Riding on Big OPEC Decision is $490 Billion of Oil Investors

As crude prices continue their recovery from a 12-year low, investors in the world’s biggest energy producers have some cause for hope after two tough years of falling oil prices and company valuations. Those investors will be looking to OPEC not to dash this trend.

According to data compiled by Bloomberg, in six years following a 25 percent rise in benchmark Brent crude, $490 billion to their market value this year have been added by oil companies around the world combined. And at the time of lunge of price plunge of crude, there was a $850 billion loss in value last year and $720 billion in 2014.

From giants like Royal Dutch Shell Plc to exploration minnows, the oil slump has hammered producers around the world. To ride out the downturn, these companies have slashed jobs, piled on debt and canceled billions of dollars of projects.

By agreeing to cut production and reversing a two-year policy of pumping at full throttle, the Organization of Petroleum Exporting Countries gave these companies hope in September. Yet, the group is struggling to overcome obstacles to implementing the deal.

“We all know what the oil companies are hoping for — a cut. The companies have become leaner and meaner than they have ever been, but they would still be looking at OPEC closely. It’s one of the most important OPEC meetings,” said Brendan Warn, a managing director at BMO Capital Markets in London.

Following two years of declines, the largest gain since 2009 was made by the Bloomberg World Oil & Gas Index of 58 companies which is up 12 percent this year. Among the large companies that have increased this year are Exxon Mobil Corp., Chevron Corp., Shell, Total SA and BP Plc. After languishing at the bottom in 2015, energy companies are the second-best performers in the MSCI World Index.

The year didn’t start so well however. As OPEC kept its taps open and production from Russia and the U.S. was increasing, brent crude fell as low as $27.10 a barrel in January, the lowest since November 2003.

Amid increasing domestic financial pressure and the group decided to cut production for the first time in eight years, Saudi Arabia, which had led OPEC’s free-flowing oil policy, changed course in September.

Since every dollar increase in crude raises BP’s annual adjusted profit by about $300 million, according to the company’s website, oil bosses could be forgiven for hoping OPEC members resolve their differences.

By renegotiating contracts, making projects smaller and cutting workers, CEOs from BP’s Bob Dudley to Shell’s Ben Van Beurden have reduced their operating costs. With a price level of about $50 to $55 a barrel, these CEOs wil be able to balance their cash sources and spending next year.

“It’s one thing to hope and another to plan your business for the future,” Warn said. Regardless of the outcome of the OPEC talks “the companies will be focusing on the things they can control, like efficiency and costs.”

(Adapted from Bloomberg)


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