Recent developments in Iraq have increased the risks for oil and gas firms operating in the country. However, after reviewing each company's relative exposure, we see little earnings impact if the situation worsens or if assets become inoperable. Seven companies we cover currently have assets in the country, but one of those, Chevron, has no production. For the others, Iraqi volumes constituted only a fraction of total production in 2013: ExxonMobil 1.8%, BP (BP.) 1.9%, Total 0.3%, Occidental 2.2%, Eni 1.4%, and Shell (RDSB) 0.7%.
Additionally, these companies operate under technical service contracts and only receive a modest remuneration fee of a few dollars per barrel after cost recovery. In other words, Iraqi barrels tend to be some of the least valuable in a company's portfolio, implying the earnings impact is much less than the relative amount of production would suggest. Also, thanks to rather quick cost recovery and an inability to increase investment due to government constraints, capital exposure is also limited. As our result, our moat ratings and fair value estimates are unchanged.
Most companies stand to benefit if the recent rise in oil prices continues. With global demand and supply already tightly balanced, removal of Iraqi volumes could result in such a scenario. As of April, Iraq was producing about 3.3 million barrels a day, marking an increase of about 1 mmb/d since 2009. While that pales in comparison with the approximately 3 mmb/d the United States has added over the same time frame, it still has contributed to the delicate supply/demand balance and stable price environment of the past three years.
With OPEC spare capacity sitting at about 2 mmb/d, essentially all held by Saudi Arabia, a disruption of Iraqi supplies could be ameliorated. However, as we've shown (see our May Energy Observer), the relationship between relatively high inventory levels and surplus of production relative to demand over the past three years has kept prices in check. The loss of Iraqi volumes, even if supplemented by increased Saudi production, would still probably disrupt that relationship and send Brent prices through the upper range of $110/bbl seen the past three years.
Given the limited impact on any one company's production and the still uncertain threat to Iraqi production and the effect on oil prices, we don't see recent events as actionable. Instead, we continue to reiterate our preferred integrated names despite their Iraq exposure: ExxonMobil, Oxy, and BP. All of them would also realize a greater benefit from the rise in oil prices than any damage suffered from impairment of Iraqi assets.
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