beat lower refining margins. Small seems again to be beautiful, on all levels.
Independents such as Anadarko Petroleum [NYSE:APC] and Apache Corp. [NYSE:APA], and oil and gas juniors such as Roc Oil [LSE:ROC; ASX:ROC] have shown that it is profitable to concentrate on one source of income. The latter has reported a record level of production of 862,454 barrels per day (bpd), which is an increase of 13% in comparison to Q2 2007.
The company also indicated that its overall revenues also have shown a significant increase to $60.8 million. The same picture has been shown by Nexen [NYSE:NXY; TSX:NXY], which reported increased production on all its assets in the North Sea, U.S. and Canada.
A possible new favourite in upstream could be American independent Apache; the company reported that record oil and gas production revenues have fuelled its overall earnings. The independent stated that its Q3 2007 earnings have increased 23% in comparison to Q3 2006.
Most gains have been based on the fact that Apache’s production increased by 9% to 561,412 bpd. This upward trend also has been shown in the company’s gas production and liquids. The company indicated that it will keep to its already stated growth target range of 9% to 12% for the whole year.
It is striking to see that pure players are again hitting best results. Although the oil and gas sector, in volumes, is still growing exponentially, profit margins of upstream and downstream have different effects the last months. This development will continue as high crude oil prices lower overall refining and petrochemical margins. Integrated players will have to cope with increased pressure on their downstream operations, which will not anymore be contributing to the high profit increases made before.
The Shells of this world are now faced with an uphill battle, as these giants are not only feeling the heat of increased competition of national oil companies for reserves, but at the same time are confronted by high costs on all sides. For the foreseeable future, pure players or juniors are the new diamonds to be watched. Although the impact of the latter players is lower than that of the majors in investment portfolios at present, it seems to be worthwhile to keep to specialists and not generalists.
Put your money in the basket of the pure players such as Apache or Nexen, and yield will for sure be higher than expected. Taking into account the pure players’ operational portfolios for the coming years, more gains are there to be made.
