Global Oil Majors: Upstream Continues to Shine
Chief Investment Office - Hong Kong17 Apr 2024
  • Global oil majors have performed well and should continue to shine in line with high oil price environment
  • Oil market fundamentals have been more promising than we earlier expected – demand outlook resilient while supplies more tightly controlled
  • Upside risk from escalation of geopolitical tensions in the Middle East, could push oil prices towards USD95/bbl and beyond in near term
  • Prefer upstream oil majors in Asia and North America which have direct access oil fields and play pivotal roles in global energy supplies
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Oil majors outperformed globally on oil price strength, Chinese oil majors lead the pack YTD in 2024. Share prices of global oil majors have mostly reached new highs, compared to the last peak cycle in 2017/2018, driven by higher sustained oil prices of USD80-100/bbl, relatively well controlled all-in costs of production, as well as growing production volumes.

During the 2021-22 period of post-Covid recovery, US oil majors led the bounce with the S&P Oil & Gas Exploration & Production Index surging 150% in 2021-22. This was followed by a period of consolidation in 2023, before the uptrend resumed this year, rising c.15% YTD. In contrast, Chinese oil major share prices were only up 40-50% in 2021-22, and since then, has been playing catch up with c.50% uptrend in 2023 post full reopening of the Chinese economy and another 30-50% uptrend YTD in 2024. Despite this, Asian oil majors remain undervalued relative to the US/European peers, trading at <1x PB and 7-8x PE vs 1.5x PB and 9-10x PE respectively. This is despite average ROEs not being that far off (c.13% vs c.16%) and a better average dividend yield (c.6% vs c.4%).

Bullishness back in oil markets, exacerbated by geopolitical tensions. We have recently raised our base-case average Brent crude oil price forecast for 2024 by USD5/bbl to USD80-85/bbl, but there are upside risks to this forecast given escalation in geopolitical risk events. Over in the Middle East, risks of direct involvement of Iran in the Gaza conflict have increased following attacks on their embassy in Syria. Meanwhile, the Red Sea skirmishes continue, and Israel shows no signs of backing down from their aggressive intent against Hamas. Ukrainian drone attacks on Russian refineries have further spooked the markets. These risk events could potentially push oil price towards USD95/bbl or beyond in the near term.

Fundamentally, demand-supply outlook seems more promising with US growth living up to soft landing expectations, improving demand outlook from China, and commitment from OPEC+ to controlling supplies with extension of production cuts and stricter monitoring and implementation of the voluntary cuts. Global crude inventories inching downwards also signal a tighter market as we head into the seasonally higher demand part of the year. The US will need to refill its strategic petroleum reserves (SPR) at some point as well.

Upstream plays have more room to run. Against this backdrop, our investment preference lies with energy upstream segments which benefit more directly from our constructive oil price outlook. The Chinese oil majors have outperformed YTD in 2024, but we reckon there is yet more upside on the back of attractive valuations and SOE revaluation trends, in addition to catalysts from earnings upgrades. Meanwhile, US oil majors continue to see upside driven by consensus earnings upgrades and organic plus inorganic volume growth potential on the back of sizeable M&A deals announced last year.

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