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number cruncher

What are we looking for?

How to evaluate oil companies in the decades-long shift to a green economy.

The screen

November began with Exxon Mobil Corp. and Chevron Corp., the two largest oil companies based in the United States, both reporting third-quarter earnings that were billions of dollars lower than the same period a year ago. The price of West Texas Intermediate and Brent crude are both down roughly 30 per cent from last October as regulation and consumer preferences have shifted demand to cleaner forms of energy. However, the world’s largest crude oil producer, state-owned Saudi Aramco, will soon have to start reporting quarterly earnings, too, as it prepares for its long-awaited initial public offering early next month. There seems to be a disconnect between a global push for cleaner energy and the timing of history’s biggest IPO by a crude oil giant.

It stands to reason that an accelerating and persistent push for cleaner energy sources will continue to drive down the price of oil. Only the largest companies that can operate at scale, with the lowest marginal cost of production and the smallest carbon footprint will be able to survive in the medium term and will be left standing to drill the last barrels of oil the world consumes. We will look at the listed oil companies that produced more than 1.5 million barrels a day last year and compare them on these qualities.

First, we look at the companies’ operating margins to see how much of a price decline in oil they can experience and stay profitable under the current model in which they operate.

Next, we look at operating expenses for the past fiscal year and calculate the total operating expenses per barrel of oil per day produced.

Finally, we look at the companies’ total emissions intensity as measured by tonnes of CO2 equivalent per barrel per day (and Refinitiv’s estimate in the case of PetroChina, which doesn’t disclose emissions). Note that “total emissions” refers to Scope 1 and Scope 2 emissions, that is, all direct and indirect emissions associated with producing the oil (and other company operations). The bulk of emissions associated with oil are Scope 3 emissions, meaning when they are ultimately burned downstream as fuel, but company disclosures around their Scope 3 emissions are far too sparse and unreliable at present to be used as a valid basis for comparison.

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What we found

The screen yields nine companies from seven countries. Perhaps surprisingly, Russia’s Rosneft Oil Co. PJSC had the lowest annual operating expenses for each barrel of oil produced and the lowest reported emissions for each barrel, as well has the highest forecast dividend yield and second healthiest operating margin. Rosneft also appears undervalued relative to these peers as it had by far the highest production last year but the second-lowest market cap. However, the only company with a lower market cap is Lukoil PJSC, also Russian, and a discount on Russian companies is hardly surprising given the current geopolitical situation. Last week, Rosneft also reported earnings and came in 5 per cent higher than the consensus expectation.

Investors are advised to do their own research before trading in any of the securities shown below.

Select global oil companies

CompanyIdentifierCountryMkt. Cap. (US$ Mil.)Operating Margin (%)Crude Output (B/D, Mil.)Ann. OpEx (US$ Mil.)Ann. OpEx Per B/D (US$)CO2e Emissions (Mil. Tonnes, Ann.)CO2e (Tonnes per B/D)Div. Yld. (%, NTM)1Y Rtn. (%)"Recent Close
(Native Currency)"
Rosneft Oil Co. PJSCROSN-MCXRussia75,28313.04.7102,89922,0207616.37.84.2453.00
PetroChina Co Ltd601857-SSChina140,4045.02.4325,171133,677280115.22.8-28.45.63
Exxon Mobil CorpXOM-NUSA297,6167.52.3258,493114,07512253.85.1-7.770.34
BP PLCBP-LUK131,4325.02.2283,904129,5775424.76.32.0506.70
Petroleo Brasileiro SAPETR4-SABrazil100,49718.52.173,43635,3236229.72.632.530.45
Lukoil PJSCLKOH-MCXRussia67,8099.51.8104,41957,8183620.15.523.76,048.00
Royal Dutch Shell PLCRDSA-ASNetherlands236,8548.71.8354,723196,8508245.
Chevron CorpCVX-NUSA228,4369.71.8143,31680,4246335.44.17.1120.81
Total SATOTF-PAFrance145,1509.01.6167,524106,9765837.05.83.749.41

Source: Refinitiv

Hugh Smith, CFA, MBA, is the manager of Refinitiv’s investment management business for the Americas, and a director on the board of the Responsible Investment Association of Canada.

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