Sectarian violence in Iraq has elevated the risk for Western oil companies operating there, including ExxonMobil , BP , and Occidental Petroleum . While their operations haven't been affected thus far, investors are rightly concerned about the impact further violence could have on their production, earnings, and credit ratings. Let's take a closer look.
Little impact, Moody's says
According to a recent note by Moody's Investors Services, the credit ratings of Western oil companies with operations in Iraq are unlikely to be meaningfully affected even if violence spreads to the nation's southern oil fields and disrupts production.
The ratings agency's view is based on the fact that Iraq accounts for a relatively insignificant share of Western oil companies' production and earnings. And even if supply is disrupted, the positive impact it would have on the price of Brent crude would likely offset the negative impact of lower Iraqi volumes on Western companies' earnings.
So far, the uprising led by the Islamic State of Iraq and Syria (ISIS), a Sunni militant group that now calls itself the Islamic State, has been concentrated in northern Iraq, which accounts for roughly 10%-15% of the nation's production. But the southern part of the country, where the majority of Exxon, BP, and Occidental's operations are located, hasn't been affected.
Minimal impact on production and earnings
Exxon's operations are mainly focused in southern Iraq's West Qurna oil field, though it also maintains interests in the Kurdistan Region of Iraq. BP maintains a 38% working interest in southern Iraq's Rumaila oilfield, which contributed 39,000 barrels per day to its net production in 2013. Lastly, Occidental is exposed to Iraq through its interest in the Zubair field, which contributed roughly 17,000 barrels of oil equivalent per day (boe/d) to the company's net production last year.
In the grand scheme of things, these operations are relatively insignificant contributors to companywide production. Iraq accounts for just 1.8% of Exxon's production, 1.9% of BP's, and 2.2% of Occidental's output, according to estimates by investment research firm Morningstar.
Furthermore, Iraq's contribution to their earnings is likely even smaller due to the onerous terms that dictate their service contracts with the Iraqi Ministry of Oil. Exxon, BP, and Oxy "only receive a modest remuneration fee of a few dollars per barrel after cost recovery," which implies that the "earnings impact is much less than the relative amount of production would suggest," Morningstar writes.
Over the long term, however, continued violence that leads to a deterioration in Iraq's security situation could prompt Exxon, BP, and Occidental to exit the country. Indeed, Occidental has been marketing a 40% stake in its Middle East/North Africa (MENA) assets, which includes its Iraq operations, since last year to reduce its exposure to geopolitical risk and focus on west Texas' Permian Basin -- its most profitable operation.
Another potential threat Moody's identifies is a regime change that could result in the voiding of existing contracts between the Western oil companies and Iraqi officials. Such a move would jeopardize Iraq's oil production growth prospects and likely result in a higher long-term Brent price since oil price stability is largely predicated upon Iraqi volumes growing at a rapid pace over the rest of the decade.
Overall, Exxon, BP, and Oxy shareholders needn't worry too much about their exposure to Iraq, which is relatively insignificant in terms of production and even less significant in terms of earnings. Further, a deterioration in Iraq's security situation that hampers its long-term production growth probably wouldn't be so bad since it would keep crude oil prices elevated, boosting these companies' oil revenues and earnings.
OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!
The article Big Oil Shareholders Shouldn't Worry About Operations in Iraq? originally appeared on Fool.com.Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.