I noticed the growing gap between the reality and recently published reports forecasting a brighter future which will uplift crude oil prices to a healthy level. It wouldn’t be an issue if not one detail. The optimistic reports were published by the world leading institutions. (Is it just unreasonable optimism?“, “NUMBERS DO NOT SUPPORT OPTIMISM“)

I find such optimism rather disturbing because these reports are misleading.

It is clear that Donald Trump’s unpredictability, inconsistency, and dramatic opinion swings as well as total lack of care whether or not his statements have legitimate grounds, sent a strong signal that 2017 will be highly volatile. 

Geopolitical events of unprecedented scale are taking place continuously. A probability factor that such volatility could trigger negative consequences for the world economy in particular, and the global stability, in general, is substantial.   

In addition, Donald Trump’s policy of isolationism, lack of clarity regarding the announced tax reforms, health care, immigration and other significant issues do not create a friendly environment for businesses to grow. It is given that lack of growth does not produce demand to lift crude oil price.

However, there is another sign which doesn’t support the option for us to enjoy a better oil price. Based on the information published by the Simply Wall Street, I compiled an express overview of the financial position of the selected integrated and independent oil and gas companies.

Exxon Mobil

NYSE: XOM

NYSE-XOM intrinsic value Simply Wall St (1)

The current share price of Exxon Mobil is above its future cash flow value.

NYSE-XOM Future ROE Simply Wall St (1)Exxon Mobil is not expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be below 20%.

NYSE-XOM Past Earnings Growth Simply Wall St

  • Exxon Mobil’s earnings growth has not matched the industry average in the past year.
  • Exxon Mobil’s 1 year earnings growth is negative.
  • Exxon Mobil earnings have fallen over the past 5 years.

NYSE-XOM Income Statement Simply Wall St

NYSE-XOM Past Revenue and Net Income Simply Wall St

  • Poor return on shareholders funds (ROE) last year.
  • Exxon Mobil performed worse than the Energy industry average based on return on assets (ROA) last year.
  • Performance based on revenue producing assets (ROCE) has been diminishing over 3 years.

NYSE-XOM Balance Sheet Net Worth Simply Wall St

  • Exxon Mobil short term (1 year) commitments are greater than its holdings of cash and other short term assets.
  • Exxon Mobil’s long term commitments exceed its cash and other short term assets.

NYSE-XOM Historical Debt Simply Wall St (2)

  • The level of debt (25%) compared to net worth is satisfactory (less than 40%).
  • The level of debt compared to net worth has increased over the past 5 years (11% vs 25% today).
  • Total debt is well covered by annual operating cash flow (greater than 20% of total debt).
  • Interest on debt is well covered by earnings (16.3x coverage).

Royal Dutch Shell

NYSE: RDS.A

NYSE-RDS.A intrinsic value Simply Wall St

Royal Dutch Shell’s share price is about right.

NYSE-RDS.A Future ROE Simply Wall St

Royal Dutch Shell is not expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be below 20%.

NYSE-RDS.A Past Earnings Growth Simply Wall St

  • Royal Dutch Shell’s earnings growth has exceeded the industry average over the past year.
  • Royal Dutch Shell’s 1 year earnings growth exceeds its 5 year annual average (90.4% vs -24.5%).
  • Royal Dutch Shell earnings have fallen over the past 5 years.

NYSE-RDS.A Income Statement Simply Wall St

NYSE-RDS.A Past Revenue and Net Income Simply Wall St

  • Poor return on shareholders funds (ROE) last year.
  • Royal Dutch Shell performed worse than the Energy industry average based on return on assets (ROA) last year.
  • Performance based on revenue producing assets (ROCE) has been diminishing over 3 years.

NYSE-RDS.A Balance Sheet Net Worth Simply Wall St

  • Royal Dutch Shell is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
  • Royal Dutch Shell’s long term commitments exceed its cash and other short term assets.

NYSE-RDS.A Historical Debt Simply Wall St

  • The level of debt (49%) compared to net worth is high (greater 40%).
  • The level of debt compared to net worth has increased over the past 5 years (23% vs 49% today).
  • Total debt is well covered by annual operating cash flow (greater than 20% of total debt).
  • Interest on debt is not strongly covered (ideally 5x) by earnings (earnings are 0.8x annual interest expense).

BP

NYSE: BP

NYSE-BP intrinsic value Simply Wall St

BP’s share price is about right.

NYSE-BP Future ROE Simply Wall St

BP is not expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be below 20%.

NYSE-BP Past Earnings Growth Simply Wall St

  • BP’s has become profitable in the last year making it difficult to compare the industry average.
  • BP’s has been loss making last year but is now profitable.
  • BP earnings have fallen over the past 5 years.

NYSE-BP Income Statement Simply Wall St

NYSE-BP Past Revenue and Net Income Simply Wall St

  • Poor return on shareholders funds (ROE) last year.
  • BP performed above the Energy industry average based on return on assets (ROA) last year.
  • Information is not available.

NYSE-BP Balance Sheet Net Worth Simply Wall St

  • BP is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
  • BP’s long term commitments exceed its cash and other short term assets.

NYSE-BP Historical Debt Simply Wall St (1)

  • The level of debt (60%) compared to net worth is high (greater 40%).
  • The level of debt compared to net worth has increased over the past 5 years (39% vs 60% today).
  • Total debt is not well covered by annual operating cash flow (less than 20% of total debt).
  • Interest on debt is not strongly covered (ideally 5x) by earnings (earnings are 0.1x annual interest expense).

Chevron

NYSE: CVX

NYSE-CVX intrinsic value Simply Wall St

Chevron’s share price is about right.

NYSE-CVX Future ROE Simply Wall St

Chevron is not expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be below 20%.

NYSE-CVX Past Earnings Growth Simply Wall St (1)

Chevron does not currently make a profit.

NYSE-CVX Income Statement Simply Wall St (1)
NYSE-CVX Past Revenue and Net Income Simply Wall St
  • Negative return on shareholders funds (ROE) last year.
  • Chevron had negative or no return on assets (ROA) last year.
  • Return based on revenue producing assets (ROCE) is negative or zero.

NYSE-CVX Balance Sheet Net Worth Simply Wall St

  • Chevron short term (1 year) commitments are greater than its holdings of cash and other short term assets.
  • Chevron’s long term commitments exceed its cash and other short term assets.

NYSE-CVX Historical Debt Simply Wall St (1)

  • The level of debt (31%) compared to net worth is satisfactory (less than 40%).
  • The level of debt compared to net worth has increased over the past 5 years (8% vs 31% today).
  • Total debt is well covered by annual operating cash flow (greater than 20% of total debt).
  • Company is making a loss, therefore interest on debt is not well covered by earnings.

TOTAL S.A

NYSE: TOT

NYSE-TOT intrinsic value Simply Wall St

TOTAL S.A’s share price is about right.

NYSE-TOT Future ROE Simply Wall St

TOTAL S.A is not expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be below 20%.

NYSE-TOT Past Earnings Growth Simply Wall St

  • TOTAL S.A’s earnings growth has exceeded the industry average over the past year.
  • TOTAL S.A’s 1 year earnings growth exceeds its 5 year annual average (17.5% vs -16%).
  • TOTAL S.A earnings have fallen over the past 5 years.

NYSE-TOT Income Statement Simply Wall St

NYSE-TOT Past Revenue and Net Income Simply Wall St

  • Poor return on shareholders funds (ROE) last year.
  • TOTAL S.A performed above the Energy industry average based on return on assets (ROA) last year.
  • Performance based on revenue producing assets (ROCE) is broadly the same over 3 years.

NYSE-TOT Balance Sheet Net Worth Simply Wall St

  • TOTAL S.A is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
  • TOTAL S.A’s long term commitments exceed its cash and other short term assets.

NYSE-TOT Historical Debt Simply Wall St

  • The level of debt (56%) compared to net worth is high (greater 40%).
  • The level of debt compared to net worth has increased over the past 5 years (47% vs 56% today).
  • Total debt is well covered by annual operating cash flow (greater than 20% of total debt).
  • Interest on debt is well covered by earnings (6.4x coverage).

ConocoPhillips

NYSE: COP

NYSE-COP intrinsic value Simply Wall St

The current share price of ConocoPhillips is above its future cash flow value

NYSE-COP Future ROE Simply Wall St

ConocoPhillips is not expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be below 20%.

NYSE-COP Past Earnings Growth Simply Wall St

ConocoPhillips does not currently make a profit.

NYSE-COP Income Statement Simply Wall St

NYSE-COP Past Revenue and Net Income Simply Wall St

  • Negative return on shareholders funds (ROE) last year.
  • ConocoPhillips had negative or no return on assets (ROA) last year.
  • Return based on revenue producing assets (ROCE) is negative or zero.

NYSE-COP Balance Sheet Net Worth Simply Wall St

  • ConocoPhillips is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
  • ConocoPhillips’s long term commitments exceed its cash and other short term assets.

NYSE-COP Historical Debt Simply Wall St

  • The level of debt (77%) compared to net worth is high (greater 40%).
  • The level of debt compared to net worth has increased over the past 5 years (41% vs 77% today).
  • Total debt is not well covered by annual operating cash flow (less than 20% of total debt).
  • Company is making a loss, therefore interest on debt is not well covered by earnings.

EOG Resources

NYSE: EOG

NYSE-EOG intrinsic value Simply Wall St

The current share price of EOG Resources is above its future cash flow value.

NYSE-EOG Future ROE Simply Wall St

EOG Resources is not expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be below 20%.

NYSE-EOG Past Earnings Growth Simply Wall St

EOG Resources does not currently make a profit.

NYSE-EOG Income Statement Simply Wall St

NYSE-EOG Past Revenue and Net Income Simply Wall St

  • Negative return on shareholders funds (ROE) last year.
  • EOG Resources had negative or no return on assets (ROA) last year.
  • Return based on revenue producing assets (ROCE) is negative or zero.

NYSE-EOG Balance Sheet Net Worth Simply Wall St

  • EOG Resources is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
  • EOG Resources’s long term commitments exceed its cash and other short term assets.

NYSE-EOG Historical Debt Simply Wall St

  • The level of debt (50%) compared to net worth is high (greater 40%).
  • The level of debt compared to net worth has increased over the past 5 years (40% vs 50% today).
  • Total debt is well covered by annual operating cash flow (greater than 20% of total debt).
  • Company is making a loss, therefore interest on debt is not well covered by earnings.

None of the above companies are expected to deliver strong performance. However, all companies show either insignificant or negative profit. On the other hand, accelerated debt increase is a major concern.

It is also alarming that short-term commitments of Exxon Mobil and Chevron exceed their cash and short-term assets. Whereby all companies may not be able to meet their long-term commitment.

Geopolitical uncertainties, fading hope that the oil price will soon be recovered and growing debt, do not suggest soon revival.  

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We shall also keep in mind that cost competitiveness of renewable sources of energy is continuously improving.

PV capex

The cost of solar PV modules has fallen 99% since 1976 according to Bloomberg New Energy Finance (BNEF).viii Over the last seven years alone, solar PV costs have come down 85% according to the latest research from Lazard.ix This cost deflation is the primary driver for an increase in solar PV installations globally.

Between 2008 and 2013, renewable power generation, of which solar PV was a big part, grew by 8% in total. The five major European utilities were very much misaligned with this shift, costing them €100 billion in value over the period.xi This demonstrates exactly why the extent to which solar PV costs fall further in the future, and subsequent penetration, is critical to those in the global energy sector.

PV capex1

The above chart compares the global power mix out to 2050 in scenarios in which original and lower-cost solar PV assumptions are paired with climate policy that either exceeds current NDCs, ie ‘Strong’ policy effort, or under-delivers on the NDCs, ie ‘Weak’ policy. The scenarios with NDC level climate policy feature in between these two pathways in terms of the balance between fossil fuels and renewable energies.

PV capex2

This chart illustrates what solar PV generation means in terms of the installed capacity supplying this power and how this study’s scenarios compare to projections from other institutions.

PV capex3

The above shows that penetration of BEVs plus PHEVs is virtually the same whether ‘Weak’, NDC or ‘Strong’ climate policy effort is assumed. This represents the fact that in our modelling, EVs are cheaper from 2020 onwards and are selected by the least-cost optimising TIAM-Grantham from then onwards. Any cost penalty incurred by ICEs only increases the cost discrepancy to EVs. This modelling approach explores the potential penetration of EVs when they are the cheapest option available to economically rational consumers. It assumes, therefore, that perceived challenges, such as range anxiety, are overcome and the infrastructure required for high EV penetration is installed. The future demand and use of EVs are not yet known, but if these obstacles are overcome, then there seems potential for a faster switch to EVs from ICEs than thought by many commentators. 

PV capex4

Scenario ‘NDC_EV’, ie the scenario assuming an NDC consistent level of climate policy action combined with lower EV costs, sees 16.4 million barrels of oil per day (mbd) being displaced annually by 2040 due to EV penetration in the road transport sector. By 2050 this figure is 24.6mbd in ‘NDC_EV’. This level of oil displacement due to EVs is a little above that from BNEF’s 2016 New Energy Outlook (NEO). Both are significantly above the IEA’s 2016 New Policies Scenario (NPS) and even the IEA’s 2°C (450) scenario that shows EVs could displace six mbd of oil demand by 2040.

PV capex 5

PV capex6

I think that the trend which shows growing share of renewables in total energy consumption, the ability of the U.S. shale producers to react to a slight oil price improvement and absence of demand growth is in direct opposition to the unreasonable optimistic opinion that the oil price shows sign of recovery.

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