The quoted oil&gas sector may have finished 2009 on a dull note, but it still managed to outperform the broader market in Q4.
Given the sharp recovery in oil prices over the past year, it’s no surprise that investors have preferred the more dynamic exploration and production companies, such as Tullow Oil, and the oil services companies which have earnings more leveraged to oil&gas prices.
Indeed, those prepared to accept the additional risks associated with E&P stocks could reap significant rewards in 2010 as the sector is re-rated, taking into account a higher oil price underpinned by a strengthening global economic recovery.
Three regions are likely to be of particular interest for investors – West Africa, Falklands and West of Shetland. The success of Tullow Oil and Heritage Oil in Uganda has captured investors’ imagination and sparked a host of fundraisings, ensuring that an active year of exploration activity lies ahead.
Plenty of high-risk/reward wells will be drilled in 2010 with the potential to see huge gains for investors willing to take on significant risks.
Aminex is currently drilling the Likonde-1 well in southern Tanzania. Tullow Oil is the operator and holder of a 50% interest in the Ruvuma PSA, but the success or otherwise of the well will have a much bigger impact on both Aminex (13.75p), which has a 37.5% share, and Solo Oil (0.6p), which holds a 12.5% interest after a recent farm-in. Be warned, though, if Likonde-1 disappoints, the price of Aminex and Solo will fall swiftly as speculative cash moves elsewhere.
Two interesting stocks with interests West of Shetland are Dana Petroleum and Faroe Petroleum. Dana is capped at around £1.1billion based on a £12 share price and has been a fantastic investment, with the price rising by 12 times since 1995. Its growing licence portfolio provides a strong and balanced asset base underpinned by healthy cash reserves, and a robust production portfolio delivers strong cash-flow generation. West of Shetland, Dana sees “world-class” discovery potential. Interestingly, Dana owns roughly 28% of Faroe Petroleum, which is also involved in this area. Faroe is much smaller and AIM listed, so can’t be held in an ISA. Still, it is a much purer play on the Shetland-Faroe Basin. The shares are currently trading around 134p, with the market cap of the company approximately £140million.
Meanwhile, interest is again starting to build in the North Falkland Basin with another AIM-listed stock, Desire Petroleum (120p).
2010 could be huge for Desire after recently raising capital to fund its drilling programme. The rig, Ocean Guardian, is about to arrive in Falklands waters, where four wells will be drilled, with options on a further six either by Desire or one of its partners.
The placing to fund the programme proved so popular with investors that an excess facility to purchase additional shares over and above one’s standard entitlement was oversubscribed by 431%.
Mark McCue is 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
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