Oil and gas exploration the place to be for speculators
Date September 5, 2012 - 11:15AM 3 .
In the same vein as Prince Harry popping up for a charity event this week after his Vegas nude exploits, ex-BP chief executive Tony Hayward is back on the oil and gas radar after his London-listed company Genel Energy snapped up offshore exploration assets in Malta and Morocco.
Success offshore will go a long way to propelling Genel into the ranks of the world's oil and gas producers, and may also go some way to repairing Hayward's reputation as the person remembered for the deadly deep-sea oil blowout in the Gulf of Mexico in 2010, and the resulting environmental disaster.
As in all big events (with the exception of Prince Harry's misadventure), Radar takes an interest in where the speculative dollars are travelling. And right now, it appears to be oil and gas.
While iron ore and coal prices are at multi-year lows, the oil price remains very strong, at around $US100 a barrel. Although it's been above $140 a barrel in 2008 in the late 1990s it got as low as $11 a barrel.
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Added to this, the seismic 3D technology used to hunt down those big oil reserves has considerably improved the chance of exploration success. It has only been in the past two years that this technology has been widely used.
Chris Prunty, a small-cap fund manager with Ausbil Dexia, sums up many of the fund managers Radar speaks to in relation to the bullish sentiments in the sector: “We feel that a good weight in our portfolio of energy stocks is essential, while we have reduced our weighting towards the bulk [commodities] and base metals given the price weakness.”
The binary bet of exploration
Prunty also extols the fund manager's natural inclination to avoid what you might call the “binary” bet of punting on exploration success: “Small companies in wild-cat exploration is still a tough game. We look for near-term producers that use technology to accelerate them getting into production.”
Radar is inclined to agree with these sentiments, but we do like to keep our eye on the wild cats of this world, finding it more interesting, and profitable, than the roulette table.
There might be big risks at the exploration end of the spectrum, but they can mean big money for investors if one of the majors like Hayward's vehicle or Cairn Energy decides to “farm in” to a project and take half of it, or more, in return for development rights.
Already the amounts being paid for blocks in prospective areas are rising. This factor underlies the meteoric rise in ASX-listed minnow Pura Vida Energy (PVD) since listing at 20¢ a share earlier this year after raising $5 million. Trading at 38¢ a share, its shares have almost doubled.
It owns 75 per cent of a large offshore exploration block of 10,900 kilometres squared off the coast of Morocco and just to the north-east of the field Hayward's Genel has bought into.
Betting on history
The oil and gas world don't just look at recent history, it's looking at Jurassic times, about 200 million years ago when in theory Africa and the Americas were joined, prior to the continental drift. Following this logic, multibillion-barrel oil discoveries in east Canada are directly connected to exploration potential off the coast of Morocco. This is what is getting the likes of Hayward, Cairns Energy and Pura Vida so excited.
Back to Pura Vida. About a third of its block has 3D seismic data. The company trumpets that it has “independently certified net mean recoverable resources of 2.4 billion barrels of oil”.
But it has one big problem. It's got only $5 million in cash. What it desperately needs now is a partner of Hayward's stature to develop the field (well not Hayward alone; Genel has a cash pile of $1 billion).
In the tradition of oil and gas executives, Pura Vida's chief executive and ex-lawyer Damon Neaves exudes confidence: “We're confident of finding a partner to develop the field by Christmas. We're setting up a data room on 1 October and we've got a number of groups interested.”
We wonder if Hayward is one of them.
Click here to access the fortnightly newsletter Under the Radar Report: Small Caps edited by Richard Hemming
Read more: http://www.smh.com.au/business/under-the-radar/oil-and-gas-exploration-the-place-to-be-for-speculators-20120905-25dhf.html#ixzz25YfpU66o
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