AMMAN, Dec 06, 2006 (Dow Jones Newswires)
U.K. oil companies that earn revenues in dollars but pay North Sea production costs in sterling are taking a knock from the weakening dollar and valuations could further dip in the near future.
Oriel Securities published updated valuations Wednesday, changing its long-term exchange-rate assumption to $1.90/GBP1 from $1.80/GBP1 to take account of the falling value of the dollar.
Sterling's push higher is being driven by the U.S. economic downturn, which is influenced by a variety of factors including the U.S. government's reduced expectations for economic growth, worries over the narrowing interest-rate differential between the U.S. and other economies, and continued talk of reserve diversification by central banks worldwide, analysts said.
The dollar weakness led to Oriel reducing several mid-sized oil companies' net asset values, including Cairn Energy PLC (CNE.LN), Burren Energy PLC (BUR.LN) and Soco International PLC (SIA.LN).
Share prices of oil companies have a high correlation with their net asset values.
If the exchange-rate trend continues, oil companies such as Dana Petroleum's PLC (DNX.LN) ratings will be reconsidered in the first quarter of next year, one U.K. analyst said.
This trend could be further exacerbated by payroll and unemployment data due out from the U.S on Friday.
Adarsh Sinha, a foreign-exchange strategist at Barclays Capital, said, "The interest-rate differential is moving against the dollar, and as long as that continues the market will continue to sell the dollar."
Sinha said the market expects Friday's announcements in the U.S. to show weaker figures than previous trends. Payroll and unemployment figures' impact "would be quite significant" on the exchange rate, he added.
Oriel Securities analyst Phil Corbett said, "A 10-cent change in the value of the dollar against sterling would impact valuations across the oil sector by 4%-5%."
"If sterling went through $2 and stayed there for a sustained period, then people may have to look at their valuations again," he added.
Historically, oil prices have tended to rise when the dollar weakens, KBC Peel Hunt analyst Tony Alves said.
"The exchange rate has been a factor in the recent increase in the oil price," Alves said. "But a weak dollar would cause one to devalue assets valued in dollars."
Copyright (c) 2006 Dow Jones & Company, Inc.
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