Oil shares could be set to crash further

Credit: Daryl Cauchi

News that the Saudi Arabian government is considering selling some of its ownership interest in the state-owned Saudi Aramco oil company suggests the Saudis might think the writing is on the wall as to the future valuations of big oil companies.

Saudi Aramco is the world’s most valuable company according to The Economist magazine, with a worth in the ‘trillions of dollars’ thanks largely to “hydrocarbon reserves of 261 billion barrels” which are reportedly “more than 10 times those of Exxon Mobile, the largest private oil firm.”

It has been suggested the Saudis would initially look to sell off a 5% stake in Saudi Aramco to raise capital to help cover the nation’s ballooning budget deficit that is due to the plunging price of oil.

However, investors need to consider whether the Saudis have concluded that now is the time to get what they can for some of their oil wealth, as the long-term outlook for energy prices turns increasingly negative.

The beginning of the end?

Indeed The Economist has previously quoted a Saudi Arabian minister as saying: “The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil”.

One obvious problem for oil investors is the accelerating shift towards battery powered electric cars as a credible alternative to the mainstream of petrol-guzzling automobiles. Governments around the world are also likely to support the electric car industry in a bid to reduce their fossil fuel dependency.

For example, it has been estimated in oil-rich Norway that more than 13% of new car sales are now electric, with 1 in every 100 cars on the road an electric plug in.

Long road down

The improving battery technology and growth of companies like Tesla mean even OPEC itself is predicting “an overall downward trend in oil demand growth” over the period to 2040.

OPEC thinks demand growth for oil is expected to average just an annualised 0.7% per year out to 2040 in part as demand from developed economies in the US and Europe for road transportation fuel falls.

The second major problem for investors in the major oil companies is that new shale oil extraction technologies in the US mean some shale-producing companies are reportedly still profitable with oil at around US$30 per barrel.

These kinds of stats suggest the Saudis may have accepted oil is likely to stay lower for longer due to the simple supply and demand equation changing more rapidly than expected.

Hence, the decision to try and cash in on Saudi Aramco now before the going gets tougher.

Today, the share prices of Australian energy companies are continuing to adjust to a new reality in the medium-term outlook for energy prices and the forward earnings of the energy majors.

  • Origin Energy Ltd (ASX: ORG) shares are down 5.5%
  • Santos Ltd (ASX: STO) shares are down 6.8%
  • Woodside Petroleum Limited (ASX: WPL) shares are down 2%
  • BHP Billiton Limited (ASX: BHP) shares are down 5.2%

Given that even OPEC itself is forecasting decelerating demand growth alongside increased supply then it’s not hard to conclude that the share prices of these companies may track the oil price sideways, or even lower over the next five years.

At the end of the day markets are forward looking and share prices follow earnings higher or lower, which is why you might want to forget the oil sector and take a look at the business below….

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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