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Roll out the barrel, oil scare is nothing new

CRITERION: Tim Boreham
From: The Australian
February 09, 2011 12:00AM

EMOTION aside, Egypt's political woes should be as significant to global markets as Greece's financial strife, which got investors in a tizz last year. Both are great places to visit but they're not exactly financial powerhouses.

But there's a powerful resonance when it comes to the mob marching through the streets of Cairo: old-timers will remember the 1973-74 oil shock prompted by members of the Organisation of Petroleum Exporting Countries (plus Egypt) boycotting Western nations in response to the US's military dealings with Israel.

Egypt isn't a significant oil player, but the Suez Canal is a conduit for the brown stuff, accounting for about 3 per cent of daily global supply. Any real or perceived disruption has the potential to play merry hell with the oil price.

At the time of writing, the oil price had moderated to about $US90 a barrel, with the Egyptian concerns easing.

But we reckon if it's not Egypt, it's something else that will restore oil to levels where it's appreciated as a (disturbingly) finite commodity. How about a Venezuelan strike or Iranian president Ahmadinejad in front of an open mic at the UN?

Start of sidebar. Skip to end of sidebar.
Related CoverageOil prices wobble on Mubarak reports The Australian, 1 day ago
Oil price falls on China news Adelaide Now, 3 days ago
Oil retreats as tensions in Egypt ease The Australian, 4 days ago
Oil breaks through $103 on Egyptian crisis The Daily Telegraph, 8 days ago
Egypt unrest lifts oil prices Adelaide Now, 10 days ago
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On the demand side, the US economy -- more resilient than many give credit for -- is recovering. And, no, those Humvees aren't getting any smaller (and nor are Beijing's thoroughfares getting less congested).

In short, Criterion has seen higher oil as a no-brainer. We suspect that BHP Billiton's deal-deprived bigwigs -- rumoured to have eyed off the ginormous BG Group -- are thinking along the same lines.

The cranium-draining part is choosing oil stocks that are leveraged to the improving gobal price. Most of our mid-tier plays -- AWE (AWE), AED (AED) and Beach Energy (BPT), have been disappointing because of production glitches or lack of exploration success.

The biggest producers ex BHP, Santos, Oil Search and Woodside, are also gas oriented and carry the risk and rewards of involvement in big-scale liquefied natural gas projects. Depressed LNG is also yet to move in sync with the improving oil price.

Macquarie Equities in-house gurus forecast an average $US95 barrel price this year, peaking at $US104 a barrel in the second quarter. "Indeed, we see oil as the commodity of choice this year, based on our house view of a robust recovery in the US, while China slows." Crucially, the firm believes spot Asian LNG prices will track oil more closely.

Macquarie Equities suggests the best mid-cap stocks for oil-price leverage are Beach (a high fixed component of operating costs which dribbles any price upside to the bottom line), AWE (long-life assets and a presence in the red-hot US shale sector) and Tap Oil (TAP). The latter trades at a 24 per cent discount to the value of its cash and producing assets and also has development opportunities in Ghana and Thailand.

Further downstream, Caltex (CTX) should benefit from improving refiner margins, but the stock is prone to earnings surprises (both positive and negative).

Another strategy is to take advantage of Woodside's price weakness and enjoy the ride on what's a premium producer and takeover target.

In North America, meanwhile, Australian juniors are benefiting from the heady sums being paid for shale acreage. Sometimes it's better to dispose of assets at a decent price than pursue longer-term production.

In the latest transaction, Canada's Legacy Oil and Gas shelled out $188 million (cash and scrip) for Molopo's Spearfish play in southwest Manitoba.

Amadeus Energy, which operates in and around Texas, has been subject to a takeover proposal but a formal offer is yet to eventuate

On a cautionary note, the oil price is notoriously subject to speculation and there's too much funny money in the game to hazard a confident call.

As the Egypt situation attests, marginal events move the price. Let's wait for a Saudi palace coup to experience how a real oil shock feels.

[email protected]

The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser.

http://www.theaustralian.com.au/business/wealth/roll-out-the-barrel-oil-scare-is-nothing-new/story-e6frgac6-1226000463627