There are two commodities that are fundamental to life on earth – oil for essential energy, and water, without which humanity would disappear without trace. In the case of water, though not in my life time, a diminishing supply will inevitably prove disastrous, regardless of preservation controls.
Oil has been a controversial commodity for 150 years, with its price volatility being decided by supply and demand; geopolitical issues; the power of OPEC [Organisation of the Petroleum Exporting Countries]; the value of the dollar; and the cost of exploration and refining. Though an economic history lesson is not required, it is interesting to note the price dissemination since 1970 for Nymex crude, which climbed from $20 a barrel to $120 in 1980 before dipping to $12 in 1997. An average barrel now costs $51, which fell again from $136 in 2008.
Outlook and companies to watch
This week, I asked two of my esteemed colleagues at Panmure Gordon & Co, Colin Smith and Jamie Campbell, for their views on the outlook for oil and the companies they think will prove sound investments in the months to come. By the end of the year, Colin Smith predicts that oil will be slightly firmer in price than today, at around $55-60 a barrel. He believes that OPEC will maintain its production discipline at the May rollover date and that US production levels through 2017 are unlikely to be as overwhelming as some may have feared.
Among the companies he favours this year include Royal Dutch Shell. Having bedded down its $47bn acquisition of BG Group, CEO Ben van Beurden and his management team have a duty to focus on its entire portfolio and make sure it delivers its promises, while maintaining a full dividend through to 2018.
A story of growth
Smith is also enthusiastic about Kazakhstan’s Nostrum Oil & Gas, listed as a FTSE 250 company. This is a simple story of growth, where politics is of limited concern, due to the importance of oil to its economy. In the past year the share price has already gone up by 40%.
Another one to watch is Savannah Petroleum. This exploration and production operation based near the Niger is due to start drilling in June 2017 and there is considerable hope that some really decent world class acreage will be found, attracting realistic financial syndication involvement. The share price has hardly moved in the past year but rallied by 18% last week.
In his assessments of oil and gas companies which make attractive investments, Jamie Campbell’s criteria for success is simple. Companies based overseas should have good and trusted external exploration prospects with decent carry with the ability to fund themselves. Exploration companies should work with local governments and there should also be no prospect of nationalisation. According to Campbell, political instability is never usually a concern, with oil a major contributor to the economies of most oil producing countries.
Here are three companies Campbell believes show the most promise:
Gulf Keystone was completely disregarded by the market last year, due to the near collapse of the listed equity structure, resulting in over-leverage and restricted payments by the government.
However, the underlying asset, Shaikan, has always been a good, stable, low-cost performer. Now that debt has been reduced by $500m and the company is in a net cash position and operationally cash flow positive, it could be the right time to re-visit – the operation is starting to look very cheap.
Kurdistan is still a ‘hot spot’ from a geopolitical perspective, but the region is still one of the last energy frontiers and there is sufficient skills and infrastructure to foster future growth. Look out for the M&A flag to be raised before too long, in my view. The share price has been trashed since the beginning of last year but has been stable for nearly five months.
Eland Oil & Gas
This emerging Nigerian producer has onshore assets in the Niger Delta. The company has struggled with monetising their OML40 field in Nigeria due to third party issues with Shell’s Forcados terminal being offline for over 12 months. However, the resumption of revenues from barging should also re-ignite the development and appraisal drilling at both the Opuama and Gbetiokun fields on the OML40 licence.
Given the success from recent well work-overs and the lower geological risk associated with oil reservoirs in the Niger Delta, the potential for a gross production uplift beyond 15,000bbl/day is real with strong margins, yet the market cap still remains at sub-£100m. Though a small cap company, the share price has risen by 60% in the past year.
Jersey Oil & Gas
This is pure exploration, but Jersey Oil & Gas situated in the politically safe North Sea and is under the supervision and auspices of Statoil.
A well is committed to be drilled in the summer by Statoil targeting the 300mmbbl+ Verbier prospect on Licence P.2170. Jersey has a $25m carry on the first exploration well in addition to a secondary carry for other partners CIECO. Jersey has an 18% interest in the well and the company is catching a significant level of media and retail investor attention. The company is also seeking to add a production asset to their portfolio to strengthen the company’s core.
Expectations have clearly been at fever-pitch – up from 12p to 220p in the past year.
David Buik MBE is a market commentator at Panmure Gordon. The companies he has worked for mostly involved financial spread betting. He worked for BGC Partners from 1999 to 2011. He has appeared as a financial pundit on the BBC, Bloomberg Television, CNN International and ABC News (Australia).
Disclaimer: The content on this page does not constitute financial advice and is provided for general information purposes only. Nothing on this page should be regarded as an offer to conduct investment business or to buy/sell any investment.