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Is it time to buy oil and gas?

Oil and Gas … Latest Buzzwords?

Buoyed by rising prices these two sectors are creeping back into the conversation … well, much more than they have in recent years but still not at the frenzied levels we have seen in the past.

For the oil sector this is a chance to make things happen while there is cash around.

Glennon owns a small oil stock called Otto Energy (ASX: OEL) which we have written about previously. OEL updated its production and sales from the SM71 production well in the Gulf of Mexico during the week. In summary, its share of annual sales is more than $50m. Its market cap is just $129m. It is using the cash to further explore the areas surrounding SM71, drilling new acreage in Alaska near extremely successful and large production fields and has begun an extensive new drill program in the Gulf Coast in partnership US drilling giant, Hilcorp. The share price doesn’t seem to be reflecting reality (even though we have already made good money out of it).

This week we also caught up with a local driller, Triangle Energy (ASX: TEG). We don’t own it but the similarities struck us, albeit on a smaller scale than OEL. It is producing oil from a field in the Perth Basin called Cliff Head. Its 78% interest is dragging in $22m of oil sales per annum. In May it made an annualised US$12m in profit. Yet the market cap is just $20m. Not only that but it owns the offshore platform and the only onshore infrastructure in the immediate area (Arrowhead), which would cost circa $170m to replace.

It has further tenements close to Cliff Head from which it expects to extend the life beyond its current expected limit of 2025 and a 30% interest in a new oil discovery further south in the Perth Basin called Xanadu. It is awaiting seismic interpretation.

The point is; here is another example of a stock with real cash earnings that is not being rewarded in the market.

The question is; will this change?

We discussed this with TEG’s management and it seems that after quite some time in the wilderness, the period for smaller oil plays to consolidate is arriving very quickly. There is a rising sea of cash, a rising oil price and falling local currency. This is not out of kilter with history. When oil prices rise the first to be rewarded are the majors, like Beach Energy. In lean times before then they had typically trimmed their portfolio down to major oil fields and discarded their smaller assets which are picked over by more nimble players like TEG. After years of not having the funds to do anything, these smaller players emerge pretty quickly. Ultimately their valuations will catch up to their cashflows. Certainly, a sector to watch.

In the gas sector the outcry over domestic gas shortages has pressured the government to, in-turn, pressure the industry to think more about domestic gas as opposed to gas exports which have dominated investment in the last decade. The export facilities built in QLD need more gas to improve their returns, which keeps the industry humming along, but the government’s introduction of use-it-or-lose-it on gas tenements to ensure domestic supply will likely lead to a ramp up in exploration and production. This has meant stronger engagement of tier two and three players already.

At the moment, given the long lead times to gas production, we are interested in the supply of infrastructure around gas. Activity is emerging once again after a hiatus, particularly since the peak period around the onset of the coal seam gas frenzy back in 2008. We notice Decmil (ASX: DCG) has seen a lift in activity through its QLD-based coal seam gas infrastructure support division and recently we spoke with Valmec (ASX: VMX) who is seeing a strong lift in its tender pipeline. VMX is involved in the design, engineering and construction of infrastructure that facilitates the efficient flow of oil from the well head to the pipeline. There are thousands of these structures dotted around the country but the industry has been relatively quiet for some years. VMX says the Northern Territory is the next region ripe for expansion once the tier one constructors leave town post the construction of the giant Icthys facility… leaving it to the little guys to facilitate the fracking sector.

Another interesting sector.

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