Oil price rise rouses small players from their slumber

Four years is a long time between drinks, but a long-dormant sector of local industry has woken with a jolt in recent weeks.

The all but forgotten small oil and gas explorers have returned to centre-stage, with a higher oil price the driving force behind the revival of local stocks such as Carnarvon Petroleum, Buru Energy and Australis Oil & Gas.

Those three, plus a long list of other small to mid-tier energy companies, have been eclipsing the performance of recent resources-sector darlings, such as stocks exposed to the family of environmentally friendly battery metals.

Oil is not the only fossil fuel staging a revival, with coal also on the way back (see next item).

Among the small oil stocks, Carnarvon is up from 9 cents to more than 15 cents since late last year. Buru has done better, rising from 19 cents to 39 cents, and Australis is up from 20 cents to 39 cents.

While other oil and gas companies have shared in the revival, the percentage increases are magnified for the small companies, which are rising off the low base following the oil-price crash of mid-2014.

Sector leader Woodside Petroleum has had a strong six months, though at $34 it is up by only $2, or 6 per cent, since late last year, a function of a big share issue that watered down its capital, and deep exposure to liquefied natural gas, which is not immediately exposed to the oil price.

Beach Energy and Santos, two other prominent oil and gas stocks, have performed well, but both are being pushed higher by corporate activity – a takeover bid in the case of Santos, and persistent buying of Beach shares by interests associated with Seven Group Holdings.

Small oil and gas stocks are in a different category because of the risks they carry in an expensive business, and the potential returns they can generate if they achieve exploration success, and if the oil price continues to rise.

In the case of Carnarvon, there is growing interest in two exploration wells in which it has an interest off the coast north of Port Hedland.

The South Phoenix number three well and the Dorado well are both targeting the same geological formation, which has previously yielded encouraging oil and gas shows.

A major share-price rerating can reasonably be expected if either of the current wells is successful in discovering commercial quantities of petroleum.

Buru has been beavering away in the remote onshore Canning Basin inland from Broome for the best part of 10 years, enjoying some success with the discovery of the conventional Ungani oilfield, but with less luck pinning down elusive deposits of oil and gas in unconventional rock units (which include beds of shale).

Over the next few months during the northern dry season, Buru will step up its search for Ungani look-alike structures and double the rate of production from the existing field, which is proving to be reasonably profitable despite the absence of a pipeline (meaning oil has to be trucked long trucking distances to port for shipping to oil refineries).

Australis could deliver the biggest surprise in the oil sector thanks to its work in a region that has proved too hot for Australia’s biggest resources company, BHP.

It is in the shale country of the southern US states of Mississippi and Louisiana that Australis has been enjoying some success, even as BHP prepares to quit the region – having bought in at the peak of the market for an estimated acquisition and field development cost approaching $40 billion.

The darkly humorous side of BHP’s position is that, having bought in at the peak, it started the selling process near the bottom, an acutely embarrassing double-banger which should be mitigated somewhat by the recovery in the oil price to more than $US75 a barrel.

Australis has impeccable connections to the US oil patch through a management team that previously ran Aurora Oil & Gas, a listed Australian company that was sold at the peak of the last oil boom for $2.6 billion.

Headed by former Aurora chair Jon Stewart and finance director Graham Dowland, Australis is leading an Australian push back into US shale as BHP heads for the exit.

If the oil price stays high – and price tips range from an easily achievable $US80/bbl in the current climate of Middle Eastern, Russian and Korean uncertainty, to a spectacularly ambitious $US300/bbl from oil industry analyst Pierre Andurand – then everyone in oil will be smiling broadly (even management at BHP, which might claw back half the company’s ill-timed U.S. investment).

Powering coal

As mentioned earlier, coal is following oil, due to its role in generating energy for industry. However, coal has two other factors behind its renaissance.

Despite predictions of a slowdown, demand for coal continues to rise, much to the annoyance of the environmental community.

And then there is the problem of supply disruption.

Coal-burning power stations in Asia, which is the biggest market for thermal coal used in the production of electricity, is showing no signs of slowing, while South Africa, one of the world’s biggest coal exporters, material earmarked for the overseas market has been redirected to the local electricity sector.

The net result of strong demand, and at least 3 million tonnes of South African coal being removed from the international market, is that the price of thermal coal has risen by 11 per cent to $US101 a tonne for material exported from the NSW port of Newcastle.

Coal traders attending a conference in Indonesia last week said they had firm orders stretching several years into the future, which should keep the coal price high.

The South African situation is likely to compound pressure on the coal market because the country’s electricity authority has not bought sufficient coal to meet local electricity demand, forcing the diversion of 3mt.

More South African coal is likely to miss the boat over the next few years with a spokesman for Eskom, the government electricity agency, telling media outlets in Johannesburg that an extra 11mt of coal might be required to meet power demand.