The world’s largest oil companies have survived a life-changing crisis, and are now poised to reap the rewards, Goldman Sachs Group Inc. said.
Oil majors in a sweet spot with rising oil prices and low operating costs, leaving them with the biggest cash-flow growth in two decades and boosting earnings, Goldman said in a report Monday. That will increase their attraction for investors after years of elevated spending followed by crude’s slump sent their weighting in global equity indexes to a 50-year low, according to the bank.
“We see this as the start of a new golden age for Big Oil’s reborn Seven Sisters,” said analysts led by Michele Della Vigna, referring to the seven largest non-state oil companies. It is “also a favorable environment for returns in the commodity.”
Crude’s slump since the middle of 2014 wiped out some smaller companies and changed the way the biggest operate as they continue to drive down costs in an attempt to survive. A downturn is typically followed by a period of relative plenty as the cost of getting new barrels out of the ground takes time to catch up with the crude price, widening profit margins.
The majors are leading the pack. While crude’s collapse pushed the weight of oil companies in equity indexes to about 5 percent, less than half their normal level, Big Oil is now in a position to regain its standing. The slump culled smaller drillers and has left the larger ones with the opportunity to take more market share.
Royal Dutch Shell Plc, Total SA and BP Plc are among the majors that reported the highest earnings in years last quarter. Some even started share buybacks and others are promising higher dividends.
They are also benefiting from the start up of projects sanctioned years ago but were delayed by the downturn, Goldman said.
The years from 2011 to 2013 “witnessed the largest number of project sanctions in the history of the oil and gas industry,” Goldman said in the report. “While those investments are likely to yield low through-cycle returns, all these projects are now coming into production, releasing unproductive capital and providing the industry with the strongest production, cash flow growth in two decades.”