Oil price Viagra is losing its effect on Big Oil

By Reuters Staff
April 25, 2011

By Christopher Swann and Fiona Maharg Bravo
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

NEW YORK/MADRID — Rising crude prices are like Viagra for Big Oil. First-quarter earnings, due next week for U.S. majors, are set to display the glow. But even the stocks that should be most sensitive to prices — like Chevron and Hess — no longer seem to be tracking higher.

Chevron has already said it was paid about $10 more per barrel in the first three months of this year than in the previous quarter. And since then, the price of Brent crude has surged still higher to top $120 a barrel. Chevron pumps much more crude than cheaper natural gas. Along with other firms like Hess and Occidental Petroleum, that makes its earnings and stock price relatively sensitive to the oil price. Relative to rivals, these firms also have less of their output tied up in production-sharing agreements, in which governments grab more as prices rise.

As a result, earnings per share at Chevron climb about 20 percent for a $10 increase in the price of oil, according to Credit Suisse. By contrast, profit at France’s Total, a company with less oil and more production-sharing agreements in its mix, gets just a 7 percent boost. The likes of Exxon Mobil and Royal Dutch Shell fall somewhere in between.

But the blue pill of rising crude seems to be losing its effect on oil stocks. Not even Hess — which Credit Suisse reckons gets a 30 percent profit boost for every $10 hike in the oil price — has kept pace with the 40 percent rise in the price of Brent crude over the past year.

One interpretation is that investors don’t think current prices are sustainable. Sanford Bernstein estimates that the shares of European majors are priced for oil at $90 a barrel, about a quarter below the current price. Above $100 a barrel, demand is at risk. In addition, crude oil spikes aren’t usually good news for refining and marketing margins, since the extra costs can’t easily be passed on.

All this means that despite benefiting from high prices in the first quarter, oil executives may not applaud further increases. That applies especially to the companies whose stocks have gained the most. If pricey barrels start to chip away at demand, they are likely to be the first to suffer.

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