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Super-majors' report card reads 'could do better'

The second-quarter report season revealed a mixed picture for the large, international oil companies
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The crude price has improved, but cash flow is still a bit spotty, analysts said

The international super-majors appear to be prospering from the rising price of a barrel of oil, with Brent crude up 50% in the past year. The curtain recently came down on the second-quarter reporting season. So, here’s five things we learned about the industry:

1.     Overall, the report card would read: ‘Could do better.’ As Barclays Capital pointed out, half the companies it covers missed earnings guidance. However, the industry’s underlying performance showed significant improvement with net income up 55% and production ahead 1% year-on-year and debt down 2% over the quarter.

2.     Companies are still keeping a tight rein on budgets. BP PLC (LON:BP.) was a case in point, as it said capital expenditure would be slightly lower than previous guidance. The UK giant’s story was repeated across the industry.

3.     Cost pressures are starting to creep in. American giants Exxon Mobil Corp (NYSE:XOM) and Chevron Corp (NYSE:CVX) both reported the dial starting to move in the Permian Basin, Texas. This is a well-understood part of the world where oil is reasonably cheap and easy to extract. Little surprise then, there’s been something of a stampede in the direction of the Lone Star State, putting pressure on the local infrastructure. Separately, Chevron said it is feeling the pain in Kazakhstan, where it is joint owner of the giant Tengiz field.

4.     A more buoyant oil price isn’t being translated into gushing free cash flow. The picture is mixed from business to business. The laggards versus consensus were Exxon and Shell, according to research by RBC Capital Markets. Portugal’s Galp Energia was the stellar outperformer on this score, though BP did well too. The free cash flow yield for the industry is expected to be strong and average 9% over the next three years. Dividends are back in fashion and companies such as Royal Dutch Shell PLC (LON:RDSA) and Chevron have now launched significant share buyback programmes.

5.     Investors are getting slightly frustrated with the big oilers. Why? There’s a thing called operational gearing, which means during the good times the cash should flood in. The complaint, according to RBC, which has been out to see the major investment companies, is the seeming disconnect between the theory and the reality of operational gearing. “We think this issue could lead investors to other energy subsectors, particularly E&P [exploration and production], where trading losses, margin calls and cash conversion are all less opaque,” the bank added.

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