They were called the Seven Sisters, and not long ago they were the giants of the energy world. Today the seven – Exxon, Gulf, Texaco, Mobil, Standard Oil of California, British Petroleum and Royal Dutch Shell – although they have slimmed down to five, still give the impression that their power and reach is vast.
Nothing could be further from the truth. Big Oil, or the supermajors, as they're collectively known, control a mere 4 per cent or less of known oil and gas reserves. Like the Detroit auto makers, they are becoming bit players on the global stage. Investors beware. The companies that combined endless growth with decent, even luxurious, dividend payments, are fading from view, and maybe within your stock portfolio too.
The deal flow says it all. Investment in commodities is booming as economies strengthen. But it is the national oil companies (inelegantly known as NOCs) that are in the thick of it. This month China Petrochemical bought Occidental Petroleum's operations in Argentina for almost $2.5-billion (U.S.). Earlier, another Chinese state oil player, CNOOC, in partnership with Bridas, an Argentine oil company, paid $7-billion for BP's 60-per-cent stake in Argentina's Pan American Energy. As Chinese and other national oil companies extend their grip on resources from the Middle East and Russia to Africa and Latin America, the supermajors are getting squeezed out.
There is no reason to think the trend will reverse, for two reasons. The first is the rise of resource nationalism. Nationalism is depriving the supermajors and other Western oil biggies from many of the prizes they seek (Canada recently proved it is no slouch in the nationalism game by blocking BHP Billiton's $39-billion takeover attempt of Potash Corp. of Saskatchewan).
Governments in the developing world, where most of the future oil development will take place, realize that they can earn more by retaining control of a resource instead of letting much of the profits get siphoned off to shareholders in Europe and North America. And when they do deals with foreign oil companies, they often go with the state-owned ones. Since the state companies are not accountable to private shareholders, they can offer higher prices and often throw in a sweetener or two, such as commitments to build hospitals and schools. The Chinese companies have turned the added value deal into an art in Africa.
The second is the sheer aggression of the state energy companies. They are driven by voracious demands for fresh reserves and cheap funding from their governments. Ego also plays a role. How else to explain Gazprom's obsession with expanding outside of Russia? The Russian energy market is vast and begging for development, but Gazprom seems bent on making a splash on the international stage.
In short, the supermajors are getting boxed in. They go where they are welcome, hence the popularity of the Alberta oil sands and the Gulf of Mexico. Or they go to highly risky locations, as BP did with disastrous results in the deepwater bits of the Gulf. Australia is also attractive to them, in spite of the Australian government's sporadic attempts to tax resource wealth to the hilt, and the next frontier will be the ultrahigh-risk Arctic.
The supermajors are rapidly falling down the league tables. At last count, 14 of the top 20 oil and gas producers, measured by reserves, were national oil companies. The biggest stock market-listed name is Exxon, ranked 12th, according to Petroleum Intelligence Weekly. The national oil companies' share of world oil reserves and production will keep growing, partly because new companies are emerging. Sinopec of China, Petrobras of Brazil and Malaysia's Petronas, none of them market forces a decade or two ago, are competing strongly for exploration and production rights wherever they can.
The upshot is that the big oil companies in your portfolio are unlikely to be the growth stars that helped pay for your parents' and grandparents' cottages and cars. But that doesn't mean these wheezing beasts should be written off. Going sideways is no sin as long as the dividends are fat.
Exxon is one supermajor that combines dividend growth (the current yield is 2.44 per cent) with a history of share buybacks – the company keeps buying itself. An attractive option is to buy the smaller exploration and production companies, which exist to expand production aggressively, all the better to get snapped up by biggies. As the national oil companies come to dominate the global oil market, the big oil companies with a history of underwhelming dividend growth will be the ones to avoid.
Eric Reguly