Oil has been in the news for obvious reasons over the past month, the price of which has dropped to approximately $60.50 from $110+ in June of this year. This decline has occurred for a number of reasons, one of which is due to the US almost doubling its oil production and thus increasing its energy independence by producing 9 million barrels per day. The International Energy Agency (IEA) is estimating that the US production will increase to 10 million per day within the year, inevitably increasing supply further, provided OPEC does not step intervene. The fall in the price of oil has had consequential implications for energy stocks.
Despite the significant fall in oil prices, drilling for oil and maintaining a reliable flow to produce a sufficient amount of barrels per day is becoming increasingly complex for firms such as Exxon, Chevron, Total, BP and Royal Dutch Shell. These organisations have been suffering from declining revenues and profits, over the last decade in particular. Additionally, their cost of producing oil is steadily increasing, in addition to their level of production is decreasing too. The fact that oil companies are struggling to maintain a consistent level of production per economic year is not new news for investors and corporations alike.
In order to maintain investor confidence and to continue to produce a sufficient amount of barrels per year; major oil corporations must develop a greater sense of certainty when it comes to drilling in a specific regions, especially in regards to shale oil. They must also be mindful of their costs, which may be a heavy burden on the income statement. This is where oil research firms come into play, and they may benefit from the oil companies’ struggles to produce an acceptable level of oil over the long-term.
There are a variety of different companies researching specific reservoirs in order to determine the possible level of oil within a particular region. Examples of such firms include Schlumberger, Core Laboratories and Baker Hughes. Core Laboratories provides data to the energy industry by analysing specific reservoirs. The data that is produced can then be utilised by firms such as Exxon for example, to determine the capacity of both oil and gas that may be present in the reservoir. Similarly, Baker Hughes and Schlumberger perform similar activities. Their evaluations of specific reservoirs where a sufficient amount of oil may or may not be present can be crucial to the multinational oil corporations. The strategies and solutions produced by these firms will enable organisations such as Shell and BP to reduce their costs, which over the course of the last couple of years in particular, which have become increasingly burdensome over the previous years.
If one were to look at the income statements and balance sheets for the oil and natural gas research firms it would be relatively comforting from an investor point of view. Schlumberger’s assets as well as Baker Hughes’ assets are primarily financed with equity as opposed to debt, which evidently implies that that they are not highly leveraged. BHI has a debt to equity ratio of approximately 0.57, whereas SLB possesses a debt to equity ratio of around 0.70. Unfortunately, the same cannot be applied to Core Laboratories as its assets are mainly financed with debt as opposed to equity. Therefore, there is a relative amount of leverage with a debt to equity ratio of 3.05. However, they all have a current ratio greater than one thus there is a positive implication with regard to any urgent scenario surrounding the firms’ current liabilities. They are 2.23 for CLB, 1.94 for SLB and 2.47 for BHI.
The aforementioned firms saw their stock prices soar in the economic year 2013, but midway through 2014 their prices have continued to decline in association with the fall in oil prices. For example, CLB has declined from a high of $221 to trade now at approximately $119. SLB and BHI reached highs of $118.76 and $75.64 to trade now at $82.50 and $55.10. The major oil corporations will become more dependent on the oil and gas reservoir research organisations in the long term, due to their high level of expertise and commitment towards minimising the cost aspect of their income statements. A healthy future may well be in store for the likes of CLB, BHI and SLB, and with their stock prices trading at low levels in comparison to their highs in the first two quarters of 2014 this could be an ideal purchasing opportunity for any investor interested in the energy industry upon which the global economies are dependent.
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