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Why investors don't care about crude's drop

Oil companies' discipline during slump shows they can now easily withstand corrections


CRUDE prices are down yet European oil companies are weathering the slump, signalling a change in fortunes for last year's laggards.

While benchmark Brent crude has fallen more than 9 per cent over the past week, the Stoxx Europe 600 Oil & Gas index has retreated just 3.9 per cent. The reason? Oil companies' discipline during the 2014-2016 crash proved to investors they can now easily withstand such crude-price corrections.

"Oil companies have done a good job adjusting their budgets to the lower oil-price environment and their shareholders are now benefiting from that," said Ahmed Ben Salem, an analyst at Oddo Bhf. "The resilience is mainly linked to the fact that oil companies have an oil cash breakeven as low as US$50 per barrel and their budget and share-buyback plans are based on US$60."

Crude's collapse forced European oil giants to slash spending, reduce costs and delay projects, a strategy that's now made them less sensitive to short-term price fluctuations. Brent has tumbled from a recent three-year high on concern that an escalating trade spat between the US and China will curb demand and as Saudi Arabia pledges to lift output to record levels.

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Investors have also been encouraged by a buoyant outlook for second-quarter earnings, which start to roll in next week. Analysts expect the European oil sector to report the highest profit growth among 10 industries. The biggest companies are also set to deliver the highest free cash flow in almost a decade, according to Goldman Sachs Group Inc.

"Oil stocks are decoupling from oil owing to the strong free cash flow," said Christyan Malek, head of EMEA oil and gas research at JPMorgan Chase & Co. "Robust" earnings, crude above US$70, and exploration and production project delivery underpin continued outperformance in shares, he said.

Last year, investors were slow to believe in the profit recovery. Although the price of Brent rose 18 per cent, oil stocks were one of the few declining sectors in Europe, with a loss of 2.2 per cent.

European oil companies continued to resist crude's decline on Wednesday, with the Stoxx Europe 600 Oil & Gas Index little changed while Brent fell 1.1 per cent. BLOOMBERG

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