OILING THE MULTIPLIERS

by Geoff Uttmark

There’s nothing like earnings to boost share price, but short of earnings, the next best thing is improved prospects of earnings. No where has this been more apparent lately than the effect the rise in price of a barrel of oil has had on the offshore sector. In real terms, oil was cheaper than it had even been back in January/February of this year. That is remarkable in and of itself, given that even the “greenest” forecasters concede that fossil fuels like oil and coal will dominate the world’s energy balance well towards the middle of the next century. Hence, all the fuss about the recent “recovery” in the price of oil is more about the fact the price is up about 50% from the $11 per barrel level, rather than the fact that oil is not priced anywhere near its true value. To a commodity trader, oil’s value is today’s price in the pits. But to oil companies – including all who feed from the long trough that starts at E&P and ends at R&M – oil should be valued by the cost of maintaining the Reserve/ Depletion Ratio at an acceptable level, be it a global, geographic or country-specific subset of the inevitably finite resource.

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