On the face of it, the Majors turned in some pretty good results in the second quarter. Most companies reported substantially higher earnings than in the second quarter of the previous year off the back of higher oil and gas price realisations. Moreover, the trend for the group has been steadily upwards since early 2009, albeit starting at a lower overall level than the heady days of 2008 when bloated oil prices swelled company coffers. BP (LON:BP.) stands out with its spectacular $17 billion reported loss in the second quarter, and even if we look at its underlying performance by removing the effects of non-recurring items, growth in adjusted earnings was just 15% – much lower than any of its peers. (see Normalised Net Income graph below). So not much cheer to report here.
So earnings in the short term look reasonable. But now let’s stand back a bit and look at what the markets make of all this. The graph below of market capitalisation at end quarter tells the story. You can see the catastrophic drop in BP’s market capitalisation during the second quarter but note also that the overall trend is for the market value of ALL of these companies to fall. Indeed while ExxonMobil is falling from a greater height, the gap between its total market cap and that of its competitors is narrowing. A certain lack of enthusiasm among investors for its deal with XTO appears to have a lot to do with this. The same pattern shows up if we compare enterprise value for these companies. The conclusion you might draw is that in terms of perceived future value, (as opposed to generating dividends) these companies are in trouble.Debt Capacity – or Lack of It
Despite the exceptional calls on BP’s capital during the second quarter as a result of the Horizon disaster, the company managed to further trim its debt exposure relative to its capital employed. The company’s ratio of debt (net of cash) to total capital employed was just 18.5% by the end of the second quarter, Evaluate Energy calculates. This may be high by the standards of BP’s main competitors but not particularly onerous in an historical perspective.
If…
