Special Focus on Independent Oil & Gas
However, I believe it’s too early to get excited, since:
Macro uncertainties in Eurozone continue to weigh heavily on capital markets and, just as in 2011, the oil and gas sector is not immune.
With the US economy appearing to show signs of green shoots, there is every reason for investors in the sector to take money out of UK/European oil and gas stocks and put them into their US or Canadian counterparts to avoid Euro exposure. I have already seen signs of this at some institutions.
Even though industry fundamentals are strong for the oil and gas sector, this is a stark contrast to what’s playing out in the rest of the economy, which is already showing signs of double dip recession.
Capital markets are still struggling with significant (tectonic) changes taking place among small-mid cap brokers and investment banks. At some point this could have an impact on the ability of companies in the sector to raise cash.
I’d be surprised to see the kind of declines we saw in 2011 repeated in 2012. However until problems in Greece (and probably Italy and Portugal) are resolved I expect a fairly muted stock performance in the sector and continued volatility. But at that point the value in the sector should be in the spotlight.
What Does This Mean For Management?
The two-tier oil/non-oil economy creates a number of practical risks that I believe management teams should prepare for:
1. Be smart – if your broker looks vulnerable don’t wait too long to engage with another one but choose carefully. I have seen first-hand how a multi-billion dollar investment bank can go from solvent to insolvent in the space of just a week. It’s shocking and a stark contrast to companies in our sector with hard assets producing a commodity product. But in financial services it is happening. Look for a broker with robust/defensive business model and a strong client base as there is generally safety in numbers.
2. Protect your liquidity – don’t wait until you need capital before you raise it. When the markets were pricing in Armageddon towards the end of 2011 even the majors were raising money (mostly bonds) because they could, not because they needed it. This should be particularly relevant for smaller companies with capital-intensive funding needs coming up over the next 12-18 months.
3. Be patient about your 2012 share price performance – it is likely to take some time for the dislocation between fundamentals and share prices to work its way out of the system. Your broker will only be able to do so much for your share price. This has implications on how far you might want to use shares as currency to do deals versus cash.
4. Be brave – as long as you are not running your business as a lifestyle company the market will start to recognize the value you are now creating when conditions get back to normal.
5. Be happy – life outside the oil and gas industry is a lot tougher than life inside it. Oil & gas industry fundamentals have arguably never been stronger. This, together with new technology reducing risks associated with exploration and priority access to capital, we have much to be grateful for.
Simon Hawkins is Managing Director of Omni Investment Research, an independent research house focusing exclusively on the global Oil and Gas sector. Previously, Simon held senior positions at UBS and Dresdner Kleinwort, having been ranked number one by Thomson Extel for his coverage of the European Gas sector, number two in European Oils and three in European Utilities. He is also former Head of O&G at Ambrian and Head of Energy Equity Research at MF Global. Prior to joining the City, Simon had eight years international experience with the Royal Dutch Shell Group of companies, working in economics and finance in Nigeria, The Netherlands, the Far East and the US. During his time with Shell he was recipient of the UK's 'Young Accountant of the Year' award.
Omni Investment Research: With over 70% of the UK E&P sector now under coverage Omni Investment Research is the only independent research house that focuses exclusively on the global Oil and Gas sector, providing stock, company and asset research to investors, corporates and other asset holders. Omni’s coverage extends from large cap stocks like Tullow Oil and Cairn Energy to quality smaller cap juniors. Omni’s staff are oil and gas specialists, with senior management experience at top-tier companies together with access to a large network of technical and other professionals to support their research. Omni’s corporate research service is tailored to guarantee the highest return on investment for clients.
Drillers and Dealers :::
::: February 2012 Edition
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