Shale oil set to continue piling pressure on oil majors, Citi says

When valuing the oil majors, investors need to take into account the investment necessary to replenish their resource reserves with the impact that has on the companies' reserve life and balance sheet gearing, Citi said.

In other words, Big Oil might be able to fully cover its diviend payments at $50 a barrel oil but at a cost; namely, a 20% reduction in their reserve life as a result of underinvestment, it said. For reserve life to grow, the group needs oil at $60 a barrel.

Hence, more changes were needed at the oil majors.

Central to its analysis, geologically Citi believed the US Permian basin was capable of producing at a rate of between six to eight million barrels of crude oil a day, versus just 1.4m b/d at present. That meant output was set to double and then double again, opening the way for cost reductions of roughly 60% (assuming similar learning rates to those at Eagle Ford and Bakken and not much better ones).

Italy's Eni, which Citi rated at 'buy', was the exception, with an ability to grow reserve life all the way down to $40 a barrel.

Other 'buy' rated stocks in its coverage universe, once adjustment was made for real yields for reserve life and balance sheet leverage, were Conoco Philips, Chevron and Statoil.

On the opposite end of the spectrum were Royal Dutch Shell, (sell), Exxon Mobil (neutral) and Repsol (neutral), Citi said.