Oil stocks have been in the news on the Australian market lately, with some major jockeying on the M&A (mergers and acquisitions) front.
First, there was the $11.7 billion scrip bid made by the big kahuna, Woodside Petroleum, to take over PNG-based Oil Search. Oil Search knocked Woodside back, and the Woodside share price has lost 12% while the company mulls a revised offer. Oil Search, in contrast, has gone the other way, rising 15%.
Then there was the $7.1 billion takeover approach made to Santos last month by the Middle East-backed Scepter Partners, with former chief executive John Ellice-Flint tilting for his old job. The approach came at $6.88 a share, but Santos rejected the bid: subsequently, the big South Australian has announced a $3.5 billion debt-slashing program and a $2.5 billion capital raising, and the share price has fallen below $4.
While the takeover bids swirl at the big end of the market, the mid-cap area of the oil and gas market has seen share price slumps, based on a tanking oil price.
Crude oil has lost almost two-thirds since June 2014, on the back of an estimated over-supply of 0.7 million to 2.5 million barrels a day, and prices are near six-year lows. The International Energy Agency (IEA) appears to have no good news for the oil market, saying that global stocks of crude oil are at record highs and that global oil demand will ease next year on the weaker outlook for the world economy and over-supply. The IEA forecasts global demand to slow to 1.2 million barrels a day in 2016, after surging to 1.8 million barrels a day this year.
So, is there any light at the end of the tunnel?
Peter Strachan from Stock Analysis is one analyst thinks so. Strachan says the rising production picture over the last decade has been almost entirely a US shale oil (light tight oil, or LTO) story – despite a rising oil price, he says, production outside the US has been flat since 2004. A 4 million-barrel rise in output of LTO from the USA since 2011 has masked peak oil output from conventional reservoirs, he says. Even though the US shale producers have lifted their productivity as much as they can, the “US shale oil party is over,” says Strachan.
He sees US oil production falling by 100,000–120,000 barrels of oil a day, per month, right through 2016. That would see oil production falling from a peak of about 9.6 million barrels a day in April 2015, back to about 8 million barrels a day by the end of 2016. Even with an estimated 500,000 barrels of Iranian oil a day coming back into the market, following the nuclear deal struck with the country, the oil market will be under pressure, says Strachan. And that means rising prices. By the middle of 2016, says Strachan, oil prices could be back in the region of $US80–$85 a barrel.
It is a contrarian view, but if it is borne out, some of the mid-cap Australian oil and gas stocks represent a “once-in-a-generation opportunity,” he says.
Here is a glimpse of seven of the most potentially attractive opportunities. (Analysts’ consensus estimates were collated by FN Arena.)
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FAR Limited (FAR): 8 cents
Market capitalisation: $280 million
Last 12 months: –38.2%
Analysts’ consensus price target: 11 cents
Implied upside: 37.5%
Last month, FAR announced two world-class oil discoveries off the coast of the west African nation of Senegal that could be transformational for the company. FAR started drilling three appraisal wells earlier this month, in a program that is estimated to be completed in mid-2016: FAR is not actually spending anything, because all the costs of the wells are being paid by global petroleum giants ConocoPhillips and Cairn Energy. So FAR can sit on its $30 million in the bank. FAR also holds exploration acreage in Guinea Bissau, to the south of Senegal, and on the other side of the continent, in Kenya.
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FAR Price at posting:
7.8¢ Sentiment: Buy Disclosure: Held
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