That the announcement comes in the midst of a six-week, 40% rally in oil prices from lows around $46 per barrel serves only to add to the noise surrounding the commodity and further fuels questions about the likely future course of crude – and, in particular, whether or not the recent rally is a dead cat bounce or the start of a new uptrend in long term prices.
For investors, however, unless they are playing the commodity directly, the comments made by new CEO Wan Zulkiflee Wan Ariffin are likely to be of more interest.
“We view this period of low oil prices as an opportune time to relook at our internal processes,” Bloomberg reported him saying, “Petronas has revised its plans and activities accordingly, holding back on expensive and high-risk exploration activities and redirecting our resources.”
ROCE
It is comments like the one above that are beginning to attract fund managers like Invesco Perpetual’s Stephen Anness and Andrew Hall to the sector.
“We continue to allocate a good deal of our research time to the oil sector. The reasons are simple. We see a sector that trades at a depressed valuation in both absolute and relative terms at a time when we see tangible signs of industry change. This combination tends to be a fruitful backdrop for investment opportunities,” the pair said in a recent note.
“We think that the changes that are currently being implemented will in time lead to improved returns on capital and in turn a higher sector valuation,” they added, pointing out that this is not a macro call based on an oil price assumption.
“It is a view that industry returns have fallen well below historical norms and that companies are beginning to take action to improve returns. Indeed, although company behaviour started to change before the oil price did, a lower oil price is perversely quite helpful to management teams which need to rein in operating and capital expenditures. Given the self-help opportunities available to management teams in the sector, we believe it is certainly possible that some of the major oil producers can be more profitable at a lower oil price.”
