Integrated Oil Performs Well, but what's next?

While there is definitely a range on performance, profits remain near record levels for "Big Oil" and the larger independents are growing larger. In E&P, both cash on cash returns and production income are up. Current integrated oil financial expectations and valuations are higher than they have been in a decade. Integrated oil companies in particular have outperformed S&P Energy and matched the S&P 500. For example, BP, COP, CVX, and OXY continue to hold strong investment potential.

ConocoPhillips (COP) is a good example of the current strength of integrated oil companies. COP equity leads its peers over the past few years, and the company appears poised to perform at even higher levels through 2012. COP’s major businesses are both high quality performers and well positioned from a competitive standpoint in their respective markets. COP's balance sheet appears strong with pro-forma dividend yields at 5% and 3% for E&P and R&M.

Investors will, however, want to avoid/sell under-funded gas focused companies (i.e., those with a poor gas/oil/NGL mix) due to what I consider to be the almost certainty of pain from a future "Marcellus fallout." Under-funded companies with greater gas exposure will find the markets less hospitable for obvious reasons.

So, in general, things look good for integrated companies and larger independents.

But what's next?

Virtually all current global oil demand growth emanates from non-OECD countries, led by Latin America, the Middle-East and Asia in 2011-2012. However, in the short term, even non-OECD demand projections fell in the past few months due to higher fuel prices, and slower economic growth. Chinese oil demand picked up by six percent in August, but was offset by weaker overall global demand. Slow economic growth, lower coal prices, heavy rains (which means lower agricultural demand and increased supply of hydroelectric power) and the release of stored inventory through "destocking" have all contributed to recent demand growth projections. Global oil demand growth is projected to slow to 0.9 and 1.3 MMBPD in 2011-2012. Non-OECD demand growth remains positive but, of course price increases will certainly impact demand in Asia, Latin America, FSU countries and Africa. These non-OECD areas represent approximately 80% of projected global demand growth in 2011-2012. Lower consumption in these countries would be negative for crude oil prices.

What strategies are best for dealing with these variables? How do companies weather the new challenges that arise every day?

I would like to hear from you, the reader, with your opinions on prospects for companies considering the current market.

What are your predictions for 2012?