High Oil Prices Carve a New Energy Landscape

Neil Fleming

2007 Platts Top 250 Global Energy Companies in focus

AS OIL PRICES ENTER THEIR THIRD YEAR above the $50/barrel mark, the dominance of major oil and gas businesses in Platts' annual Top 250 Global Energy Companies rankings grows ever more pronounced.

Figure 1 shows in starkly graphic terms the impact of high oil prices on the composition of the "Top 30" over the past four years, as oil majors, refiners and exploration companies have steadily moved into the top slots, leaving French utility giant EDFat #14 in the worldthe only non-oil company ranked higher than 20th by 2007.

Figure 1: March of the Majors. Top 30 global energy companies since 2004, by S&P GIC industry code. IOG: Integrated Oil and Gas; EU: Electric Utility; E&P: Exploration and Production; R&M: Refining and Marketing; DU: Diversified Utility.

World #1 for the third year in a row was ExxonMobil. BP and Shell exchanged places from the 2006 rankings to occupy the #2 and #3 slots respectively. And Chevron jumped three places to #4, pushing France's Total into fifth position.

Petrochina, Statoil, ENI, Petrobras, and ConocoPhillips made up the rest of the Top 10, all regular participants at the head of the rankings.

The March of the Majors has been driven, unsurprisingly, by a combination of all four financial factors used in computing the Global Top 250assets, revenues, profits, and return on invested capital.

But interestingly, the Majors' near-total monopoly on the top 20 places in the 2007 rankings may have as much to do with the impact of high hydrocarbon prices on non-oil energy businesses, as with their own growth.

In point of fact, major oil companies grew rather more slowly in the course of 2006 (the basis for the 2007 rankings) than in previous years, in line with a slower rate of growth in oil prices. And they saw their greatest boost in profitability in 2004, the first year of higher oil prices, rather than in subsequent years. By implication, it may be that the cumulative impact of a tougher business environment for utilities is the real driving force behind their slippage in the rankings.

The world's key crude oil benchmark, Platts "Dated Brent" price, crossed the $50/barrel mark for the last time on June 1, 2005. It has not been below $40 since January 3rd of that year, and not been below $30 since February 9, 2004. Oil's relentless climb, with its knock-on effects on gas pricing and other combustibles, has dramatically changed the landscape for success in the utility business over the past three years. Of the eleven utilities ranked in the top 30 in 2004, only two survive at that level: Italy's Enel and Belgium's Electrabel.

Others have faced challenging times. British gas giant Centrica, for example, which ranked #18 in 2004, saw its profits hammered into the red two years ago by a previously unimagined, and largely unhedged, steep rise in wholesale gas pricesa rise with which Centrica's retail pricing could not keep pace.

It was not alone. A quick glance at the profits history of all those utilities which in 2004 were in the world Top 30 shows a generous scattering of red ink (Figure 3).

Figure 2. The Rise of EDF (figures in $ millions). Source: Platts

Figure 3: Where Are They Now? Changes in profits among 2004's leading utilities. High oil prices have delivered challenging times for all those utilities which in 2004 ranked in the Top 30 energy companies in the world. All have lost ground to oil companies in the 2007 Top 250 rankings. (NB: Platts modified its ranking methodology in 2005, dropping "earnings per share" from the mix of financial measures.)

Rise of the European Super-Utilities

In strong contrast, however, has been the rise of the European super-utilitythe product of a decade of sometimes stuttering market liberalization in the European Union which has spawned a generation of giant playersstrong, efficient and wedded to continuous growth.

First among these is France's EDF, the power company which listed on the French stock market in 2005 but remains majority state-owned. EDF arrived with a bang in Platts 2006 rankings, placing #17 in the world. This year it is #14, following a decade-long shopping spree, which in the past five years has included:

• Buying 45% of two combined heat and power plants in Poland in 2002, consolidating its already powerful position in the country;
• Buying out its energy trading arm EDF Trading from Louis Dreyfus in 2003;
• Taking a 17.3% stake in Motor Columbus, holding company for Switzerland's ATEL;
• Buying an additional 34% of Hungary's Demasz in 2006, taking its stake to 95%;
• Acquiring this year a 66.5% stake in SUPRA, a company which manufactures a zero-CO₂ wood-burning heating system;
• Buying Dutch coal-terminaling business Amstuw BV in July this year.

Joining it in the Top 20, with a ranking of #20 this year, is a second French utility giantSuez, whose planned merger with Gaz de France finally won French government blessing in September this year. The new group, GDF Suez, which is likely to come into being in mid-2008, is set to become the world's fourth biggest energy utility by market capitalization, behind Russia's Gazprom, EDF and Germany's E.ON.

Suez, which operates in power, natural gas, liquefied natural gas, water and waste management, has already clocked up an impressive growth record since its books tipped into the red in 2003, dropping it to #111 in 2004's rankings. Since that year's realignment, which included buying a majority stake in Belgium's Electrabel, Suez has surged ahead on all four measures used in calculating the Platts Top 250. In 2005, it completed the purchase of Electrabel (itself ranked #28 in the world in this year's Top 250) and in 2006 delivered the best stock market performance of any European business in the diversified utility sector in a decade.

At #24 in the world, Germany's E.ON completes a trio of powerful merger-based European utility businesses (it was formed in 2000 from the VEBA and VIAG groups) in the upper rankings of the Top 250, though the energy giant has never quite recaptured its #11 position, held in 2003. It had a busy 2006, buying the gas trading and storage operations of Hungary's MOL, taking a 75% stake in Italy's Dalmine, exiting the specialty chemicals business by selling its remaining stake in German firm Degussa, and selling its E.ON Finland shares to Fortum.

But the Europeans in the Top 30 are only a part of the story. Strikingly, the thirteen most successful utility businesses in the world in this year's rankings are all European companies. US nuclear giant Exelon, at #56 in the world, is the highest place non-European utility business of any kind to figure in the Top 250 rankings, recovering 18 places on its 2006 standing, to displace Duke Energy as the top-scoring US utility.

Europeans Outnumber Americans in Top 100 for First Time

Growth in Europe, and to some extent in Asia, is indeed a characteristic across the board of the Top 250 rankings since 2002. A straight regional ranking of companies from all industry sectors, shows European, African and Middle Eastern businesses outnumbering companies from the Americas in the Top 100 places for the first time since Platts began its Top 250 Rankings (Figure 5). There were 42 Europeanincluding Russiancompanies in the Top 100 this year, compared with 39 from the USA, Canada and Latin America.

Asian participation, by contrast, has been relatively static since 2003, both in the Top 100 and indeed in the whole Top 250, where the number of Asian businesses ranked has stood at 56 for two years in a row.

Who Has the Fastest-growing Businesses?

This statistic is in marked contrast to the self-evident rapid economic growth in the Asian region over the past decade. It appears as though, while Asia itself is growing rapidly, the number of Asian companies large enough to play at the top energy table is not yet growing.

Growth instead is occurring inside a small but select number of super-players: China's Petrochina, CPPC (Sinopec), China National Offshore Oil Corp. and China Shenhua Energy; India's Oil and Natural Gas Corp., Indian Oil Corp. and Reliance; Thailand's PTT plc; Korea's SK Corp. and Korea Electric Power Corp.; and Japan's Nippon Mining Holdings.

Interestingly, too, when one measures three-year compound revenue growth to find the world's fastest-growing energy companies in the Top 250, it is not Asia but the Americas region which appears to be producing the fastest-growerstwenty-one of the top fifty.

Some caution is needed, however, in interpreting "fastest growth". The revenue growth measure, for example, throws up Zimbabwean coal business Hwange Colliery as the fastest-growing company in the world in 2006. The mine is certainly a potential fast-grower, but in actual fact coal production fell 32% last year amid chronic equipment shortages caused by Zimbabwe's economic melt-down, and its astonishing 389% growth figure appears to be down to windfall debt repayments to the company.

Other top growers on the new measure include Russia's UES, clocking up 144% over three years, the US' Energy Transfer partners at 140%, China Resources Power Holdings at 131%, and South African utility Eskom, which grew 130%.

THE PLATTS TOP 250 ENERGY Companies ranking is based on four financial measures: Assets, Revenues, Profits, and Return on Invested Capital. All ranked companies have assets greater than US$2 billion and must be publicly listed companies. The underlying data come from the Compustat database, which is compiled and maintained by Standard & Poor's, which, like Platts, is a division of The McGraw-Hill Companies.

Where the Numbers Came From

This 6th annual survey of global energy companies by Platts Energy Insight magazine measures companies' financial performance using four metrics: asset worth, revenues, profits, and return on invested capital (ROIC). All companies on the list have assets greater than US$2 billion. The underlying data comes from the Compustat database compiled and maintained by Standard & Poor's (S&P), which, like Platts, is a division of The McGraw-Hill Companies. This year, in addition to recognizing the best financial performances of the year, we are also launching the list of Fastest Growing Companies in the Top 250 list based on the three year compound growth rate (CGR) for revenues.

Energy companies were grouped according to their Global Industry Classification Standard (GICS) code. Each company's GICS appears in the right-hand column of Table 1. The 9 codes found in Table 1 are: C&CF (coal and combustible fuels), DU (diversified utility), EU (electric utility), E&P (exploration & production company), GU (gas utility), IPP (independent power producer), IOG (integrated oil and gas company), R&M (refining and marketing company), and S&T (storage and transfer company). How a company is described is somewhat subjective and is based on how it generates most of its revenues.

Because the survey is global, and because all countries do not share a standard financial reporting standard, the data used is from the full year of 2006. Since then, material changes in a company's financial health may have occurred, and any evaluation should take that into account. Data for U.S. companies in the tables came from SEC Form 10K.

The company rankings are derived by adding each company's numerical ranking for asset worth, revenues, profits, and ROIC. The overall rank of 1 is assigned to the company with the lowest total, 2 to the next lowest and so on.

ROIC figures—widely regarded as a driver of cash flow and value—were calculated using the following equation:

ROIC = [(Income before extraordinary items) – (Available for common stock)] ÷ (Total invested capital) x 100

"Income before extraordinary items" is net income less preferred dividends and "Total invested capital" is the sum of total long-term debt, preferred stock (value), minority interest, and total common equity.

A final note: The Compustat database is not comprehensive, and as a result some companies in developing countries such as Russia or China may not be represented. S&P is making every effort to add those firms to the database as soon as reliable data on them is available.

Industry segments analyzed

*Coal and combustible fuel companies

*Diversified utilities

*Electric utilities

*Exploration and production

*Gas utilities

*Independent power producers

*Integrated oil and gas companies

*Refining and marketing

*Storage and transfer companies

Leading financial indicators measured

*Assets

*Revenues

*Profits

*Return on invested capital

Figure 4: Suez Resurgent

Figure 5: Europe Conquers America

Figure 6: The spectrograph shows the 50 Fastest-Growing Eenergy Companies in the world from left to right, with the fastest growers to the left.

Figure 7: Top 50 Fastest Growing Companies

Top 50: Who's Up, Who's Down Source: Platts

Leaders by Financial Indicator Source: Platts

Leaders by Region Source: Platts

Coal and Combustible Fuels. Source: Platts

Diversified Utilities. Source: Platts

Electric Utilities. Source: Platts

Exploration and Production. Source: Platts

Gas Utilities. Source: Platts

Independent Power Producers. Source: Platts

Integrated Oil and Gas. Source: Platts

Refining and Marketing. Source: Platts

Storage and Transfer. Source: Platts