Market said to be declaring death of 'Major Oil model'

by Bob Tippee, Editor

Investors and large oil companies have steered onto paths so divergent that Deutsche Bank Securities Inc. says, "The market is declaring the Major Oil model dead." In a research report, analysts Paul Sankey, David T. Clark, and Silvio Micheloto cite valuation metrics against which the market heavily discounts major oil companies relative to service firms, independent producers, refiners, and the general market.

Reasons cited by the analysts include:

• The companies follow strategies "fundamentally opposing" market desires. They stress financial conservatism, minimum debt, hedged portfolios, avoidance of make-or-break investments, and 10-50 year planning horizons. The market rewards indebted companies committed to high-risk exploration with 1-3 year growth plans and those with break-up strategies.

• The traditional business model of international oil companies no longer works. It involves large exploratory success followed by major project development, exploitation, transport, refining, and chemicals production. Scale and integration make that model work—but only for some. "Only ExxonMobil can claim to have enhanced returns through integration," the analysts say. And only Chevron can boast of superior returns through large exploratory success and organic oil reserves replacement.

• Major companies missed the initiative off Brazil and in deepwater West Africa and US unconventional plays. They now must catch up via mergers and acquisitions.

• Access to major oil development projects increasingly depends on payment for service, "with Abu Dhabi, Iraq, and Russia all offering fixed margins with limited upside in exchange for project management skills."

• Size criteria and control by governments of large oil opportunities force major companies to concentrate on gas, which presents investment and cash-flow patterns at odds with traditional emphases on scale and integration.

If the analysts are right, the main problem for companies seems to be one that has been around awhile: reconciling short-range investor expectations with the capital needs of companies oriented to behemoth projects with lives measured in decades.

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