Abstract

66% of companies delivered positive returns through the five year cycle from 2004 to 2009. Timing and size matters as only 37% delivered positive returns over the last three years with a clear correlation between market cap and TAR. Medium and large independents delivered the best risk adjusted returns followed by the NOC’s who out-performed the majors and super majors. The service sector delivered strong operating results however share prices were hammered in the sell off as investors question future earnings and worried about operating leverage. Seismic services look like a market leading indicator. Integrated gas out performed while integrated oil under performed, this illustrates an opportunity for oil price bulls. Refining appears a drag on the returns of the integrated players however specialist US refiners delivered excellent returns with expected dispositions by integrated players to specialist players. The market rewards a growth track record in reserves, production and earnings; look out for NOC’s and Majors acquiring performers with the right metrics. While small cap exploration delivered negative returns, exploration in well resourced companies is a highly ranked and valued strategic theme. Numerous gas strategies outperformed and CBM E&P was the winning strategic theme by a long way. The degree of internationalization is positively correlated with returns strongly suggesting a link between returns and capabilities. The independents and some majors look attractive M&A targets to cashed up NOC’s and Super Majors. The small cap sector looks like it will get smaller as asset sales are implemented to pay down debt and raise needed funds. While risk was rewarded on the up cycle it was punished in the downturn. With risk aversion to the following in particular, unfunded exploration, development and acquisition strategies, emerging markets, unproven technology, capital intensive low margin resource plays and EOR, and oil which is risky but long life stable gas cash flows are rewarded.

Keywords: Equity Market Risk • Market Cap • Risk and Return

Presented at: 2009 South East Asia Petroleum Exploration Society (SEAPEX) Conference, Singapore, 2009