In the jungle of oil companies, it is hard to find a favourite as the companies look very similar to each other. Their share prices tend to move in tandem as well, as can be seen in chart 1 where Exxon is plotted against its peers, BP, Chevron, Total, ENI, Statoil, Conoco Philips and Shell.
When measuring an oil company’s future earnings its oil reserves are a good way of determining its future production capacity.
Reserves vs. production
Chart 2 plots current production vs. current reserves of the big oil companies. As can be seen, Exxon has the largest reserves in the industry at almost 25,000 million barrels of oil equivalents (boe). With a current production of 1,623 million boe per year (or 4.5 million boe per day), its implied years of production is 15.3 years at the current rate (2010 figures). With 15.3 years of implied production Exxon is at the high end of the chart while Statoil, with 7.8 years, is at the low end.
Implied years of production vs. pricing
In chart 3 we have added another element – the P/E multiple. What can be seen is that BP, which has 13 years of implied production trades below 6 times its expected earnings for 2013. Chevron on the other hand has only 10.5 years of production and trades at 8.1 which is more expensive. In the long run, all companies will have to continuously explore and develop new reserves and the success of this process ultimately reflects the success of the company. However, all other things being equal, big reserves and cheap pricing looks attractive.
Risk aspects
A barrel of oil is not just a barrel of oil. First of all, barrels of oil equivalents can include both oil and gas of varying qualities, which makes one company’s reserves more valuable than others. Secondly, there are risk aspects regarding where a company has its reserve base. Statoil, for example, has the bulk of its reserves in the politically stable Norwegian Continental Shelf, while BP has a large exposure to the troubled Gulf of Mexico. Of course, at the end of the day, the oil price, which is determined by market conditions, will determine how much the companies get in return for their produced barrels.