Macquarie: Oil Sector - Further Upside Ahead?Recent record highs in oil prices are creating quite a stir amongst the industry with stocks prices expected to continue to rise. This was seen in Light Sweet Crude finishing up $1.48 overnight to close at a new record high of $87.61. There are a wide and mixed variety of companies that are exposed both to the positives and negatives of these high prices. Growth is particularly apparent when one reviews the oil producing companies, of which Macquarie Research Equities (MRE) has placed an outperform on many.
ROC Oil (ROC) is such a company with strong exploration upside and development potential. A majority of this is derived from their Angolan sites, which despite the countries relatively tight fiscal regime, the discovery of what could prove to be a commercial heavy oil discovery has placed considerable upside pressure on the stock. The key consideration is the companies ability to recover this commodity.
The countries fiscal regime ranks with the oil price as one of the most important economic considerations when analysing the returns of any oil development. What tends to occur in creating this pressure is the government, instead of collecting a royalty or specific petroleum tax, negotiates a contract with each company on an individual basis. These contracts are usually in the form of a stake, which at 84% are among the highest in the world (Australian rent / taxation effectively equals 58%). Typical agreement durations are 20 years for production and five years for exploration.
Although this contract will weigh on the recovery costs, MRE believes that given the shallow nature of the reservoir it would seem that more cost effective equipment may be used in the appraisal process, perhaps including the use of truck mounted rigs. In saying this there is still a significant amount of appraisal and evaluation work to be done before any commitment can be made to commercialise the discovery.
Despite the costs associated MRE feel the well could prove profitable for the company and hence maintaining their outperform on the stock.
ROC Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
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