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The Bucket List – 2016 Update
When I started the bucket list last year I pointed out that it was not a list of share recommendations per se, I have not been in the habit of putting out shares for the year like a Sunday newspaper. The bucket list was actually the idea of a leading institutional investor who wanted me to identify a group of companies that would weather the storm of the low oil price and, in the long term, reward investors. Last year it was intended that the portfolio would be robust at $40, now I suggest that should read $30. This time last year I said that we would not see any light at the end of the tunnel until the end of the year, all that has changed is that it now means the end of this year. Call it an oily investment trust if you like, but one in which there are a number of themes running through the core, hopefully mitigating risk but not preventing it. For that reason you will notice that the list is broadly unchanged albeit updated significantly.
The key requirements to be considered are still the same, companies that are well managed and as strongly financed as possible, this should include ability to control discretionary spend within the portfolio. That portfolio can be broad or contain a small number of game changing assets; it is not always about being risk averse, the diversity of stocks should see to that. Geographically the list of stocks is well spread as one would expect and of course offshore and onshore are represented as are both oil and gas companies. Many of the stocks on the list now have long-term significantly embedded asset value and are seriously undervalued even at current oil prices, capex costs have been slashed and opex is down more than any of these companies would have expected. So, whilst the oil price has fallen to recent new lows and the mood is understandably sombre it must not be forgotten just how much industry costs have come down too, maybe it’s a good thing that this list is free of oilfield service companies.
It has been well documented in the blog that whilst I am not as bearish as some in the industry, my concern about the short term fundamental position for oil is still pretty grim. With not much sign of non-Opec production cuts and Iran coming back on-stream strongly, the short term outlook is indeed grim but things can and will change. The oversupply from all quarters will change but slowly and only when it is obvious will dawn on the market place. The final point on the success or otherwise of the Opec market share strategy is well known to blog readers and that is a matter of timing, it was always going to take longer than envisaged which is why it can’t end quite yet. That is because US shale didn’t, and to some extent still hasn’t, taken the pain. This will happen as hedges have gone and loans are twice yearly investigated, but banks have been more accommodating than maybe was expected. No, the pain has been taken by the majors who in the last 18 months have cut over $400bn from capex budgets primarily to finance dividends promised in better times by some managements. IHS/CERA have suggested that another way to look at this is that over the next few years $1.8tn worth of oil will now not head to market, combine that with the rig count and a Russia without US service companies and the mind positively waters.
So, if you have got this far you will know that the following stocks are meant to be a portfolio as they share risk but of course not everyone will buy them all, my institutional friend is an old investment trust lag and for him it was a way of playing a commodity market that he feels will return to favour at some stage. At the risk of repetition the list now contains a lot more embedded value with genuine upside.
The list has lost two stocks that were taken over during the year, FOGL which vicariously remains as a part of Rockhopper and Alkane Energy which unfortunately is a part of Balfour Beatty, most investors did well in Alkane but it should have been much better. Caza Petroleum has had to have a major refinancing and I own up to being over optimistic, the assets remain and will deliver I’m sure but from a lower base.
Top of the pile in the BL last year was Pantheon Resources which cracked the code in East Texas and rewarded holders as an almost ten bagger, rising from 16p to 156p during the year. Things actually get better, a combination of profit takers and a technical problem on the latest rig has brought the shares back to around 85p, if they really have cracked the code, and I believe that they have, then this is an opportunity not to be missed. With so many wells to be drilled and so cheaply at the moment, the risks in Pantheon are that it will be taken out too soon or being short.
The other good performer in an otherwise poorly performing sector was Sound Energy which has concentrated on gas, particularly onshore in Italy where they now have meaningful production paying the bills. The company is expanding fast and have taken some low risk, potentially high reward plays onshore Morocco, so they have a geographically spread exploration portfolio with plenty of upside. Excellent management and a truly supportive shareholder means that this company is well financed and has entered into partnerships such as the one with Schlumberger, so enabling them to be carried on some prospects.
Next up is Amerisur which took the bold step of shutting in some of its higher cost production early last year, a decision which has since proved very wise. AMER have just received final permissions for its pipeline from the Platanillo field in Colombia to the Victor Hugo Ruales field in Ecuador. This means that the company make transport savings of around $11 per barrel and will be able to bring back on-stream some previously shut in production. In addition it is quite possible that other local operators will also be able to pay to use the pipeline creating more income and possibly create a value for the pipeline itself.
Rockhopper has had a very good year with the drill bit in the North Falklands Basin achieving significant success at Zebedee as well as in the Isobel/Elaine area. This means that the Sea Lion development looks increasingly attractive, potentially one billion barrels of oil and by 2020 producing as much as 85/- b/d in phase one. Given what industry costs are doing there could hardly be a better time to be doing it as capex costs fall and opex numbers tumble making the economics extremely attractive.
Hurricane Energy are farming-out part of their Lancaster fractured basement discovery and have the ability to go to an early production system which will enable the company to start work swiftly and to move on to the rest of what is an exciting portfolio. Like others in the list the upside for HUR is substantial and again here management is first rate.
Over in Senegal the Cairn discoveries are indeed world class and resource upgrades are appearing thick and fast. One can play this through Cairn but those with appetite for a little more risk should look carefully at Australian quoted Far Ltd. Far has 15% of this and whilst the market hasn’t recognised this potentially huge value to the shares it will do so before long. A recent 42% upgrade in 2C resources to 468m bbls won’t be the last as there is more testing to come, with current market cap of only A$270 and 15% of this massive find, Far is outstanding value.
The North Sea, UK and Norway has had a bad press this year but I still believe that the quartet of stocks I selected for the initial BL deserve to stay in. Premier has had critics regarding Solan and its Falklands exposure but the latter has been confirmed economic by discoveries and it will be important in coming years. The E.ON deal was sound and confirmed that the company were not in breach of covenants.
Ithaca is well financed and found a supportive shareholder last year, this year Stella will double production and capex will be down 40%. In addition Ithaca has been the best hedged company in the sector, this year much of its oil is hedged at $60 or higher.
Faroe had an indifferent year with the drill bit but still has exciting value enhancing developments coming through. It also has the ability to hunker down, apart from doing these projects they are drilling three wells in the tax efficient Norwegian North Sea, capex last year was only $15m net and this year will be around $12m net. Faroe has cash and undrawn facilities and may well be a key player should M&A opportunities arise.
Finally in this section I still believe that Tom Cross will be a survivor, he has much skin in the game at Parkmead and has delivered value before. Another company to watch out should any M&A activity strike the sector and with significant discretionary spend.
Back in Africa I consider that Bowleven with its valuable Etinde prospect in Cameroon containing both gas and liquids to be very strong. With its strong balance sheet it will be protected in this market and together those two account for much more than the current market cap. I am on record as saying that BLVN could do worse than buying Victoria Oil & Gas which is also in the list as it is an extremely valuable play, also in Cameroon. With its ‘cradle to grave’ exploration to power generation capacity sometimes VOG exhibits the characteristics of a utility, not always a bad thing.
Finally in Africa I have taken the plunge and decided to add Tullow to the list. Aidan Heavey acted fast last spring to cut costs and focus the company. Although the group has had huge capex spend recently the coming on-stream of TEN in the summer will relieve a substantial part of that burden. Indeed, capex will reduce from $1.3bn this year and could be as low as $300m in 2017. By then Tullow will be producing 100,000 b/d and have a portfolio of low cost assets with the exploration projects mainly in East Africa.
That leaves four stocks in the list last year awaiting coverage. By far the most difficult are the Kurdistan twins of Genel and Gulf Keystone who have been miserable performers as they had the doubts over being paid to add to the commodity risk. Certainly I come clean about remaining over optimistic throughout the process and should have cut them some time ago. Having said that, there has been a return to payments, albeit of a modest nature, and an attempt by the KRG to ensure that the oil companies do, eventually get rewarded. Whilst this is rather too much jam tomorrow I am not going to push them overboard right now.
Next is President Energy where I still feel that Peter Levine is going to be success but it is certainly taking longer than expected, another South American play in Andes Energia is worth keeping an eye on as Argentina becomes more business friendly. These two should be on the subs bench as they say as both have much to offer in the longer term.
And finally Velocys, which was and is a special situation and has had a turbulent year with a change of CEO who the market will need to get to know. Recent news from the company shows that investments are being made and the project slowly becomes a reality, we shall have to see but small scale GTL still looks like offering something the market wants to come to fruition.
TV Interviews:Below are interviews I have done which talk through the stocks in the Bucket List, all have links and are on www.malcysblog.com as well.