From TheTimes: http://www.thetimes.co.uk/tto/business/columnists/article2919361.ece
Four rules to follow if you want to plunge into oil and gas
Martin Waller: Tempus
February 19 2011 12:01AM
When last our vessel approached the wilder shores of the oil and gas exploration sector, I did warn that these were choppy waters. These are shares much loved by private investors but not for widows and orphans, mostly. There are an unbelievable 87 oil and gas companies quoted on the Alternative Investment Market alone.
The City gossip mill suggests that there are a number of others eyeing a stock market float, encouraged by the surge in the oil price to above $100 a barrel since the start of the year. These include such exotica as 3Legs Resources, owned by the wealthy Jeffcock family of the Isle of Man, hence the name. This extracts gas from shale in Poland, the first time this controversial technique has been used in Europe. The company has lined up Tim Eggar, a former energy minister, as a potential chairman.
There are, as I see it, four ways of approaching investment in oil and gas. One is to go for the blue chips, companies that have been around and have proven reserves. You will not make a fortune out of these, but you may not lose one, either.
The granddaddy of the sector is Premier Oil, in the North Sea from 1971 and now active in Vietnam and Indonesia, ramping up oil production from 44,000 barrels per day (bpd) in 2011 to 75,000 bpd next year.
One of Tempus picks for 2010 was Northern Petroleum, a tiddler with reserves in the North Sea off the Netherlands. The shares are now trading, I am pleased to say, at 134¼p, 23 per cent above the price when I tipped them.
The second is to follow people who have a strong track record. Sir Bill Gammell is the former Scottish rugby international who founded Cairn Energy in 1980. Cairn is locked in an uncomfortable dispute with the Indian authorities over the sale of its Rajasthan reserves to Vedanta Resources, which would bring in a windfall of up to $9.6 billion. There is no guarantee that the deal will go through, but some analysts see this as a two-way bet. If Cairn is required to hold on to the asset, it will still be worth more than when the sale was announced in August. Angus McPhail, the veteran oil-watcher now at Investec, says that it is in the interests of the Indian authorities to allow the deal through, given their need for indigenous diesel fuel to power coal and iron ore production. Phil Corbett, at Royal Bank of Scotland, agrees: “Does the Indian Government really want to put a black mark over investment in India?”. Sir Bill wants to spend much of the money from Vedanta on exploring off Greenland. This is unproven territory, but his loyal army of investors would happily back him.
Also bogged down in local political issues is Tullow Oil, which is trying to sell assets in Uganda and only this week abandoned a well in Mauritania. The Ugandan deal has been delayed by the election there but, on the assumption that Yoweri Museveni is re-elected as president, the parties should go back to the negotiating table, Mr McPhail says.
The third approach is to plump for a region that, for geopolitical reasons, looks promising. There are several Western explorers in Kurdish Iraq again involved in a political dispute, including Heritage Oil, which this week disappointed investors with the discovery of gas, rather than oil, there. Heritage remains one of the sector’s possible bid targets.
In the Falklands, the stock market high flier Rockhopper also disappointed with a drilling report this month, having raised £206 million to fund further exploration in November. The company insists there are reserves near by; expect more news shortly.
The third area exciting investors is off Vietnam and Thailand. David Farrell, at Evolution Securities, likes Soco International, which should be producing 35,000 bpd in the not too distant future from two wells there. Mr Corbett also singles out Soco, whose assets alone support the share price, with unproven exploration in the Democratic Republic of the Congo probably thrown in for free.
Soco is another bid candidate. “Historically, this is a company that has been looked at by potential predators,” Mr Farrell says. Last year Dana Petroleum was bought by the Korea National Oil Corporation for £1.9 billion, after a hostile takeover battle. KNOC still plans to spend £3 billion or more on acquisitions, while its Chinese equivalent is equally deal-hungry.
Mr Farrell’s colleague, Richard Griffith, likes Cove Energy. This is partnering with Anadarko Petroleum, one of the biggest oil independents in the world, in offshore Mozambique, and there are further opportunities further north off Kenya.
Dana’s founder Tom Cross believed the deal undervalued the company, and the rise in the oil price suggests he may have had a point. Mr Cross is back as chairman of Parkmead, an AIM-quoted penny share that typifies our fourth investment strategy in oil and gas stocks, the wildcat stock pick. Latching on to a company with little in the way of assets is an easy way to make money if you choose the right one, but it is a lottery, even if it is linked to someone with a track record such as Mr Cross. The shares have rocketed since he joined, and Parkmead still has much to prove.
