Grease is the word as oil stocks run on Middle East worries

11th May 2018
Tim Treadgold

If oil stocks are not part of your investment portfolio then you really ought to start thinking about adding a few because last week saw an acceleration of a re-awakening process that has lifted small oils into the ranks of top performers on the ASX -- with the prospect of more to come.

The obvious driving forces behind small oils such as Carnarvon, Buru and Australis are the oil price, which is at a four-year high, and the very real potential of even higher prices if shipments from the Middle East are disrupted, as seems possible given the reimposition of US sanctions on Iran.

How high the oil might go is a guessing game with forecasts ranging from $US80 a barrel, which looks easily achievable given that the European (Brent) price has already reached $US77/bbl, to a seemingly ridiculous $US300/bbl.

That top-end tip could be laughed at because a price that high would devastate the wider economy but it did come from a professional oil industry analyst, Pierre Andurand, who floated the $US300/bbl target as a future possible price, though he failed to put a time on the forecast.

What Andurand did predict in a tweet to his followers last week was the prospect of a serious crisis in Iran combined with the failure of the oil industry to invest in major new projects, partly because of concern about future demand for transport fuels if the electric car revolution achieves its goals – an interesting combination of events.

As with last week’s Prospector’s Diary, this edition comes from the US home of big oil and perhaps another factor in my revitalised interest in oil. Prices used are at the close on Wednesday, a result of the time (and date) difference between Australia and the U.S.

Whatever the preferred reason for dusting off your files on oil, perhaps the most important from an investment perspective is that after four years of depressed pricing the industry has a very different feel to it today and while the price of oil is critical, there is a second factor influencing profits and that’s a widespread collapse in costs.

Layer geopolitical pressures on the cocktail of forces which determine the oil price and its hard to avoid the conclusion that it is the commodity most likely to deliver an upside surprise for investors who might be looking for the next hot sector after playing the gold, zinc, copper and battery metals sectors.

Before a bit if detail about some of the small oil stocks which are doing well on the ASX, it’s worth a look at the oil leaders, where Santos this week reached a 12-month price high of $6.28, a 120% increase on its low of last July, and Beach Petroleum, which traded up to a multi-year high of $1.70 this week, a 200% increase on the low of last June.

Both Santos and Beach are being influenced by another factor which has been absent from oil for several years, corporate activity. Santos in the form of a takeover bid and Beach in the form of a slow-moving merger process being orchestrated by Kerry Stokes and his Seven Group.

A selection of small oil stocks worth following includes:

  • Carnarvon Petroleum, which is drilling two wells off the north-west coast of WA, chasing a similar target which has yielded encouraging oil shows in the past. The Phoenix South No.3 well is expected to reach its target depth in July while the shallower Dorado should be in the prospective pay zone next month. Multiple wells have built interest in Carnarvon, which traded up to a four-year this week of 18c, a gain of 8c (80%) since the start of the year.
  • Buru Energy also reached a multi-year high this week of 39c, up 8c on a month ago, and double the price of last August. The inland Canning Basin of north-west WA is Buru’s hunting ground with a modest level of production from its Ungani oilfield expected to increase over the next 12-months while an exploration phase hunting for Ungani look-alike pools of oil gets underway during the northern dry season.
  • Australis Oil and Gas added 4c this week to 40c, double where it was 10 months ago thanks to interest in its US tenements, particularly those in the Tuscaloosa Marine Sale (TMS) of onshore Louisiana and Mississippi. Another point of interest in Australis is that it grew out of the roots left by Aurora Oil and Gas, an Australian stock which was also active in the US but sold at the peak of the last oil boom in 2014 by the same management team running Australis for a handsome $A2.6 billion.
  • Cooper Energy which, as its name implies, has a strong position in the Cooper Basin of South Australia, plus an extensive spread of interests off the Victorian and South Australian coasts. The primary focus is delivering gas to the energy-short markets of Sydney and Melbourne. Cooper has added 4c to 36c over the past two weeks but did reach a 12-month high mid-week of 40c.

Other small oil stocks which have been waking after the four-year oil-price drought include: Comet Ridge, which is drilling in Queensland’s Galilee Basin, with a share price up 5c to 32c last week (with a 12-month high of 34c reached), and Senex Energy, which is anther stock heavily exposed to the Sydney and Melbourne gas markets with a share price at a 12-month high of 44c.

In the mining sector there were a number of interesting stock market moves and news events, including:

  • Macphersons Resources, up 4c to 12c after reporting encouraging drill results from the Crown Jewel Hole prospect located within the broader Boorara project in WA with a best assay of 4.19 grams a tonne over 36 metres, and
  • Azumah Resources which had its best week in several years with a rise of 1.1c (55%) to 3.1c after reporting what management described as a “game changing” drill result from its Kunchee project in Ghana with a best intersection of 5.37g/t over 44m from a depth of 99m.

A final word on the Australian mining market should go to West African Resources and Beadell Resources which raised substantial pots of fresh funds ($35 million by West African and $23 million by Beadell) – a good sign that the capital markets remain open for small stocks.

 

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