With oil prices rising 29% so far this year, things are looking up for the oil industry.
Goldman Sachs analysts see “a turning point in the oil and gas capital expenditure cycle, as seven years of declining activity have depleted spare capacity in most parts of the industry, and the Russia-Ukraine conflict provides a renewed sense of urgency around security of supply,” they wrote in a commentary.
The analysts cite five overriding themes.
1) “Shrinking reserves: oil reserve life shrank to 25 years in 2022, a 52% reduction from 2014, as the industry stopped exploring for new resources. Investment delays since 2014 will cost 10 million barrels per day of oil production – equivalent to Saudi production – by 2024.” Meanwhile, “we do not expect material liquefied natural gas (LNG) growth to materialize until 2025.
2) “Steepening cost curve: the top projects cost curve has become smaller and steeper, with incentive pricing at $90 per barrel at the current cost of capital."
3) “Investment growth: we expect oil and gas activity to compound at 11% [per year] growth (20% for LNG and shale) by 2024, from a decline of 7% [per year] since 2014.”
The analysts said they expect “a tripling of investment decisions from the trough.
4) “End of non-OPEC growth: we estimate that 2019 saw peak non-OPEC production. Non-OPEC, excluding shale and Russia, is starting a phase of structural decline,” the analysts said.
They said that decline will total 300,000 barrels per day, “with a depleted pipeline of big project start-ups accelerating decline rates and deteriorating project delivery.
5) “Spare capacity no more: we expect a call on incremental OPEC production as large as 3 million barrels per day by 2025 from pre-Covid levels,” the analysts said.
That will “deplete OPEC spare capacity by 2023, with limited capacity expansion until 2024.”
Goldman analysts put together a list of top oil stocks, screening for estimated production growth for 2021-24; cash flow growth from top projects over the coming five years; quality of the portfolio of growth projects; opportunity set; country and technical risk.
Top performing U.S. companies in order of ranking include Hess (HES), Pioneer Natural Resources (PXD), Conoco Phillips (COP), Kosmos Energy (KOS), EOG Resources (EOG), Exxon Mobil (XOM) and Continental Resources (CLR).
The author of this story owns shares of Exxon Mobil.
