Special Focus on Independent Oil & Gas
The More Recent Past: Changing Fortunes…
The aftermath of 2008’s financial crisis proved somewhat of a renaissance for E&Ps, as the oil price gradually made up the ground it had so dramatically lost, and an appetite for frontier exploration gripped the market and drove ratings skyward. Indeed, with the long line of successes which included Rockhopper’s Seal Lion discovery, the Catcher discovery re-invigorating interest in the North Sea and each new appraisal well in Kurdistan, prices and excitement surged past the expectations of analysts and fundamentals. Retail investors flooded bulletin boards with news of mobilisations, and scolded “derampers”.
Whilst company specifics ought to tell the story of individual performance, the chart below does evidence the broad outperformance of the more exploration focused constituents in the aftermath of the crisis with the sector ‘in vogue’ and risk appetites abound.
Absolute Performance: 01/01/09-31/12/10 Nautical (A)
Bowleven (A) Afren
Borders (A) Heritage Brent
Premier
Salamander Cairn
Valiant (A) Tullow
JKX (B)
FTSE All Share (ex. IT) Soco
Melrose (B) 0% 200% 400% Source: Thomson Reuters
The subsequent slowing of growth and Eurozone debt crises have been unkind to the sector. The grim reality of progressing discoveries to developments or even staying afloat against a backdrop of difficult equity markets and cautious debt providers has largely pulled back valuations.
Unsystematic issues have compounded poor performance, with the deepwater Macondo disaster almost seeming to set off a conveyor belt of negative news flow. Drilling successes in the Falklands turned to failures, Cairn kept missing in Greenland, EnCore Oil’s fortunes flipped after a single well and negotiations between the KRG and Baghdad seemed to go into reverse. In Heritage’s case, oil even turned into gas.
Not all news was bad, with Anadarko, Eni and partners enjoying huge successes off East Africa. However, this merely broadened the divide between top and bottom, as those with recent failures at the drill-bit/poorer balance sheets (typically smaller players) were increasingly punished by investors. This has led to increased M&A activity, as larger players have used stronger equity to take over their smaller brethren. This is only likely to increase in the shorter term if a lack of liquidity in the markets and sovereign debt concerns continue to compress valuations.
The absolute performance of our constituents from 2011 onwards (see chart below) betrays the disappointments and the market’s aversion to risk, underperforming Brent and (largely) a broadly flat market. The exceptions have been Tullow, where the market affords significant goodwill given its exploration track record, and Borders, with first results imminent from its potentially transformational two well drilling programme.
Oil Prices Still Out Of Kilter With Everything Else…
Both Brent and WTI have proven remarkably robust, with WTI currently trading around $97 and Brent at $116, despite economic concerns potentially placing downward pressure on demand. Brent in particular remains stubbornly high, possibly reflecting a European shortage of light sweet crude, which yields more middle
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Drillers and Dealers :::
::: February 2012 Edition
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