PICKING winners in the oil sector of the stock market has been tough for the past few years, but a fresh look at locally listed explorers reveals a remarkable blossoming of opportunities.
Ten stocks that stand out as ‘worth watching’ feature in this special report into the revolution rolling through the junior end of the Australian oil industry.
They are: Senex Energy; Drillsearch; Beach Energy; Buru Energy; Aurora Oil & Gas; Maverick Drilling; New Standard Energy; Norwest Energy; Neon Energy; and Strike Energy.
Missing from this list, for the obvious reason that they are not juniors, are the usual suspects in Australian oil and gas – Woodside and Santos.
Size is one reason for shuffling Woodside and Santos into a category of their own, along with a few other majors, such as Origin and Oil Search, but a more interesting reason is that the bigger stocks are not yet playing a leading role in the onshore revival, which has re-energised the small end of the sector.
The biggest driver of the onshore (or inland) recovery, apart from the rising oil price caused by Middle East tensions, is the discovery in the US of techniques to find and extract oil and gas locked in tight reservoirs, such as shale, and other rock types once regarded as impervious and uneconomic.
With hopes high that Australian geological conditions will mimic those of the US, there is a resurgence of exploration activity across vast tracts of inland Australia – from the Beetaloo Basin of the Northern Territory to the Cooper Basin of South Australia, and the Perth and Canning basins of Western Australia.
For small explorers, largely locked out of the offshore hunt for oil and gas because of the sky-high costs of drilling in deep water, the return to inland Australia has generated a stampede of the sort not seen since the original oil discoveries at Rough Range near Exmouth in the early 1950s, and in western Queensland.
It is the whiff of an oil and gas bonanza that has driven stocks such a Buru from 50 cents just 12 months ago to a peak in March of $3.85, while the minnow in the local oil game, Norwest Energy, went from a low of 2.8 cents last September to a peak of 9 cents in March – a 221 per cent profit for the lucky punter who timed his entry and exit to perfection.
Both stocks have since retreated from their recent high points. Buru is back to around $3 and Norwest is back to around 5.8 cents, but the rapid rise (and fall) is an indication of the revitalised interest in the onshore oil hunt, a business that almost came to a standstill a few years ago, leaving investors with a limited choice.
Woodside and Santos had become so dominant in the Australian oil sector that many investors steered clear because of the lack of choice. With a combined market capitalisation of $35 billion, those two companies outweighed all other ASX-list oil stocks, combined.
For some investors striving to achieve a balanced portfolio it was a case of including Woodside and Santos out of a belief that there wasn’t much else to choose from.
What’s changed is the realisation that so-called ‘unconventional’ oil and gas, the stuff trapped in hard rocks or found in seams of coal, is no different to conventional gas of the sort pumped by Woodside and other companies operating in the waters off northern Australia.
Methane is the common gas that links most gasfields, along with ethane, propane and butane (the family known as natural gas), and a methane molecule in a Woodside well is the same as that found in coal-seam gas or trapped in deeply buried shales of the Cooper Basin of central Australia or the Canning Basin in the Kimberley.
The challenge now for investors is to time their entry and exit, and to focus on the emerging junior unconventional explorers with best exposure to liquids (oil and condensate), and gas which is liquids rich.
Timing and a liquids focus are important, especially if Australia follows the US experience where a shale-gas boom has become a bust for some investors thanks to an excess of success.
Major shale-gas discoveries across the US have crashed the gas price in that country and severely damaged the coal and renewable energy sectors. From more than $US13 per million British thermal units a few years ago, natural gas in the US fell to less than $US2/mbtu a few weeks ago; but with hotter weather driving air-conditioning demand, the price is now back above $US3/mbtu – still less than the $US4/mbtu than some producers say they need to break even.
Australia lacks the depth of market and the pipeline infrastructure to get gas discoveries to major population and industrial centres, but the early signs from shale-focused wells in the Cooper Basin have added to a belief that Australia’s shale gas boom is starting.
For investors, that means the early years will be a time to take advantage of discovery news, which will drive share prices higher. After this, the next phase of the boom will drive gas prices lower, which will also drive share prices down.
Trading and timing will be the keys to success in oil juniors’ return to inland Australia, with the overriding consideration of avoiding being left holding a fistful of exploration shares if/when the boom turns into a gas glut.
For a bit more detail on the top 10 junior oil and gas stocks to watch, here is a snapshot.
Senex (ASX code: SXY)
Focused on exploration in the Cooper and Surat basins of central Australia, Senex has been steadily building its production of oil and gas, which has recently been running at close to a record 6,500 barrels a day. Cash from conventional production is helping fund the search for unconventional (shale and coal) gas. On the market, Senex has risen over the past 12 months from a low of 31.5 cents to a high of $1.19, and recent sales at 70.5 cents, valuing the stock at $727 million.
Drillsearch (DLS)
Another Cooper Basin specialist, and while the central Australian oil and gas fields that run across the top of SA and into Queensland have been well-drilled during the past 40 years, the discovery of gas in previously ignored beds of shale has restored interest in the region. Drillsearch has been a major beneficiary of that newfound focus. On the market, Drillsearch has risen from a low of 42.5 cents to a high of $1.58 and recent sales at 99 cents, which values the business at $334 million.
Beach Energy (BPT)
After Santos, the original Cooper Basis explorer, Beach has the most valuable portfolio of central Australian oil and gas tenements. It is also more advanced than most other explorers in the area with unconventional work having already drilled two shale-specific wells, which resulted in the booking of Australia’s first shale-gas resource, an indication that it should be the first to deliver gas from shale to customers in the south-east of the country. On the market, Beach is up from 81 cents to a high of $1.76, and recent sales at $1, valuing the company at $1.2 billion.
Buru Energy (BRU)
The Canning Basin of north-west WA is Buru’s focus. It has made useful conventional oil discoveries and is confident of major unconventional discoveries. Interest in Buru has also been driven by its close ties to two big companies, Mitsubishi and Alcoa, which are providing funds to help with the Canning Basin search. On the market, Buru is up from a low of 52 cents to a high of $3.85, with recent sales at $3 valuing the stock at $735 million.
Aurora Oil & Gas (AUT)
Aurora is one of the many small Australian oil and gas explorers that made the trek to the US, and one of the few to succeed. The key to its success has been exposure to the Eagle Ford shale in western Texas, where Aurora is enjoying rising production and investor interest from a busy exploration schedule. On the market, Aurora has risen from $2.11 to $4.26 and back to recent sales around $3.24, which value the stock at $1.4 billion.
Maverick Drilling (MAD)
Apart from having Australia’s most interesting ASX code, Maverick is another Aussie company to have succeeded in the US, also in Texas (like Aurora), and on a mix of conventional and unconventional oil and gas. Most current interest is in the Boling Dome, a salt-intrusion structure Maverick is redeveloping. On the market, Maverick has risen from 19 cents to $1.20, and more recently around $1.15, which values to stock at $322 million
New Standard Energy (NSE)
Like Buru, the Canning Basin is New Standard’s primary focus, and like Buru it has attracted a powerful partner in the form of US oil major, ConocoPhillips. Drilling on New Standards flagship Goldwyer project is scheduled to start soon with success potentially transforming both the company and the region. On the market, New Standard has risen from 24 cents to 81 cents and more recently back to 54 cents, which values the stock at $164 million.
Norwest (NWE)
The future of the company, and possibly the future price of gas in Perth, could be determined soon by work at the Arrowsmith exploration well near Dongara, which is the first significant test of shale gas in WA. Norwest, a 27.9 per cent shareholder in the Arrowsmith project (AWE is the majority shareholder with a 44.3 per cent stake) has most to gain from successful fracture stimulation of the well due to start in the next two weeks. On the market, Norwest has risen from 2.8 cents to 9 cents and back to around 5.8 cents, valuing the stock at $49 million.
Neon Energy (NEN)
One of the more ambitious locally listed oil and gas explorers, Neon has interests scattered from Vietnam to Indonesia and across the Pacific to California, where cash flow from small oil and gas fields is funding much of the Asian search effort. Interest in Neon was boosted last month with news that the Italian oil major, ENI, had bought into its Vietnam projects. On the market, Neon has risen from 24.5 cents to 59 cents, with recent sales at 41 cents (up 10 cents in a month) valuing the stock at $180 million.
Strike Energy (STX)
Once best known for its efforts to find a niche in the US oil sector, Strike has returned to focus on the Cooper Basin of central Australia. The company is exposed to more than 16,000 square kilometres of tenement, and says it is targeting a potential resource of 6.1 trillion cubic feet of gas, enough to start an LNG project, if successful. Much more work is required on the company’s exploration blocks but speculators are starting to build positions in the stock, which has risen from 9.9 cents to a high of 22.5 cents. Recent sales at 13.5 cents value the company at $82 million.