What Are The Signals That Oil Prices Are Reaching The Limit The Global Economy Can Stand Without Major Consequences? Analyst At Agricole Securities Reveals His Take In This Exclusive Interview
January 17, 2012 - The Wall Street Transcript has just published Oil & Gas: Refining, Independent and Major Integrated Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Hernan Ladeuix, CFA, has worked since 1998 for Credit Lyonnais Securities Asia, a broker-dealer affiliate of Credit Agricole Securities, when he joined the firms as a Latin American regional oil and gas Analyst. Subsequently, he became the Head of Latin American research, before moving to London and then Singapore as Asian Head of Oil and Gas Research. He is currently CLSA's Global Head of Oil & Gas Research, covering major oil companies in the Americas. With extensive experience in the sector, Mr. Ladeuix previously worked as a Latin American oil and gas Analyst and Head of research in Argentina for ING Baring. Before that, he worked for oil companies Bridas Corporation and Exxon Mobil Corporation in Argentina. He holds an MBA from Universidad del CEMA in Argentina. He received a degree in industrial engineering from the University of Buenos Aires, also in Argentina.
TWST: In a recent report, you wrote although the international integrated model has been written off by some people, you believe it's still a strong model. Please tell us the reasons you like that model.
Mr. Ladeuix: One of our main messages in the report was that the integrated model is one that we shouldn't write off just because of the integration concept. I think there are cases where integration works and there are cases where integration doesn't. The fact is that most of these companies are integrated because of historical reasons. Before the mid-1970s, spot markets were reduced and most of the oil came from large companies, so it was logical that these companies refined oil themselves. But when you take a look at the integrated companies today, you see some companies that are very profitable, that have a refining model that is efficient, that has enough scale and that is well integrated with chemical operations. Also, the integrated model has been instrumental in many corporate deals. So I think that there are businesses where integration makes sense and business where it doesn't, but definitely it's not a business model that we should write off.
TWST: Based on your view this model is going to be successful moving forward, do you expect to see an increase in M&A over the next several years in the form of the large global integrated companies purchasing smaller companies?
Mr. Ladeuix: Certainly, we don't expect megamergers as we had in the past, and it is unlikely that we have refining companies merging with upstream companies unless we go into a very bad macroeconomic scenario where refiners, which are typically more volatile and more vulnerable to economic conditions, would seek refuge into upstream companies. But I think that what we are going to see is companies acquiring niche companies. I mean, the type of deals that Chevron did by acquiring Atlas Energy (ATLS) to get an edge on shale oil technology advantage. But certainly, deals are unlikely to be of a scale that we had in the early 2000s.
TWST: What may be some of the other attractive niche companies that the larger companies may consider purchasing?
Mr. Ladeuix: There are areas that are being developed by smaller companies at the moment in East Africa, for example, where major companies do not have a strong foothold. Smaller companies, exploration companies in Australia, for example, which may not have the capital to engage into energy businesses. Shale oil companies everywhere in South America or Europe could be targets too. But I think that it's basically companies that are developing new regions or new technologies.
TWST: You've said you expect oil prices to be more stable over the next several years than they have been over the past few. What are the factors you believe are going to contribute to that stability?
Mr. Ladeuix: I think what happened over the past 10 years was very unusual, and the reason behind it was a very large trading range for oil prices - which I wouldn't call it volatility, because technically speaking, volatility has not been very different from what it was in the previous 10 years. I think that's the main difference between the 1990s and the 2000s. In the 1990s, you've seen prices most of the time trading at between $18 and $22 per barrel with the exception of the period around the Gulf War. But in the 2000s, we had a low at $20, we had a peak at $160, and then $40 again. At some point we had very strong global oil demand boosted by the rise of China and very, very unusual monetary conditions, probably at a scale that we haven't seen in previous decades - that impacted on the prices of all commodities. Then we had the Great Recession.
We think there are two main factors why behind a narrower trading range for oil prices going forward. One is that the capacity - the spare capacity from OPEC is not that generous. We are now at the three, four million barrels per day level, and we're expecting at some point in the next three or four years to reach something near five or six million barrels per day. But it's nothing to a scale that we had in the 1980s that provoked a very sharp decline in oil prices. Therefore, we think that the limited spare capacity will make it easier for OPEC to put a floor on oil prices, probably at around $80 per barrel.
Taking a look at the upside, we are at the point where high prices are stressing the global economy, and we measure these through a ratio called oil burden. Oil burden is basically how much the world is spending on oil versus the global GDP. And if you take a look at the past 50 or 60 years, every time that ratio went beyond 5%, it was very difficult for the global economy to grow. In fact, we had three major global recessions when that ratio surpassed 5%, which was in 1974, in 1979 and in 2008-2009. At the moment, the global expenditures in oil represent about 5% of GDP.
I think that this is a signal that we are reaching the limits of what the global economy can stand without major consequences. It doesn't mean that oil prices won't go higher if we have a significant geopolitical event, but I think it would be at the expense of a drastic decline in global oil demand and global GDP growth. So I think that these are the two boundaries that will limit the trading range of oil prices going forward.
TWST: All things considered - the positives for the sector and the risk factors - what would you say are your two top-rated stocks right now, and what makes those companies stand out from their peers?
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