Swimming naked, oil markets edition

9 Dec

Big oil companies are trying hard to put their trunks back on before the tide goes out. They might even try to take the trunks off of some others, just not to get caught naked. No time to create an oil major.

Swimming naked. Source: Eagle eye/Independent

Time to create a new oil major – that was the title of Nick Butler’s piece last week in his FT blog. He observes that all majors are preparing to sell assets next year and lowering their investments, as recent returns have not matched growth in spending. And we are not talking about majors selling unprofitable refining assets or marginal fields not worth the trouble. Now they are selling producing assets and even undrilled prospects.

But who will buy the assets?

Butler argues:

“the scale of the asset sales now in prospect means something more [than new independent businesses] is needed  – the creation of one or more new mid to large-sized companies with the financial and technical resources to run a portfolio of fields in different regions”.


So is this the time to create an oil major? Absolutely not. And that is because of a growing sense on the oil market that the US tight oil boom and easing in Iran might push prices lower.  It is also suggestive that Shell ditched its plans to build a US gas-to-liquids plant last week.  And probably not because there was not enough gas…

Creating a new oil major out of the unwanted assets of the old ones would effectively mean that the new investors go against the collective wisdom of the industry. Sometimes the collective wisdom is wrong, and we are more likely to remember those cases. But most of the time it is not, and it is a brave investor who bets against it. Especially if the bet is as huge as creating a new major.

Who’s the patsy?

Oil markets are cyclical (as our collection below of Economist covers eerily attest). How much money you make on your investments will depend crucially on WHEN you sell or buy your assets. Buying high (and probably having to sell low) is not a really good proposition. But creating an oil major now could be exactly that.

Source: What comes after oil? Mostly oil.

The downward pressures on prices have been accumulating – but so far have been roughly counterbalanced by (probably temporary) supply disruptions. It is no surprise that majors are trying to sell now. They are probably afraid that if they don’t do it on time, their assets might be worth less. And they hope they can find others who would buy these at still relatively OK prices.

It is to be seen whether they manage to pull off that trick or not. Given the mounting pressure that we have covered here and here, the question is probably not IF oil prices decline, but only WHEN they decline. Also, given oil consumption’s low sensitivity to price changes (low price elasticity), prices need to change significantly to make demand adjust. Still, the ‘when’ this might happen is a billion-dollar one.

We wish the oil majors good luck in finding patsies on time. Some German Landesbanks or Spanish cajas, maybe? Or a good old state-owned investment fund? Just remember, “If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”

[Googling up the poker patsy quote I just realized that both that and the “Only when the tide goes out do you discover who’s been swimming naked” are from Warren Buffett, or at least attributed to him. Wow.]

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