OVER recent weeks, the optimism that had driven commodity prices and equities higher disappeared. The escalation of the Greek debt problems has certainly highlighted the still significant issues facing the global economy. In broad terms, we believe that if the market is undergoing volatile movements in a possible sideways direction, then the quoted oil&gas sector may still outperform.
Sentiment should be helped by easier quarterly oil-price comparatives through the year following the price recovery in 2009.
This weakness in global equities as a result of broader debt worries has created what appear, on the surface, to be some attractive buying opportunities in individual oil companies. As always, this must be tempered with the fact that there are a host of company-specific factors that could have a major negative impact on the share price of a number of junior quoted E&P stocks over the coming weeks.
Desire Petroleum remains a darling of the private investor and, late last month, the rig, Ocean Guardian, started drilling the first of a series of exploration wells.
Argentine president Cristina Kirchner has declared that all ships making their way through Argentinean waters must be in possession of a permit and has called for a UN review on Falklands ownership rights. This escalates the ongoing conflict between Argentina and Britain over ownership of potential mineral hydrocarbon resources in the Falklands aquatory following Argentina’s claims that British oil companies are exploiting its reserves.
The Falklands are currently home to a number of UK-listed oil companies other than Desire, including Rockhopper Exploration, Falkland Oil & Gas, Borders & Southern Petroleum and, most recently, Australian mining heavyweight BHP Billiton has joined the hunt.
While Desire, Rockhopper and others have known for a while that the use of the ports would be restricted, it’s unlikely that this latest Argentinean move will come as a complete surprise, with contingency plans probably already in place.
Any share-price weakness could therefore prompt investors with a large appetite for risk to take a look at these shares, hoping for the larger returns a successful drilling campaign would bring.
Of course, there is more than one way to gain an exposure to oil&gas. We believe that both Amec (791p) and Petrofac (1026p) at the time of writing represent a less risky approach to investing as they have a good record of producing a regular, growing dividend from their investments. Both are due to report their 2009 finals in early-March. Petrofac’s appeal is threefold: an enviable performance in completing fixed-price engineering, procurement and construction (EPC) contracts; a strong position in the Middle East, and exposure to rising energy prices via its low-risk production assets.
If “normal” oil service business picks up in the second half of 2010 and to this is added some potentially good news from drilling results in the North Sea and there is the strong possibility of further earnings upgrades.
Amec finds itself with almost £700million of cash and has set itself the target of more than doubling earnings by 2015. This won’t be easy, but Amec is only assuming “neutral” market conditions. We think management can deliver on its growth ambitions.
Mark McCue is a divisional director of broker and wealth manager Brewin Dolphin in Aberdeen. The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd