Rising black gold and shares of Seven Sisters

dubai - Scenario is bullish for oil supermajors

Opec's algiers agreement to restrict output to 32.5 million barrels does not end the global glut but accelerates oil market rebalancing. This means Brent crude can well rise to $52 by the time Opec meets to ratify individual country quotas in the November Vienna conclave. Apart from the dubious history of quota compliance, a price rise higher than $52-55 Brent would lead to a surge in West Texas shale output as US land rig counts have risen higher even at current prices.

Apart from buying oil export currencies (Norwegian kroner, Russian rouble) and selling oil importers (South Korean won, Turkish lira, South African rand), this macro scenario is hugely bullish for Big Oil supermajors. Enrico Mattei called these integrated global oil companies - the proverbial Seven Sisters. Sector to short? Airlines. Lufthansa, Air France KLM and Iberia are most at risk.

I believe the stock market winners among the Seven Sisters will be those who convince Wall Street that they can cover their 2017 capex and dividend with organic cashflow, thanks to output growth and cost control. This leads me to Total, BP and Exxon.

I often viewed Total as the energy diplomacy arm of the late Jacques Foccart's Françafrique, given its deep ties to Elysee Palace client states in West Africa. While Gabon and Chad are still "tres bien", Total has a six per cent dividend, "assez bien" growth profile and a "magnifique" focus on profits. The six per cent dividend is highest among the Seven Sisters, second only to Shell. Though the price of crude oil and gas has crashed since mid 2014, Total shares have only fallen 17 per cent, thanks to its profit resilience, diversified earnings and the high dividend. Total trades at 10.6 times forward earnings, discount to Shell and BP, let alone Exxon and Chevron.

Total CEO Christophe de Margerie was killed in a tragic accident during a snowstorm in Moscow in 2014 and was succeeded by Patrick Pouyanné, his Dauphin. Total has slashed capex from $28 billion in 2013 to $10 billion now and implemented a $3 billion cost savings programme. The project pipeline suggests at least six-seven per cent output growth, mainly in LNG (Australia), deepwater (Angola) and, of course, the Caspian mega project Kashgan. Operating margins, cash flows and earnings per share growth will be the endgame. This reduces the risk of a dividend cut, as the dividend payout has been maintained by asset sales and leverage.

BP, the former British Petroleum and Anglo Iranian Petroleum Company, once ruled the waves, with Britannia. Yet Lord Browne's foray into Russia and the 2010 Deepwater Horizon explosion were a disaster for the BP, with epic asset sales, boardroom turmoil and unprecedented cost cutting. However, the BP of October 2016 is inexpensive, better managed more cash flow generative and less leveraged to crude oil prices. The stock market is nervous about a dividend cut but, as long as Brent remains in a $42-50 range, I do not see this as a high probability event. That said, I would not buy BP's New York ADR near 34 but design a option strategy where the worst case scenario was a put delivery at $30. BP's franchise value is still misunderstood on Wall Street six and a half years after the horror story of 2010. Caveat. I am bearish on the British pound even at 1.30 cable.

Exxon Mobil is the world's largest integrated energy colossus, a lineal descendent of John D. Rockefeller's Standard Oil trust. The recent SEC investigation into Exxon's asset write down accounting/climate practices have cast a bearish gloom on the shares, which have fallen from $96 in July to $82 now. Exxon's appeal has been its size, sheer earning power, defensive exposure to the energy mix and superior returns on invested capital. Exxon offers a 3.59 per cent dividend yield. For now, I expect Exxon to trade in a 78-90 range in the next six month as long as nothing traumatic emanates from Washington or Irving, Texas!

Exxon's woes suggest the beneficiary will be Chevron (CVX), the second largest American oil and gas supermajor in the world. Chevron's Permian Basin, Tengiz and Australian LNG projects will enable its cash flows to rise in 2017 and reduce any concern about a potential dividend cut as long as crude oil prices do not collapse from current levels. Though Chevron has been the best performing Big Oil Company in 2016, thanks to its superior growth prospects and mature project development risks. I would not be surprised to see Chevron trade in a $94 - 120 range in the next six months.

The writer is a global equities strategist and fund manager. He can be contacted at: mateinkhalid09@gmail.com