With long-term oil prices anchored at $75 per barrel, oil stocks may be undervalued.

Overview

Based on an analysis of the 2025 annual reports of the world’s 50 largest publicly listed oil and gas companies (the TOP50), this report estimates the global marginal cost of oil. It finds that, although the marginal cost declined to $69 per barrel in 2025 amid falling oil prices, taking into account the reflexivity between costs and oil prices, as well as anticipated inflationary pressures, the marginal cost is expected to rise again to $77 per barrel in 2026. On this basis, the firm concludes that $75 per barrel represents a more appropriate long-term price anchor for oil—above current market forward pricing—implying potential undervaluation in the oil‑sector equity universe. Meanwhile, insufficient industry reinvestment is driving a decline in reserve life, which constitutes a favorable supply‑side signal over the longer term.

Core views

Key Point 1: Marginal cost determines the long-term oil price, which is projected to rise to $77 per barrel in 2026. The research report defines “marginal cost” as the oil price required to cover the production costs of the top 10% of non-OPEC producers—those at the 90th percentile—and to replace their reserves. In 2025, driven by a 14% decline in Brent crude to $69 per barrel, global marginal cost fell 2% year on year to $69 per barrel. However, costs are not static; they fluctuate with oil prices. The firm projects that spot oil prices will reach $90 per barrel in 2026, fueling cost inflation across fuels, raw materials, and production taxes, thereby pushing marginal cost up to $77 per barrel in 2026. Accordingly, the report recommends using $75 per barrel as the long-term Brent crude price assumption (nominal) in equity valuations—above the current level of approximately $70 on the 60‑month forward curve. Key Point 2: Industry Break-Even and Cash‑Flow Dynamics. Global unit production costs declined 5% year on year to $35 per barrel of oil equivalent (boe). Given that oil and gas companies typically realize only 72% of the Brent price (2025 data), the industry average requires an oil price of $50 per barrel to achieve net‑profit breakeven. Marginal cash cost—covering only operating expenses and interest, excluding depreciation and amortization—remained steady at $39 per barrel, serving as a theoretical floor for oil prices. In 2025, the industry’s average return on capital employed (ROACE) was 10%, on par with long‑term cost of capital; should oil prices reach $90 per barrel in 2026, ROACE could climb into the mid‑to‑high teens. Free cash flow, though slightly reduced by lower earnings, remains at historically elevated levels, largely supported by a low reinvestment rate. Key Point 3: Underinvestment and Shortening Reserve Lifespan Signal Long‑Term Bullishness. Despite an organic reserve replacement ratio of 135% in 2025, the total reserve base has not expanded significantly, as the reinvestment rate—capital expenditure as a share of operating cash flow—remained at just 61%, well below the historical average of 80–90%. Consequently, the reserve‑to‑production (R/P) ratio for the TOP 50 companies dropped to 10.4 years, the lowest in 20 years (the long‑term average is 13 years). The report notes that a lower R/P ratio often serves as a leading indicator of slower future production growth, constituting a bullish signal on the supply side. Exploration spending has been slashed to $1.0 per boe, reflecting companies’ cautious stance on long‑term demand.

Analysis framework

The institutional analysis follows the central premise that “cost determines the long-term equilibrium price.” First, the sample is defined: 50 of the world’s largest non-OPEC oil and gas–listed companies are selected (excluding Russia and the low-cost regions of the Middle East, due to data opacity or their positioning at the lower end of the cost curve). These firms account for the bulk of non-OPEC supply and are thus highly representative. Second, a cost curve is constructed: by analyzing these companies’ financial statements, the marginal cost of each firm is calculated. Since financial reports typically do not separately disclose oil and gas costs, the analysis employs an “implied ratio” approach, allocating mixed costs to crude oil based on the proportion of oil production. The marginal cost formula incorporates lease operating expenses, general and administrative costs, net interest, exploration expenses, depreciation, depletion, and amortization (DD&A), as well as incremental capital expenditures required to replace 100% of reserves—roughly 1.3 times DD&A—adjusted for tax rates and the realized‑price-to‑realized‑value ratio (%Z). Finally, conclusions are drawn: the 90th percentile of the cost curve is taken as the global marginal cost. By comparing this marginal cost with current forward and spot oil prices, as well as historical trends, the institution assesses the appropriate long-term price range and the valuation status of related equities. At the same time, changes in reinvestment rates and the reserve‑to‑production ratio are factored in to gauge future supply elasticity.

Methodology notes

• Industry/ Sector Analysis FrameworkCost curve analysis

  Marginal Cost Pricing Theory

  In the commodities sector, the long-term equilibrium price is typically determined by the cost of the highest-cost producer—i.e., the marginal producer—required to meet market demand. When prices fall below this level, high-cost capacity exits the market, leading to supply shortages and upward pressure on prices; conversely, when prices exceed this threshold, new capacity enters the market or existing high-cost capacity becomes more profitable. This research report constructs a global marginal cost curve for non-OPEC producers to identify the long-term fair-value price midpoint for oil.

• Company Fundamentals and Financial FrameworkOthers

  Cost Reflexivity

  This refers to the phenomenon whereby production costs in upstream industries fluctuate in response to changes in product prices. When oil prices rise, service fees, material costs, and taxes typically increase as well, causing the marginal cost curve to shift upward; conversely, a decline in oil prices leads to a downward shift. Leveraging this pattern, the research report has revised its forecast for 2026 marginal costs—projecting them at $77 per barrel—based on the anticipated high oil price of $90 per barrel, rather than simply extrapolating from historical data.

• Industry/ Sector Analysis FrameworkSupply-and-Demand Framework

  Reserves-to-Production Ratio (R/P Ratio) and Reinvestment Rate

  The reserve-to-production ratio measures the number of years that existing reserves can sustain production, while the reinvestment rate indicates the proportion of a company’s cash flow allocated to expanding capacity. The research report finds that, despite a high reserve replacement ratio, the overall reserve life is still declining due to a low reinvestment rate. A low reserve-to-production ratio signals constrained future supply growth and serves as a key leading indicator for assessing the industry’s long-term supply-demand balance.

Key data

• Global Marginal Cost of Oil in 2025USD 69 per barrelA year-on-year decline of 2% reflects cost deflation driven by the drop in oil prices in 2025.
• Expected Marginal Cost in 2026USD 77 per barrelBased on the projected spot oil price of USD 90 per barrel and cost inflation estimates.
• Long-term oil price valuation assumptionsUSD 75 per barrelThe long-term Brent oil price used by the institution in its DCF model exceeds the current forward curve of $70 per barrel.
• Industry-Average Breakeven Oil PriceUSD 50 per barrelCalculated based on a unit cost of $35 per barrel of oil equivalent and an execution rate of 72%.
• Marginal Cash Cost (Floor Price)USD 39 per barrelIt only covers operating costs and interest, representing the theoretical floor for oil prices.
• Top 50 Companies’ Reserves-to-Production Ratio (R/P)10.4 yearsFalling to a 20-year low, with the long-term average standing at 13 years.
• Industry reinvestment rate61%Although it has rebounded from its 2022 low, it remains well below the historical norm of 80–90%.

Impact & implications

The core investment insight from the research report lies in valuation correction. Given that the estimated long-term marginal cost—around $75–$77 per barrel—is significantly higher than the current market‑based long-term forward oil price of approximately $70 per barrel, this suggests that the market may be underestimating oil companies’ long-term profitability. Should oil prices remain persistently above the marginal cost, oil equities stand to benefit from a re-rating. Moreover, supply‑side constraints—stemming from insufficient reinvestment and the resulting shortening of reserve life—limit the elasticity of future production growth, providing structural support for oil prices over the longer term. This bodes well for leading oil and gas producers with high‑quality, low‑cost assets and robust cash flows.

Risks

• Demand-Disruption Risk: If oil prices remain persistently above $130 per barrel—equivalent to roughly 4.5% of global GDP—this could trigger a global recession, thereby dampening oil demand.
• Cost inflation falls short of expectations: Should supply-chain inflationary pressures ease, marginal costs may not rise to the anticipated $77 per barrel.
• Slower macroeconomic growth: Weak global economic expansion could lead to oil demand falling short of expectations, thereby putting downward pressure on oil prices.

What to watch

• The actual spot oil price trajectory in 2026 and its transmission effects on service costs and taxation.
• Capital expenditure plans and changes in the reinvestment rates of major global oil and gas companies.
• Production growth data from non-OPEC regions confirm the impact of declining reserves-to-production ratios on actual supply.