What a difference a year makes, if not so much for oil prices then certainly for oil company stocks. Last week was significant for oil markets, as it marked the retrenchment of crude prices from record heights this summer to approximately their levels of a year ago.
As of Friday, the price of the North American benchmark West Texas Intermediate crude stood at US$77.70 a barrel, down four per cent from a year earlier. Rather than reflecting oil prices, which are still unusually strong in historic terms, oil shares have plunged to levels more closely mirroring the general carnage that has recently gripped stock markets worldwide as part of the fallout from the global financial crisis.
The stocks of all of the exclusive "Big Five" group of major international oil companies plumbed new 52-week depths in western stock markets' most recent trading session on Friday. Their 12-month declines range from 33 per cent for the world's biggest publicly traded oil producer, ExxonMobil, to 45 per cent for Europe's biggest oil company, Royal Dutch Shell. Some of the stocks, including Shell's, are at five-year lows.
In terms of single-day losses, Chevron led the pack downwards on Friday with a 9.6 per cent plunge. Chevron, along with Exxon and Shell, saw a greater percentage of their market capitalisation wiped out in one day than oil prices have lost in a year. Exxon's big fall has come less than three months after the company reported the biggest ever quarterly profit for any US company: US$11.68 billion (Dh42.91bn) on $138.07bn revenue for the company's second financial quarter.
Has the plunge in oil company share prices outstripped oil fundamentals? Some analysts think so. "Certainly, the performance of blue-chip oil producers such as Exxon Mobil ... would suggest that the worries about demand destruction have been overstated," the US financial publication Barron's said in a stock comment last week. But this does not mean that major oil companies' share prices will necessarily rebound at any time soon. Judging from the stocks' recent performance, investors are scared of the volatile energy sector and see a further oil price plunge to $50 per barrel or lower as more likely than a rebound to $100.
What level it reaches could make for the success or failure of Opec in coming months, as it tries to stabilise oil markets, and is crucial to whether investor confidence in the energy sector takes months or years to restore. If the latter is the case, then the long-term outlook for security of energy supply will be that much less secure. This is because the business of finding and producing oil is capital intensive, and the more an oil company's share price sinks, the more expensive its access to capital becomes. Even for a company like Exxon - which may have no need to raise new equity capital by issuing shares - a sinking share price means a rising debt to equity ratio, carrying the risk of a credit rating downgrade and higher borrowing costs.
More expensive capital means less money for the company to spend on its main business of pumping crude, translating into less oil for consumers. The major oil companies are not the only energy producers to have seen their share prices eviscerated in the general stock market panic. Among the hardest hit have been alternative energy producers. US companies including HydroGen, a fuel-cell maker, Nova Biosource Fuels, a biodiesel distiller, and SunPower, a solar energy company, are among those with stocks that have plunged by more than 70 per cent from their 52-week highs.
Not to be outdone by its bigger US and European rivals, Abu Dhabi National Energy Company, also known as Taqa, has racked up a 40 per cent stock decline in the past 12 months. The government-controlled energy company has invested heavily in overseas oil, gas and power projects in the past two years. Taqa's shares closed yesterday at Dh1.80 on the Abu Dhabi Securities Exchange, down from Dh3.01 a year ago.
@Email:tcarlisle@thenational.ae