Will the Middle East Turmoil Impact Shells Profits?

Despite increased risks in the Middle East, analysts see little earnings impact for Shell if the situation worsens or if assets become inoperable

Allen Good 18 June, 2014 | 10:35AM

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BP PLC291.75 GBX-4.20
Royal Dutch Shell PLC B1,387.60 GBX-3.85

About Author

Allen Good  Allen Good is a senior stock analyst covering the oil and gas industries.

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