Oil industry analyst report

-Written by: Deva Liu

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Content

1. General introduction to Oil...............................................................................................................2

1.1 The introduction of Oil reserves, production and consumption...........................................................2

1.2 The industry chain of oil........................................................................................................................3

2. The price of Oil.................................................................................................................................4

2.1 The trend of Brent Oil...........................................................................................................................4

2.2 The supply and demand curve..............................................................................................................5

2.3 The elements influence the oil price.....................................................................................................6

2.3.1 The policy of OPEC.................................................................................................................6

2.3.2 The competition from shale gas and shale oil.......................................................................6

2.3.3 The negative relationship between US dollars and Oil price.................................................7

2.4 The future oil price................................................................................................................................8

3. The oil company...............................................................................................................................8

3.1 The general introduction the relationship between BP, Exxon & CNPC...............................................8

3.2 BP..........................................................................................................................................................9

3.2.1 BP's general introduction......................................................................................................9

3.2.2 BP's profit summary..............................................................................................................9

3.3 Exxon Mobil..........................................................................................................................................10

3.3.1 Exxon's general introduction................................................................................................10

3.3.2 Exxon's profit summary........................................................................................................10

3.4 CNPC.....................................................................................................................................................12

3.4.1 CNPC's general introduction.................................................................................................12

3.4.2 CNPC's profit summary.........................................................................................................12

3.5 BP, Exxon and CNPC comparison..........................................................................................................14

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1. General introduction to Oil

1.1 The introduction of Oil reserve, production and consumption

As of 2015, Venezuela’s total deposits stood at an estimated 298.4 billion barrels according to the U.S. Energy Information Administration (EIA): the highest deposits among countries. That compares to Saudi Arabia’s 268.3 billion barrels, which is ranked second. The Oil deposits of Canada are 172.5 billion barrels, making Canada rank third.

(Data From: EIA) Figure1, Reserves If we have a close look at the top 10 crude oil reserve countries, 7 countries are members of OPEC. As of July 2016, OPEC has 14 member countries: Algeria, Angola, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. The world's total crude oil proven reserve is 1,565.13 billion barrels while the OPEC countries hold 1,216.84 billion barrels at the end of year 2015. They possess more than three-quarters of the world’s total proven crude oil reserves. Also, about 40 per cent of the world's oil output comes from OPEC member countries. Thus the slump of oil price in the year 2015 is considerably influenced by the policy issued by OPEC what we will discuss in the paragraph of “2.3 The elements influence the oil price”.

However, the production of United States is the highest amounts to 15 million barrels per day in 2015. That compares to Saudi Arabia’s 11.9 million barrels per day. Although Venezuela has the greatest oil deposits, its production is just 2.785 million barrels per day in 2015. Russia’s oil production ranks third and amounts to 11 million barrels per day. The three largest petroleum-consuming countries in 2013 (The data for 2014 and 2015 is not available) were the United States (21%), China (11%) and Japan (5%).

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(Data From: EIA) 1.2 The industry chain of oil

The oil companies extract crude oil then sell the petroleum products to other industriesall petroleum products are used in transportation industriestransportation. The increase of profit in these industries the demand of the oil in transportation has a great influence

Another 23% of petroleum products ardriver for making products such as plastic, ethylene and propylene.

(Data From: EIA)

Figure2, Production and Consumption

crude oil from the underground, then refine it into petroleum productsum products to other industries to earn money. According to EIA's statistic, 72%

used in transportation industries such as airlines, shipping and land transportation. The increase of profit in these industries is projected by the price of oil decrease. Thusthe demand of the oil in transportation has a great influence on the oil price.

Another 23% of petroleum products are used in industries other than transportation. It is a major cost driver for making products such as plastic, ethylene and propylene.

Figure 3, The Chain of Oil industr

Production and Consumption

into petroleum products, and 's statistic, 72% of

, shipping and land projected by the price of oil decrease. Thus,

. It is a major cost

The Chain of Oil industr

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Petroleum refineries convert crude oil and other liquids into many petroleum products. On average, a barrel of crude oil is 42 gallon and it could produce 45 gallon petroleum products including 19 gallons of motor gasoline, 12 gallons of ultra-low sulfur distillate fuel and other products.

(picture from EIA) Figure 4, Petroleum product

2. The price of Oil

2.1 The trend of Brent Oil

Brent Oil maintained a high price until later 2014. The average Brent Oil price from 2011 to the first half of 2014 was 110 dollar per barrel. In September2014, the great slump started. Brent Oil hit the lowest price of 26.01 dollar per barrel in January 2016. After that, the oil price started to rebound. As of August 2016, the closing price of Brent Oil is 43.24 dollar per barrel, an increasing of almost 60% compared to the beginning of the year.

(Data From: Wind) Figure 5, The trend of Brent Oil for Year 2011 to Year 201

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2.2 The supply and demand curve

In order to explain the reasons behind the price, I will introduce the supply and demand curve here. Figure 6 shows the traditional supply and demand curve while the Figure 7 shows the supply and demand curve for oil. The rigid oil demand is projected as the steep demand curve in picture 7. Regardless how high the oil price is, countries require oil to maintain transportation and vice verse whatever how low the oil price is the oil consumption within a country is restricted to a small range. For example, if we want to deliver a parcel from China to the US by air, we will choose the most efficient and shortest route. We will not take a detour because the oil price is low. Thus the consumption of oil is maintained in a stable range in recent years. According to the data from the EIA, we can see in figure 8, the consumption increases just by 1% or 2% every year. However, since 2014 Q3, we can see from the figure, the production starts to surpass the consumption. As we mentioned above, the oil price started to decrease in the latter half of 2014. Then the question is why did the supply changed suddenly? Is supply increase the only reason for oil price slump? We will have a further discussion in "2.3 The elements influence the oil price"

Figure 6, The traditional supply and demand curve Figure 7, The oil supply and demand curve

(Data From: EIA) Figure 8, Consumption and production of oil from 2011 to 2016 Q

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2.3 The elements influence the oil price

2.3.1 The policy of OPEC

Before year 2014, the OPEC countries owned almost two thirds of oil reserve around the world and most oil OPEC owned is "sweet oil" thus OPEC has an absolute advantage in price setting. OPEC countries limited the production in past years in order to improve the profit from oil. Oil was priced by the demand pricing mechanism but things started to change after 2014. Since 2014, some OPEC countries started to increase oil production. Libya has resumed the oil production since 2014 after several years of riots within the country. Because it hoped to produce more oil in order to improve the country's financial situation and make up the loss that they had made years before, it disagrees with the oil production limitation agreement. Also, Iraq and Iran do not prefer to limit their oil production. Because of the riots and economic sanctions, they had stopped oil production for many years. These countries are eager to make up their loss. However, other OPEC countries hope to limit the oil production in order to get a high gross profit rate. In June 2016, OPEC held a conference to discuss the oil production limitation,unfortunately, countries have not reached any agreement until now.

2.3.2 The competition from shale gas and shale oil

Shale gas can be used as fuel. As we can see from the above statistics, oil used in transportation as fuel almost accounts for 72% of oil use. Thus if shale gas are cheaper to produce, gas may replace oil as fuel.In fact, a lot of electricity stations already use shale gas as fuel.

Oil production is also available by producing from shale oil. As we can see from picture 9, from 2011 to 2015 the oil production almost doubled in US. The main reason that US could produce more oil is due to shale oil production.

(Data from: EIA) Figure 9, Oil production by US

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2000

4000

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2011 2012 2013 2014 2015

Crude Oil Production_US(Thousand Barrels per day)

Crude Oil Production_US(Thousand Barrels per day)

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The US has almost 70% of the shale gas and shale oil reserves around world. However, one major problem with exploring for shale gas and shale oil is that exploration cost is higher than for crude oil exploration. And the quality of oil explored in shale is not as good as crude oil thus it required more process to refine it. In order to squeeze the shale gas and shale oil out, the OPEC countries may plan to manipulate the oil price to a low point. Once the oil price is low enough, the shale gas and shale oil companies will face a bankruptcy situation. Although shale gas and shale oil reserves are great, the cost of petroleum product from shale oil is double than traditional crude oil. In fact, some shale gas and shale oil companies have already faced a bankruptcy situation. But the cost of crude oil exploration and transportation is around 40 dollars per barrel. If the oil price is lower than this, oil companies will also have a financial problems.

2.3.3 The negative relationship between US dollars and Oil price

Because the oil price is marked by dollars. Thus when the US dollars rises, the oil’s comparable price will decrease.

As we can see from the Figure 10 following, since 2014, the US dollar index started to increase while the oil price start to decrease.

(Data from: EIA) Figure 10, Oil production by US

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2.4 The future oil price

OPEC may not limit oil production in coming months. The concerns that shale gas and shale oil will replace crude oil, the higher production of oil production in US and also some countries within Opec eager to earn money may lead the OPEC countries fail to reach an agreement.

The cost of crude oil is about 40 dollars per barrel. The oil price now is about 50 dollars. Considering the supply and demand and OPEC policy and motivation, in the near future the oil price may remain in the range of 40 to 50 dollars per barrel. Therefore, neither a long or short oil option is wise.

3. The Oil Company

3.1 The general introduction the relationship between BP, Exxon & CNPC("China National Petroleum Corporation")

According to the price of Brent Oil Price, Exxon, BP and CNPC from 2011 to 2016 first half year, the correlation between Brent Oil Price and Exxon is 0.24, the correlation between Oil Price and BP is 0.78, the correlation between Oil Price and CNPC is 0.04. In the following report, we will discuss the reasons project to these correlations and if the correlation could reflect the real relationship between these three countries' performance and oil price.

(Data from: WIND) Figure 11, Oil price, Exxon, BP and CNPC

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3.2 BP

3.2.1 BP's general introduction

BP's main operating segments are upstream and downstream. Its upstream segment manages exploration, development and production activities. Its downstream segment mainly covering three main business-fuels, lubricants and petrochemicals.

Up to the end of 2015, the total shares issued by BP is 20 billion. JPMorgan Chase Bank is the biggest shareholder of BP who hold almost 27% shares. BlackRock hold 6.3% shares of BP which make it rank to second shareholder.

3.2.2 BP's profit summary

As we can see from the profit detail from table 1, the main business of BP is Upstream(Crude oil exploration), Downstream(Chemical products), dividend from TNK-BP and Rosneft. As we have referred above, the correlation between BP and Brent Oil is 0.78 as the highest correlation among three countries however as the slump of BP's stock price is not only because of the oil price continue decreasing but also because compensation for the Gulf of Mexico oil spill.

(million, USD) Underlying RC profit(loss) before interest and tax 2011 2012 2013 2014 2015 Upstream 26,358.00 22,491.00 16,657.00 8,934.00 (937.00) Downstream 5,470.00 2,864.00 2,919.00 3,738.00 7,111.00 TNK-BP 4,134.00 3,373.00 12,500.00 - - Rosneft - - 2,153.00 2,100.00 1,310.00 Gulf of Mexico oil spill 3,800.00 (4,995.00) (430.00) (781.00) (11,709.00) Other (2,468.00) (2,794.00) (2,319.00) (2,010.00) (1,768.00) unrealized profit in inventory (113.00) (576.00) 579.00 641.00 (36.00) Profi(before interest and tax) 37,181.00 20,363.00 32,059.00 12,622.00 (6,029.00) (Data from: BP Financial Report) Table 1: BP's profit detail

(Data from: BP Financial Report) Figure 12, BP Profit

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(Data from: BP Financial Report) Figure 13, BP's Dupont picture

3.3 Exxon

3.3.1 Exxon's general introduction

Exxon's main operating segments are upstream, downstream and chemical products. Different from BP's segment, Exxon's upstream only refer to oil exploration, the product is crude oil. Exxon's downstream is crude oil refinery(Convert crude oil to petroleum, as we can see from figure 4, some petroleum products could be used directly while others require more procession.). It's chemical is producing petrochemical products such as plastic, lubricants and other products based on petroleum.

Up to the end of 2015, the total shares issued by Exxon is 4 billion. Vanguard Group Inc hold 209 million shares almost 5% of total shares and black rock hold 188 million shares almost 4.5% shares. They are the two biggest share holders of Exxon.

3.3.2 Exxon's profit summary

As we can see from table 2, Exxon's major income comes from upstream. The slump of profit is major because of the profit from upstream jumped down. The correlation between Exxon and Brent oil from 2011 to 2015 is 0.24 lower than BP's 0.78.However, from the financial report, we can get the information that Exxon has more closer relationship with oil price because it's profit from upstream almost occupies 80% of its total net profit in previous years while BP's loss was not only influenced by the oil price slump but also influenced by the Mexico gulf oil spil

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(million, USD) 2011 2012 2013 2014 2015

Upstream 34,439.00 29,895.00 26,841.00 27,548.00 7,101.00

Downstream 4,459.00 13,190.00 3,449.00 3,045.00 6,557.00

Chemical 4,383.00 3,898.00 3,828.00 4,315.00 4,418.00

Corporate and financing (2,221.00) (2,103.00) (1,538.00) (2,388.00) (1,926.00)

Net income attributable to ExxonMobile 41,060.00 44,880.00 32,580.00 32,520.00 16,150.00 (Data from: Exxon Financial Report) Table 2: Exxon's profit detail

(Data from: Exxon Financial Report) Figure 14, Exxon Profit

(Data from: Exxon Financial Report) Figure 15, Exxon's Dupont pictur

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3.4 CNPC

3.4.1 CNPC's general introduction

According to the annual report of CNPC, its main business includes upstream(oil exploration), downstream(refinery, petroleum and chemical products) and gas.

Up to the end of 2015, CNPC issued 183 billion shares. However, different from Exxon and BP, we should notice that China Petroleum Group hold 86% amount to 158,034 million shares of CNPC. China Petroleum Group is a group controlled by Chinese government.

3.4.2 CNPC's profit summary

As we can see from the table 3, the downstream oil refinery and petroleum products occupy a high profit rate in total profit compared Exxon and BP. Thus even the crude oil price slump, the net profit in 2015 still reached 55,199million dollars.

(million, USD) 2013 2014 2015

Upstream 52,522.39 49,764.63 17,389.70

Downstream 20,626.87 20,424.78 32,549.10

Gas 772.54 2,092.24 5,231.94

Corporate and financing 36.5672 36.1194 28.2090

Net income attributable to CNPC 73,958.36 72,317.76 55,198.96 (Data from: CNPC Financial Report) Table 3: CNPC's profit detail

(Data from: CNPC Financial Report) Figure 16, CNPC Profi

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(Data from: CNPC Financial Report) Figure 17, CNPC's Dupont picture

3.5 BP, Exxon and CNPC comparison

From the data of Dupont analyst method, Exxon's ROE is 9.03 rank the first among the three and its Net profit margin on Sales and Equity Multiplier are also better than other two company.

Year： 2015

Company ROE(%) Net Profit Margin on Sales(%) Asset turnover (time) Equity Multiplier

BP -6.14 -2.83 0.83 2.61

Exxon 9.03 6.17 0.78 1.99

CNPC 3.03 2.46 0.72 2.04 (Data from: BP, Exxon and CNPC Financial Report) Table 4: BP, Exxon and CNPC Dupont Data)

In fact, as data shown in table 5 Exxon's ROE was higher than other two companies in past three years. BP's ROE in 2014 is not only influenced by the oil price slump but also because of the Mexico gulf oil spill. And in a visible future, its performance will be continue influenced by this incident. CNPC's performance is not as good as BP and Exxon may be because of the technology gap. Chinese oil company's oil refinery technology is not as efficient as oil companies in western countries.

ROE

Company Year 2013 2014 2015 BP 18.93 3.14 -6.21 Exxon 19.17 18.67 9.36 CNPC 11.80 9.28 3.03 (Data from: BP, Exxon and CNPC Financial Report) Table 5: BP, Exxon and CNPC ROE)

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Under the condition that the oil companies' technology has no difference and no incident happens to the company, Exxon may be the typical oil company to be invested. However, the correlation between Exxon's stock price and Brent Oil is only 0.23. The oil companies' profit is not only influenced by the crude oil's price but also influenced by their chemical products. And we can see from these three companies' profit data, although companies lose money from upstream, companies still could earn money from downstream.

As an investor, if we only pay attention to the oil price, we would better trade oil options directly however if we consider the technology revolution in chemical products, we could choose the oil companies as our investing subjects. However, as the profit from the upstream is still the major profit to oil companies, even oil companies have great technology revolution, it may still not advisable to regard oil companies as investing subject in near future.