LONDON The traditional business model of "big oil" -- the major integrated oil company -- is far from broken, said an RCM energy fund manager on Wednesday, despite the skepticism in some quarters about future growth prospects.
Some investors have shunned the majors because of their perceived difficulties in adding enough new assets to make a significant impact to the bottom line -- and the share price.
"Historically they have not had a very great press in terms of 'is the big oil model broken?'" said Christopher Wheaton, manager of the Allianz RCM Energy fund, which has some 190 million euros ($273.1 million) under management.
As a result of this skepticism some of the biggest names are now trading at attractive valuations, and Wheaton argued the model had stood up remarkably well in poor trading environments.
"When that model was put under extreme stress in 2009, the upstream parts of most of the big oil companies were still making 8-15 percent return on capital employed, even when oil was at $40-$50 a barrel," Wheaton said, speaking at the Reuters Global Energy and Climate Summit.
Wheaton said he was probably overweight the integrated oil and gas companies compared with his energy equities peer group, with BP (BP.L), Exxon Mobil (XOM.N) and Royal Dutch Shell (RDSa.L) amongst his top 10 holdings.
Wheaton believes the oil price may come off in the short term if Chinese demand slows a little, but next year sees Brent averaging $110 a barrel and then rising $10 a year thereafter, supporting revenues for the oil majors.
He predicted a lot more M&A activity by 2013 from cash-rich oil majors looking to pick up strategic resources such as Canadian gas plays, which are well-placed to serve the growing Asian markets.
Currently, he believes the oil price is about $15 too high, arguing that in the short term, there is still plenty of oil in the world. "And the inelasticity of demand is amazing."
Demand destruction of about 100,000-200,000 barrels a day in the developed world is not enough to offset demand growth of 1.5 million barrels a day in emerging markets, he argued.
"The perception that demand is falling will be more damaging than the actual decline," he said.