By Tom Winnifrith | Wednesday 10 January 2018
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Andrew Monk of VSA is (belatedly) starting his 2018 this week with a seroes of sector reviews. In this one he looks at where oil is heading, at the majors and then concludes with the five oil juniors to buy. Over to the Monkey...
Today I will discuss the Oil & Gas sector and how I see it and how to play it in 2018 – I’m not giving any “one tip” for 2018 this year as just because it’s a New Year doesn’t mean I suddenly have a brilliant idea and timing things to Jan 2 is impossible , so let’s just think about where we are and where we want to be
The first thing people ask when looking at the sector is what do you think the Oil price will do ? (funnily they never really ask about the Gas price but also there isn’t such a strong benchmark anyway). The place to start is the forward curve
And that tells you that the price is going to come back to about $58 as it is in serious backwardation.
Now also we have inventories in the US being sold aggressively
Which makes sense as if you think the price is going to fall , then you would be selling . Actually combine that with the fact the oil service Companies are ramping up staff and services it does suggest that with the price this high it Is flat out for production in the US and so it should be as above $60 they can make plenty of money.
Now last year I was spot on in the first half predicting a rise to $50 and then too cautious in the second half with a range of $45-55 but better that way than the other. What caught me out probably was the determination of OPEC , well Saudi , to get the price higher. Well with the Aramco IPO they need to !
The price will of course always react to Geopolitical events and these are often tricky to forecast and tend to lead to upside. Looking at a long term crude price – here it is over 20 years
We clearly have moved away from the old days of $18-25 and no ware in a higher range but I don’t believe anyone thinks even with geopolitical events that we will see the price above $100 again and so we are probably settling into a new “range” that works as we move from “Peak Demand” – when that actually occurs is debatable some say now some say 10 years , real bulls even longer but I think most accept that there is an energy revolution taking place and cars will go EV , its just how quickly – also how much will gas displace oil – already happening pretty fast
I do need to reset my range and so I will now say $50-70 This is a fairly wide range but the oil price has become pretty volatile as it is so easy to trade and so many people do now trade! Clearly any major “shock” could move that but if I was deciding whether to invest in Oil as an investor or as a Company – I’d want to know that within that range I will be making good money
Gas I actually prefer gas to Oil but it is less discussed but I see little downside although plenty of gas around ! The price varies so much depending where you are but you can see Henry Hub is at the low end
So where does that leave me with stock selection ?
Well the big ones are BP and RD Shell and I have been relatively positive on both but preferring Shell but recognising BP more geared to oil price upside – they both yield about 5.5% and so very safe if they keep paying and in the current environment they will have no problem
Shell is the stabler of the two and also the one that I think is being very clever – I like Gas and think the BG acquisition will prove very smart , but also they can see the New Energy game and are making some very interesting moves in that direction …………so although Shell is currently on almost a 20 year high , I would be a buyer and prefer to BP even though they aren’t on a 20 year high
Actulaly the relative chart is quite interesting a sit tells you that basically they traded equally bar the one catastrophic fall in BP in 2010 and that actually you can trade between the 2 stocks
But as of today there is no trade on – we need one to lag behind Well that is the Majors and getting that right is pretty key as searching around for value in Mid Caps isn’t easy , but your selection to look at is probably Tullow (£2bn) Cairn (£1bn ) and in the £400mn region Premier , Ophir , Soco and Enquest
Now you might not be able to read thos echarts that well but they all basically tell you that form a macro point o fview they will perform pretty similarly bu tthat Ophir and Soco had issues . I dont have strong views right now but would back Premier to kepe recovering , and probably then back Ophir and Soco to recover and regard Tullow Cairn and Enquest as a bit boring – ok as said before this was written last weke and Soco have now annouced a possible merger with Kuwait Enegry which is a bit oif a game changer and so defienelty one on the watch list now
Which brings us on ot the real excitement – the Minoows that can become giants !!
And firstly let me remind you that they can ago I had a huge push about 2 and a half years ago on Serica and Tony Craven Walker at 4p – today over 80p
So who can do the same ? Well I am a bit biased as I do like the stocks we act for but also a couple we don’t (well yet – I do pitch for stocks I like as I want to act for Companies I relaly believe in )
First up will be no surprise – Columbus Enery!! This is a great stock with quality management and Rome wasn’t built overnight but f you want to understand just watch their video and Leo Koot explaining how he will perform – plenty more to come from this stock and it will be interesting to watch the other Trinidad plays , Trinity and Touchstone , as they tend to all follow each other
But this is one of the most exciting E&P stocks there has been in my 35 year career
Yes it is a Buy and is probably my tip for 2018 if I was doing one
Next up may surpirse you all as I have bene quiet on it as there is a risk but I think if that if the risk is removed or managed this could be a real flyer – Independent Oil & Gas - a very interetsing North Sea gas play
Trading around 18 or 20p region but all the analysts including VSA have targets form 70p to 110p so why so out of line ? Well fairly simple –2 reasosn, firstly London Oil & Gas has a huge CB with them that could swamp shareholders if converted and secondly they need serious capital to put the whole thing into production , but both can be overcome and when they are – yup you will see the share price rocket
My 3rd Current corporate is Egdon and this is a simple binary bet pretty mcuh in fracking in the UK – but also with very little downsise – the conventional production gives protection – but If you think fracking wil happen – you buy this like no tomorrow – (post writing they did have the dissapointment of the Wressle Planning permission being turmed down again – annoying but doesn’t effect the binary bet)
Now I’ll mention 2 other stocks that I like and I think will perform this year
I like Gulfsands Petroleum as it is a simple play on Syria becoming peaceful again and it has a good management team – it would be easy to double , treble or quadruple your money here this year
I also like President Energy as I think Peter Levine will make this happen , I like South America (and have soemwhat gone off Africa) and this could grow into a very serious company with a deal or two , so I’m a buyer here too
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