Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Big Oil Shareholders Shouldn't Worry About Operations in Iraq?

Sectarian violence in Iraq has elevated the risk for Western oil companies operating there, including ExxonMobil (NYSE: XOM  ) , BP (NYSE: BP  ) , and Occidental Petroleum (NYSE: OXY  ) . While their operations haven't been affected thus far, investors are rightly concerned about the impact further violence could have on their production, earnings, and credit ratings. Let's take a closer look.

Little impact, Moody's says
According to a recent note by Moody's Investors Services, the credit ratings of Western oil companies with operations in Iraq are unlikely to be meaningfully affected even if violence spreads to the nation's southern oil fields and disrupts production.

The ratings agency's view is based on the fact that Iraq accounts for a relatively insignificant share of Western oil companies' production and earnings. And even if supply is disrupted, the positive impact it would have on the price of Brent crude would likely offset the negative impact of lower Iraqi volumes on Western companies' earnings.

So far, the uprising led by the Islamic State of Iraq and Syria (ISIS), a Sunni militant group that now calls itself the Islamic State, has been concentrated in northern Iraq, which accounts for roughly 10%-15% of the nation's production. But the southern part of the country, where the majority of Exxon, BP, and Occidental's operations are located, hasn't been affected.

Minimal impact on production and earnings
Exxon's operations are mainly focused in southern Iraq's West Qurna oil field, though it also maintains interests in the Kurdistan Region of Iraq. BP maintains a 38% working interest in southern Iraq's Rumaila oilfield, which contributed 39,000 barrels per day to its net production in 2013. Lastly, Occidental is exposed to Iraq through its interest in the Zubair field, which contributed roughly 17,000 barrels of oil equivalent per day (boe/d) to the company's net production last year.

In the grand scheme of things, these operations are relatively insignificant contributors to companywide production. Iraq accounts for just 1.8% of Exxon's production, 1.9% of BP's, and 2.2% of Occidental's output, according to estimates by investment research firm Morningstar.

Furthermore, Iraq's contribution to their earnings is likely even smaller due to the onerous terms that dictate their service contracts with the Iraqi Ministry of Oil. Exxon, BP, and Oxy "only receive a modest remuneration fee of a few dollars per barrel after cost recovery," which implies that the "earnings impact is much less than the relative amount of production would suggest," Morningstar writes.

Longer-term risks
Over the long term, however, continued violence that leads to a deterioration in Iraq's security situation could prompt Exxon, BP, and Occidental to exit the country. Indeed, Occidental has been marketing a 40% stake in its Middle East/North Africa (MENA) assets, which includes its Iraq operations, since last year to reduce its exposure to geopolitical risk and focus on west Texas' Permian Basin -- its most profitable operation.

Another potential threat Moody's identifies is a regime change that could result in the voiding of existing contracts between the Western oil companies and Iraqi officials. Such a move would jeopardize Iraq's oil production growth prospects and likely result in a higher long-term Brent price since oil price stability is largely predicated upon Iraqi volumes growing at a rapid pace over the rest of the decade.

Investor takeaway
Overall, Exxon, BP, and Oxy shareholders needn't worry too much about their exposure to Iraq, which is relatively insignificant in terms of production and even less significant in terms of earnings. Further, a deterioration in Iraq's security situation that hampers its long-term production growth probably wouldn't be so bad since it would keep crude oil prices elevated, boosting these companies' oil revenues and earnings.

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3021388, ~/Articles/ArticleHandler.aspx, 9/4/2015 3:56:16 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

Today's Market

updated 6 hours ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:08 PM
BP $32.41 Up +0.21 +0.65%
BP p.l.c. (ADR) CAPS Rating: ****
OXY $70.86 Down -0.22 -0.31%
Occidental Petrole… CAPS Rating: ****
XOM $73.79 Up +0.56 +0.76%
ExxonMobil Corp CAPS Rating: ****