Big Oil Should Win With Gadhafi Gone

by Jonathan Berr | August 23, 2011 10:28 am

ExxonMobil’s (NYSE:XOM[1]) luck — and that of several other big players in oil — in Libya might be changing now that dictator Moammar Gadhafi’s rule seemingly is at an end.

Many western oil companies have waited for decades to see a payoff from their investments in Libya, which has the world’s ninth-largest oil reserves and Africa’s largest. Libya nationalized Western oil interests after Gadhafi seized power in 1969. At that time, Libya was producing more crude than Saudi Arabia. The Libyan oil industry was decimated by decades of economic sanctions that were removed a few years ago when Gadhafi renounced terrorism. Billions of dollars have flowed into the country from international oil companies in recent years.

Ending the civil war in Libya would be especially good news for Europe, which imports about 85% of Libya’s oil. Some countries, including cash-strapped Italy, Spain and Ireland, are dependent on Libyan oil. Shares of Italian oil producer Eni (NYSE:E[2]), the leading producer in prewar Libya, have risen as expectations grew that the rebels would capture Tripoli and depose Gadhafi. Other firms with big investments in Libya include French oil conglomerate Total SA (NYSE:TOT[3]), Royal Dutch Shell (NYSE:RDS.A[4]), and the U.K.’s BP (NYSE:BP[5]). They all posted gains on Monday.

That European companies have a leg up in Libya hardly is a surprise given that it was illegal to import Libyan oil into the U.S. until a few years ago. For example, ENI executives already have began returning to the North African nation[6] to restart facilities that had been shuttered because of the civil war. Many U.S. companies with Libyan investments are understandably taking a wait-and-see attitude until the situation in Tripoli becomes clearer.

The rebellion in Libya has less immediate impact for the U.S., where Libyan crude accounted for 0.5% of imports during 2010, but it might be good news in the long term. Removing doubts about Libya — which accounts for about 2% of the world’s supply — might help push down gasoline prices and boost consumer confidence along with U.S. retail sales, which in July had their biggest gain in four months.

A new regime in Tripoli might bring some needed changes to Libya’s oil fields, where foreign companies are required to provide 90% of their output to Libya’s state-run oil company. If they can renegotiate these deals on more advantageous terms, that should benefit a plethora of companies, including ConocoPhillips (NYSE:COP[7]) and its partners Marathon (NYSE:MRO[8]) and Hess (NYSE:HES[9]), which returned to Libya in 2005[10] after a 19-year absence to their exploration and production interests in the Waha concessions. Prices for these shares and Occidental Petroleum (NYSE:OXY[11]), which also has a big Libya investment, fell Monday, presenting a buying opportunity because any improvements in Libya will benefit them as well.

The road ahead in Libya for foreign companies is not without its challenges. Analysts caution that production might not return to pre-crisis levels until 2013[12] at the earliest. There are other issues tied to the departing regime in Tripoli that need to be resolved as well.

In June, The Wall Street Journal reported the SEC was investigating Goldman Sachs (NYSE:GS[13]) — along with several other financial financial firms — for allegedly violat[14]ing[15] the Foreign Corrupt Practices Act[16], which forbids U.S. companies from bribing foreign officials to win business, in its dealings with Libya’s Sovereign Wealth Fund. The SEC also has contacted Exxon, Occidental and ConocoPhillips about their operations in Libya, the WSJ reported.

FCPA cases, however, often can be resolved without going to trial. These companies will try to settle these cases sooner rather than later.

Otherwise, they might miss one of the biggest opportunities for the oil industry in a long time. Though the gains in Libya will not be immediate, they will come. The best way for investors to play this is with a broad array of foreign and domestic companies, or they can choose one: Exxon.

The Irving, Texas, company trades at an earnings multiple of 9.22. Though more expensive than Marathon and ConocoPhillips (which are both above 7), it is worth the premium because of the strength of its brand. The stock pays a dividend with a yield of 2.68% to make it even more enticing.

Exxon’s luck in Libya has not been great lately. In 2010, an exploration well it dug with the Libyan state-owned oil company[17] was not commercially successful. Of course, in the second quarter, Exxon’s cash flow from operations and asset sales was $14.4 billion — so it can afford to try again in Libya.

Jonathan Berr does not own shares of the securities listed.

Endnotes:
  1. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  2. E: http://studio-5.financialcontent.com/investplace/quote?Symbol=E
  3. TOT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TOT
  4. RDS.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.A
  5. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  6. already have began returning to the North African nation: http://www.reuters.com/article/2011/08/22/libya-oil-idUSL5E7JM17F20110822
  7. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  8. MRO: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRO
  9. HES: http://studio-5.financialcontent.com/investplace/quote?Symbol=HES
  10. returned to Libya in 2005: http://www.conocophillips.com/EN/newsroom/news_releases/2005news/Pages/12-29-2005.aspx
  11. OXY: http://studio-5.financialcontent.com/investplace/quote?Symbol=OXY
  12. might not return to pre-crisis levels until 2013: http://www.marketwatch.com/story/energy-firms-cautious-on-libyan-prospects-2011-08-22
  13. GS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GS
  14. for allegedly violat: http://www.reuters.com/article/2011/06/09/goldman-libya-idUSN0930265820110609
  15. ing: http://www.reuters.com/article/2011/06/09/goldman-libya-idUSN0930265820110609
  16. the Foreign Corrupt Practices Act: http://www.reuters.com/article/2011/06/09/goldman-libya-idUSN0930265820110609
  17. exploration well it dug with the Libyan state-owned oil company: http://www.reuters.com/article/2010/09/16/exxon-libya-idUSN1618747720100916

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