LONDON - As crude prices weaken, big integrated oil companies like Exxon Mobil (XOM.N: Quote, Profile, Research, Stock Buzz) look better equipped to deliver for investors than recent star performers in the exploration and drilling services sectors.
The drop in oil prices from July's record above $147 per barrel to below $100 last week hit shares in all types of oil and gas companies.
Analysts and investors say the exodus from the sector was overdone and predict oil majors should hold up best because of their superior dividend yields and broader base of activities beyond drilling.
"In this weakening oil price environment, we prefer the more defensive integrated names over oil services or exploration and production companies," Mark Bloomfield, oil analyst at Citigroup, said in a research note.
Shares in Exxon and European rivals BP Plc (BP.L: Quote, Profile, Research, Stock Buzz) and Royal Dutch Shell Plc (RDSa.L: Quote, Profile, Research, Stock Buzz) will be supported by the fact they have refining, fuel retail and chemicals divisions, which usually do better when crude prices ease.
Exploration companies' earnings are more closely tied to the oil price because they rely solely on profits from oil production and field sales.
Oil services companies' profits are increasingly tied to expensive projects, such as deep water fields and liquefied natural gas plants, which pay the fattest margins but which require high oil and gas prices to be profitable.
In times of such uncertainty over future oil prices, the majors' strong cash flows will also be seen as an attraction.
"The majors are generating that much cash and they're paying very high dividends, so they're not going to come off very much," Alan Beaney, fund manager with Principal Investment Management, said.
Shell offers a yield of some 5 percent on the basis of its forecast full-year 2008 payout, according to Reuters Knowledge, while BP gives a yield of around 6 percent.
Exxon, the world's largest listed oil company by market value, offers a dividend yield of 2 percent, but also makes substantial share buybacks which last year totaled nearly $32 billion.
By contrast, the world's largest listed oil services company, Schlumberger (SLB.N: Quote, Profile, Research, Stock Buzz) gives a prospective yield of just 1 percent. Oil explorers often pay no dividend because their capital is tied up in appraising or developing their non-producing discoveries.
WHOLE INDUSTRY OVERSOLD
If investors do flock to the relative safety of the oil majors, it would be a turnaround.
Since early 2004, when oil prices started to surge, the DJ Oil and Gas Titans 30 index, made up mainly of integrated oil companies, has doubled.
Over the same period, the OSX index of major oil services companies has almost trebled, as investors made bets that the builders of the industry's increasingly complex and expensive projects would benefit most from long-term higher crude.
Explorers too have outperformed the oil majors in recent years, analysts said, as the price of oil and gas fields themselves soared beyond the price of oil companies' shares.
Many analysts think the whole industry still offers investors value because profits will remain robust.
"Everything has dropped, even though the fundamentals have not really changed," Stephane Foucaud, oil analyst at Fox-Davies Capital, said.
Rising costs of steel and manpower have lifted the cost of extracting oil. France's Total (TOTF.PA: Quote, Profile, Research, Stock Buzz) said earlier this month that some projects could require crude prices of $90/barrel to offer a 12.5 percent return.
Yet, with crude futures to 2013 trading above $100/bbl, few think planned developments will become unprofitable or be cut.
"All the projects we have today still look attractive," Beaney said.
Analysts at JP Morgan said they did not expect revenues at oil services firms such as Schlumberger or Italy's Saipem (SPMI.MI: Quote, Profile, Research, Stock Buzz), Europe's largest oil services firm by market value, to suffer much, prompting them to describe the weakness in their shares as "unjustified."
The investment bank said while lower crude prices do hit the oil majors' earnings, current share prices only factored in long-term crude prices of $75-80/bbl.
"We ... view any correction in share prices as favorable entry points," the bank said in a research note.
The drop in oil prices from July's record above $147 per barrel to below $100 last week hit shares in all types of oil and gas companies.
Analysts and investors say the exodus from the sector was overdone and predict oil majors should hold up best because of their superior dividend yields and broader base of activities beyond drilling.
"In this weakening oil price environment, we prefer the more defensive integrated names over oil services or exploration and production companies," Mark Bloomfield, oil analyst at Citigroup, said in a research note.
Shares in Exxon and European rivals BP Plc (BP.L: Quote, Profile, Research, Stock Buzz) and Royal Dutch Shell Plc (RDSa.L: Quote, Profile, Research, Stock Buzz) will be supported by the fact they have refining, fuel retail and chemicals divisions, which usually do better when crude prices ease.
Exploration companies' earnings are more closely tied to the oil price because they rely solely on profits from oil production and field sales.
Oil services companies' profits are increasingly tied to expensive projects, such as deep water fields and liquefied natural gas plants, which pay the fattest margins but which require high oil and gas prices to be profitable.
In times of such uncertainty over future oil prices, the majors' strong cash flows will also be seen as an attraction.
"The majors are generating that much cash and they're paying very high dividends, so they're not going to come off very much," Alan Beaney, fund manager with Principal Investment Management, said.
Shell offers a yield of some 5 percent on the basis of its forecast full-year 2008 payout, according to Reuters Knowledge, while BP gives a yield of around 6 percent.
Exxon, the world's largest listed oil company by market value, offers a dividend yield of 2 percent, but also makes substantial share buybacks which last year totaled nearly $32 billion.
By contrast, the world's largest listed oil services company, Schlumberger (SLB.N: Quote, Profile, Research, Stock Buzz) gives a prospective yield of just 1 percent. Oil explorers often pay no dividend because their capital is tied up in appraising or developing their non-producing discoveries.
WHOLE INDUSTRY OVERSOLD
If investors do flock to the relative safety of the oil majors, it would be a turnaround.
Since early 2004, when oil prices started to surge, the DJ Oil and Gas Titans 30 index, made up mainly of integrated oil companies, has doubled.
Over the same period, the OSX index of major oil services companies has almost trebled, as investors made bets that the builders of the industry's increasingly complex and expensive projects would benefit most from long-term higher crude.
Explorers too have outperformed the oil majors in recent years, analysts said, as the price of oil and gas fields themselves soared beyond the price of oil companies' shares.
Many analysts think the whole industry still offers investors value because profits will remain robust.
"Everything has dropped, even though the fundamentals have not really changed," Stephane Foucaud, oil analyst at Fox-Davies Capital, said.
Rising costs of steel and manpower have lifted the cost of extracting oil. France's Total (TOTF.PA: Quote, Profile, Research, Stock Buzz) said earlier this month that some projects could require crude prices of $90/barrel to offer a 12.5 percent return.
Yet, with crude futures to 2013 trading above $100/bbl, few think planned developments will become unprofitable or be cut.
"All the projects we have today still look attractive," Beaney said.
Analysts at JP Morgan said they did not expect revenues at oil services firms such as Schlumberger or Italy's Saipem (SPMI.MI: Quote, Profile, Research, Stock Buzz), Europe's largest oil services firm by market value, to suffer much, prompting them to describe the weakness in their shares as "unjustified."
The investment bank said while lower crude prices do hit the oil majors' earnings, current share prices only factored in long-term crude prices of $75-80/bbl.
"We ... view any correction in share prices as favorable entry points," the bank said in a research note.
