Weak earnings from BP and Shell hit small cap oil sentiment as sub $60 a barrel oil here to stay

oil rig

A large factor behind the share price performance of a particular company is related to the sector it operates in, and sentiment towards that sector. Individual company news flow is, of course, important, but investors in small-cap AIM companies need to be aware that if the sector is out of favour then don’t expect share price fireworks and RNS news flow needs to offset that baseline sentiment.

oil price brent october 2019

Investors in AIM and in particular oil and gas shares like Union Jack Oil (UJO), UK Oil and Gas (UKOG), Reabold Resources (RBD), I3 Energy (I3E) etc. the share prices haven’t been pretty reading over the last 6 months. Negativity around earnings in Oil and gas hasn’t helped matters that’s for sure and the Q3 earnings from BP and Shell this week have confirmed that the oil price is predicted to be stuck at between $55 and $60 a barrel for the foreseeable future, as opposed to around $65. In the case of Shell, this may hamper its ability to continue its $25 billion share buyback and curtail dividend payment growth in the future (even with a company of $10 billion free cash flow in the quarter!).

Looking in detail at small caps lift costs or costs of production, marketing and distribution per barrel are key. High cost, frontier production is going to be marginal at best in this oil price environment e.g. Alaska, Canadian oil sands.

For example, UKOG has production, marketing and distribution costs of around $19-20 a barrel from Horse Hill in Surrey, which is an onshore production site. The cost per barrel is relatively high as total production is capped at 3500 bopd by planning constraints and oil has to be transported by tanker (220 barrels per tanker) out to the local Fawley refinery.

In the North Sea, at around 1.6 million boe/day, gross operating costs per barrel are £11.6/boe. The Brazilian major, Petrobras, now has average production costs of $8 a barrel, despite some pretty complex fields. Keeping costs down is critical in this medium price oil environment and oil services companies are under pressure to deliver projects at low cost and on-time.

Just something for oil and gas investors to think about when the share price languishes at close to 52 week or multi-year lows e.g. I3E (despite excellent RNS this week), UKOG, UJO and so on. Company-specific news flow has to fight the tide of the institutional love or hate of a particular sector. Right now, banks, property companies aren’t the flavour of the month. Earnings from Chevron and Exxon are due this week and are likely to follow the bad news from BP and Shell. Shell shares dropped 4.5 per cent yesterday on weak Q3 earnings and outlook for prices.