What a difference a year makes, if not so much for oil prices then certainly for oil company stocks.
Last week was significant for oil markets, as it marked the retrenchment of crude prices from record heights this summer to approximately their levels of a year ago.
As of Friday, the price of the North American benchmark West Texas Intermediate crude stood at US$77.70 a barrel, down four per cent from a year earlier.
Rather than reflecting oil prices, which are still unusually strong in historic terms, oil shares have plunged to levels more closely mirroring the general carnage that has recently gripped stock markets worldwide as part of the fallout from the global financial crisis.
The stocks of all of the exclusive "Big Five" group of major international oil companies plumbed new 52-week depths in western stock markets' most recent trading session on Friday. Their 12-month declines range from 33 per cent for the world's biggest publicly traded oil producer, ExxonMobil, to 45 per cent for Europe's biggest oil company, Royal Dutch Shell. Some of the stocks, including Shell's, are at five-year lows.
In terms of single-day losses, Chevron led the pack downwards on Friday with a 9.6 per cent plunge. Chevron, along with Exxon and Shell, saw a greater percentage of their market capitalisation wiped out in one day than oil prices have lost in a year.
Exxon's big fall has come less than three months after the company reported the biggest ever quarterly profit for any US company: US$11.68 billion (Dh42.91bn) on $138.07bn revenue for the company's second financial quarter.
Has the plunge in oil company share prices outstripped oil fundamentals? Some analysts think so.
"Certainly, the performance of blue-chip oil producers such as Exxon Mobil ... would suggest that the worries about demand destruction have been overstated," the US financial publication Barron's said in a stock comment last week.
But this does not mean that major oil companies' share prices will necessarily rebound at any time soon. Judging from the stocks' recent performance, investors are scared of the volatile energy sector and see a further oil price plunge to $50 per barrel or lower as more likely than a rebound to $100.
What level it reaches could make for the success or failure of Opec in coming months, as it tries to stabilise oil markets, and is crucial to whether investor confidence in the energy sector takes months or years to restore.
If the latter is the case, then the long-term outlook for security of energy supply will be that much less secure. This is because the business of finding and producing oil is capital intensive, and the more an oil company's share price sinks, the more expensive its access to capital becomes. Even for a company like Exxon - which may have no need to raise new equity capital by issuing shares - a sinking share price means a rising debt to equity ratio, carrying the risk of a credit rating downgrade and higher borrowing costs.
More expensive capital means less money for the company to spend on its main business of pumping crude, translating into less oil for consumers.
The major oil companies are not the only energy producers to have seen their share prices eviscerated in the general stock market panic. Among the hardest hit have been alternative energy producers. US companies including HydroGen, a fuel-cell maker, Nova Biosource Fuels, a biodiesel distiller, and SunPower, a solar energy company, are among those with stocks that have plunged by more than 70 per cent from their 52-week highs.
Not to be outdone by its bigger US and European rivals, Abu Dhabi National Energy Company, also known as Taqa, has racked up a 40 per cent stock decline in the past 12 months. The government-controlled energy company has invested heavily in overseas oil, gas and power projects in the past two years. Taqa's shares closed yesterday at Dh1.80 on the Abu Dhabi Securities Exchange, down from Dh3.01 a year ago.
@Email:tcarlisle@thenational.ae
Off-roading in the UAE: How to checklist
Famous left-handers
- Marie Curie
- Jimi Hendrix
- Leonardo Di Vinci
- David Bowie
- Paul McCartney
- Albert Einstein
- Jack the Ripper
- Barack Obama
- Helen Keller
- Joan of Arc
The National's picks
4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young
A MINECRAFT MOVIE
Director: Jared Hess
Starring: Jack Black, Jennifer Coolidge, Jason Momoa
Rating: 3/5
UAE currency: the story behind the money in your pockets
UAE currency: the story behind the money in your pockets
MATCH INFO
Uefa Champions League quarter-final second leg:
Juventus 1 Ajax 2
Ajax advance 3-2 on aggregate
Test
Director: S Sashikanth
Cast: Nayanthara, Siddharth, Meera Jasmine, R Madhavan
Star rating: 2/5
Book%20Details
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Biog:
Age: 34
Favourite superhero: Batman
Favourite sport: anything extreme
Favourite person: Muhammad Ali
SPEC%20SHEET%3A%20APPLE%20M3%20MACBOOK%20AIR%20(13%22)
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COMPANY PROFILE
Name: Kumulus Water
Started: 2021
Founders: Iheb Triki and Mohamed Ali Abid
Based: Tunisia
Sector: Water technology
Number of staff: 22
Investment raised: $4 million
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
Score
New Zealand 266 for 9 in 50 overs
Pakistan 219 all out in 47.2 overs
New Zealand win by 47 runs
New Zealand lead three-match ODI series 1-0
Next match: Zayed Cricket Stadium, Abu Dhabi, Friday
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
Israel Palestine on Swedish TV 1958-1989
Director: Goran Hugo Olsson
Rating: 5/5
THE BIO
Favourite place to go to in the UAE: The desert sand dunes, just after some rain
Who inspires you: Anybody with new and smart ideas, challenging questions, an open mind and a positive attitude
Where would you like to retire: Most probably in my home country, Hungary, but with frequent returns to the UAE
Favorite book: A book by Transilvanian author, Albert Wass, entitled ‘Sword and Reap’ (Kard es Kasza) - not really known internationally
Favourite subjects in school: Mathematics and science