These 2 energy companies are creaming it at US$40 a barrel

The price of oil is bouncing back!

A barrel of Brent Crude is currently selling for US$40 which will bring out a big sigh of relief for oil producers and investors.

Oil is up 25% in the last month, but because of the rise in the Aussie dollar against the U.S. dollar over the same period the full impact won’t quite be that much.

Regardless, at US$40 per barrel (AU$52) there are still two big energy companies creaming it based on their 2015 unit operating costs.

1. Woodside Petroleum Limited (ASX: WPL)

Woodside Petroleum pumped out over 92 million barrels of oil equivalent (boe) during 2015. The company’s massive economies of scale make it hard to beat when it comes to low production costs.

The company’s “break-even cash cost of sales” in 2015 was just US$11.09 per boe, down 22% on 2014. That is impressive, but looking at the actual operating costs by project we get an idea of how economies of scale are playing a part compared to other producers.

Woodside’s Northwest Shelf project made up 48% of 2015 production and has unit production costs at a minuscule US$4.18 per barrel of oil equivalent. The company’s Pluto project, which made up 41% of 2015 production, is close behind at just US$5.48 per boe.

This compares favourably to Santos Ltd (ASX:STO), which declared full year company unit production costs of US$10.92 per boe at current exchange rates (reported as AU$14.40). However we can expect this to drop slightly going forward as the company cranks up production from the huge GLNG project.

2. Oil Search Limited (ASX: OSH)

Oil Search needs a bit more juice from oil prices than Woodside Petroleum to produce positive cash flows, requiring the price to be above US$20 per barrel of oil equivalent, but it still has attractive unit production costs.

The strong economies of scale at Oil Search’s big PNG LNG project (which Santos also has a stake in) means unit production costs clock in at US$6.75 for the project, and this helped to pull down Oil Search’s total company unit production cost to US$10.08 per boe.

What does it all mean?

There are two key takeaways here. First, at US$40 per barrel both Woodside and Oil Search are creaming it compared to their production costs. That means there is more money left to put towards company overheads, paying debt, growing and, hopefully, reporting a profit for investors.

The second point is clearly that, when it comes to commodities, bigger really is is better and economies of scale are a huge competitive advantage when selling into a market with no material differentiation.

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Motley Fool contributor Regan Pearson has no position in any stocks mentioned. 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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