Energy Outlook
- Oil price surges above US$100 breaking 2008 downtrend
- Oil and gas stocks cheap and ready to rally
- Global economic expansion continuing with energy demand accelerating
- Peak Oil issues continuing to emerge
- Australian onshore exploration boom continuing
- Four ASX Oil and Gas stocks reviewed
The continuing pre-occupation in the Australian share markets with all things negative seems to be at odds with activity in the real world. Resources sector equities here have been declining since the post GFC rally that peaked in April 2011. April 2011 was a very important time because it was then that markets began to feel nervous about the economic outlook again. And 26 months later in late June 2013 we achieved some `extreme’ levels in price, relativities and sentiment.
The ASX Gold Index (XGD) dropped a remarkable 77% from that April 2011 into these June lows while the A$ gold price today is almost unchanged at A$1400 compared to A$1409 at the April 2011 highs. For some reason the direction of gold (or lack of it) resulted in the stocks being smashed with the market place being terrified of the sector. This has happened while demand for physical gold is at a record high. And mining generally is being hit despite firm demand for most metals and a typically low level of LME inventories (other than aluminium and maybe nickel). Iron ore exports seem to be still making record shipments and the iron ore price at US$128 STILL hasn’t collapsed. Of course it is China, or Europe or the US or Egypt or something that is doing this and making the market place groupthink just so negative.
So the Minerals and Mining Index (XMM) fell down 52% from those April 2011 highs and the Small Resources has been slaughtered 70% too. So many stocks are trading at less than 20% of their NPVs on conservative product pricing with the cry going out that “they will just never get the money”. Of course they won’t while Australia sits on A$1484bn in bank deposits and Australia’s wonderful compulsory Super Funds sit back with their own A$1500bn in assets that are studiously directed away from the very industries that provide the contributions.
Anyway while all this has been happening we have seen something else that is quite remarkable. Since its high of US$115/bbl in that famous April 2011 period the oil price had been going sideways and basing for another upmove. It has now begun that upmove by rising above US$100 and breaking the downtrend from the June 2008 high. Recall that oil rallied up from US$10/bbl in Dec Qtr 1998 to run in a major bull market than ran for almost 10 years to peak at about US$147. The GFC brought oil crunching back and we heard the calls for oil to plunge down forever to below US$30/bbl. Remember all that bearish talk when oil was rallying higher later in 2009? The downtrend has been broken and it not just because of Egypt.
The WTI price has climbed to remove the discount it had against Brent prices. The discount had reflected transport bottlenecks in the US around the new tight oil fields. Unblocking of the bottlenecks together with more oil being sent into the North Atlantic resulted in the removal of both the discount for WTI and the premium for Brent.
What has been also remarkable has been the performance of the US oil majors, Exxon Mobil (XOM), Chevron (CVX) and Conoco-Philips (COP) over this period. Year after year new rally highs and for XOM and CVX, new all-time highs. No recession/deflation/China falling over here. The GFC was a yawn.
And also just look at the performance of the Exploration and Production (E&P) companies through the XOP Index. These E&P companies had their own April 2011 moment and the obligatory rapid 40% sell off but are now within 4% of that high and probably about to move sharply higher.
So coming back to the remarkable stuff, most will recall my ad nauseumrepetition of Non-OECD energy demand being now greater than that for the OECD and that must mean a strong growth rate in the >50% sector will result in an acceleration of total energy demand. And that is what we have.
The details of the energy mix can be debated but with oil still making up around 33% of the world’s primary energy sources and, being the largest single fuel, it is very important. Particularly for transportation. And China will have more transportation requirements as its car and truck fleet grows, as its mining sector still grows and as agriculture still grows. So more oil is required. Catching up to the US will still take some time.
The Peak Oil concept is still with us and most traditional oil producers in the Middle East, Indonesia, Russia, UK, Norway and Mexico are well down on their peaks. The US is well down too but it is having a renaissance with tight oil but it is unlikely to get back to the previous highs. The new oilfields in Africa and Sth America are helping and China is increasing output too but overall the trend is a decline for traditional conventional oil despite the growing global reserve base. Maintaining 90 million bbls per day from current fields is hard and growing it is even harder.
Natural Gas Liquids from LNG production is helping meet the 90MMbopd and LNG itself has become a very big business with around 230mtpa being shipped and expectations of about 40% higher at 340mtpa by 2020. Australia will become the biggest exporter from a current 24mtpa from three WA operations to 60mtpa from seven WA operations (and possibly another 20mtpa from four more) and 13mtpa from the first train in each of three Gladstone plants and double that with each running a second train. So it could be 90-100mtpa by 2020.
Here in Australia these major LNG capacity expansions are probably most famous for their rising capital costs and on the East Coast for their land use conflicts but they will be important generators of export revenue and will deliver versatile gas to mostly Asian buyers.
Whilst the West Coast offshore fields will feed specific LNG plants, over on the East Coast it is a matter of new LNG plants being fed initially from the dedicated coal seam methane and then from wherever it can be sourced.
This development of an export market for much of the Australia’s underutilised or stranded gas reserves in Central and Eastern Australia is changing the focus upon oil and gas producers away from just the large players.
Oil and gas exploration onshore Australia has been difficult for all but the major players as the exploration risk has been high (although it is reasonable in global terms), infrastructure limited and markets for gas even more limited.
This opportunity for a larger export markets for gas has totally changed the field economics by justifying new pipelines and thereby offering stranded gas more attractive terms for development.
At the same time the onshore hydrocarbon boom is moving strongly with Australia’s own form of unconventional gas and liquids.
The Oil and Gas Sector on the ASX has well underperformed its US counterpart so that the local rush-for- liquidity disease overwhelmed the oil price and operating fundamentals. And the fundamentals should reassert themselves over the next twelve months.
It is clear that market leaders Woodside (WPL), Santos (STO) and OilSearch (OSH) are looking good and are well into the LNG business in Australia and PNG but these significant second liners, being Beach (BPT), Drillsearch (DLS) and Senex (SXY), are developing oil and gas businesses from the Cooper Basin that should also include expansion of gas production from unconventional shale gas and tight sandstone gas. Buru (BRU) with a market cap of over A$450m from its Canning Basin operations is a good fourth member of this second liner group.
All seven of these look well placed to be given good reratings with higher oil prices.
This graphic gives a good breakdown of the activity underway in eastern Australia with major resource potential identified across several basins with the Cooper Basin well positioned to supply local and international markets..
Amongst the second liners the real action is here in the Cooper Basin where principally Beach, Drillsearch and Senex are re evaluating the hydrocarbon potential. Several newly recognised reservoirs have been identified as exploration has moved beyond conventional structural traps (caused by folding and other tectonic action) that previously had provided about 95% of all discoveries in the Cooper to stratigraphic (trapped by the sediments) and unconventional targets of Basin Centred Gas Accumulations and tight sandstone gas reservoirs. New nomenclature of oil fields in the Western Flank and tight and other unconventional gas in the Gas Fairways has been adopted.
Low 3D seismic coverage (just ~20%), low well densities and low fraccing applications reinforce the Basin’s exploration immaturity. Beach even points out the immaturity of exploration in the Western Flank of the Cooper by showing that the latest discoveries are the largest found to date.
Numerous discoveries in what is termed the Western Flank oil fairway are significantly increasing reserves and production as 3D seismic is giving high exploration success rates. The new Bauer/Lycium pipeline connecting Western Flank oil flows to Moomba is already exceeding its 10,000bopd name plate capacity and the Bauer field could become much larger. The key to these fields is the high operating margin of over A$80/bbl.
I cannot help but thinking this is a rerun of Santos and the Cooper Basin partners in 1979 when at BT Australia we had at least 5% (might have been 10%!!) of Santos at a price of about A$1.10 before it went to an equivalent of A$40/share as the gas fields expanded, the first oil from the Eromanga Basin overlying the Cooper was developed and the Liquids Project was completed by 1981.
Elsewhere in Sth Australia Linc Energy’s Arckaringa Basin permits may also be providing a major unconventional hydrocarbon source with risked shale oil prospective resources of 3.5 billion barrels.
Northern Territory has some good potential with the Beetaloo and Georgina Basins attracting strong international interest. The numbers here could be very large indeed.
In WA it is the Canning Basin with Buru Energy’s Ungani field coming into production with large additional regional potential. The Perth Basin also is adding to the activity with NWE looking attractive.
Other areas are emerging and will add considerably to market interest as this boom continues.
Overall, it is important that investors appreciate the scale of these resources and that the tenements are massive in comparison to those one square mile sections (640acres) in North America and junior companies can still own over 50% and be funded by some of the world’s largest hydrocarbon companies. In previous oil booms 5 million barrels was a lot of oil for a small company. This time we have companies with large prospective gas resources where each 1 TCF is equivalent to 180 million barrels.
Take a close look at these.
Beach Petroleum
Beach is a Cooper Basin-focussed company producing over 8MMboe through 4MMbopa oil and 25PJpa of gas. 2P reserves are over 90MMboe whilst combined 2P and 2C are over 550MMboe. Resource upgrades are due in the Dec Half of 2013. BPT is in the Sth Australian Cooper Basin (SACB) JV (20.2% – STO 66.6% and Origin 13.19%) and SW Qld (SWQ) JV(20-40%) which owns the older Cooper Basin oil and gas fields and the Moomba and Ballera gas treatment facilities and also pipeline facilities including the Moomba-Port Bonython oil pipeline. BPT is also in the Western Flank with DLS, SXY and Cooper Energy (COE). In addition it has interests in onshore unconventional plays in the Otway and Bonaparte Basins as well as strategic plays in Africa and Egypt.
BPT has made a very large commitment to the Cooper and to unconventional hydrocarbons with the expectation of delivering additional reserves to meet expected domestic demand and a very large increase from the East Coast LNG projects.
Chevron joined BPT in PEL218 (BPT 100%) and ATP855 (BPT 60%) (in Qld) to earn 60% in BPT’s interests and assist in the development of the extensive unconventional potential in a US$350m programme that included cash payments to BPT of US$160m. Extensive testing to date through a number of wells has proved potential thickness of 1000m of gas charged sediments in the Permian of the Basin. Confirmation of a large resource here would be very important to the East Coast LNG plants.
BPT’s JVs with DLS, SXY and COE cover extensive areas with developing fields on the Western Flank. The recent Bauer discovery in PEL 91 amongst others has highlighted a very prospective fairway on the Western Flank. JVs are PEL 104 and 111 with SXY (40% to BPT), PEL 91 with DLS (40%), PELs 106B and 107 (50%), PEL 92 with COE (75%). Exploration/development well numbers are increasing as are reserves and production.
All fields are benefitting from 3D seismic and other new technologies.
Senex Energy
SXY has a diversified asset base with a major asset portfolio in the Cooper Basin (14 operating fields) and CSG tenements in Qld. The company has been very active with resource upgrades, extensive 3D seismic surveys and a Cooper Basin exploration/development programme of 30 wells. Oil production exceeded 1.2MMbblo in FY13.
SXY has major tenement interests along the under-explored Western Flank and in the deeper unconventional gas fairway in the Permian sediments.
SXY has upgraded its 2P oil reserves to 10.8MMbbl and 3P to 21MMbbl from its Western Flank fields PEL 104 and 111 with BPT (60% to SXY).
SXY also recently announced major contingent resource upgrades to 5.5TCF from recent analysis and interpretation of gas exploration results in the gas fairways in the Cooper. The resources included 2.4TCF 3C (396MMboe) of tight gas from the stratigraphic Hornet field that flowed 2.2MMCFD, 2.1TCF 3C from Sasanof in tight sands in the Patchawarra and Murteree formations and 1.1TCF from the CSG at Paning. Associated gas liquids are also expected in some cases.
The Qld CSG reserves of over 300Pj net to SXY will feed into the BG Gladstone LNG plant and as these are non-core assets SXY expects to monetise them in the near future.
SXY may like to join its Cooper Basin peers by admitting a larger JV partner to accelerate activity.
Drillsearch
DLS is Cooper Basin focussed where it has 22 permits and operates 14 with 2P reserves of 18MMboe and growing production currently around 2.5MMboepa. Prospective recoverable unconventional gas resources are as much as 32TCF. DLS has BG Group as an 8.5% shareholder and 60% JV partner in its unconventional projects.
Exploration is increasing with focus on 3D seismic acquisition and growth in reserves and production.
The company has three business units of Oil, Wet Gas and Unconventional.
DLS’s Oil Business is well represented in the Western Flank in SA with PEL 91(DLS 60%) and PEL 106B and 107 (DLS 50%) and also in the Inland-Cook Oil Fair way in SW Qld with growing production of over 6,000bopd. DLS recently acquired a further 29% of the Tintaburra Block in SW Qld from Santos to take its interest to 40% and assumed operatorship. Oil prospective resources are 33MMbbl and a programme to double output to 3000bopd is underway.
Wet Gas has two fields in production and several more to come online after recent discoveries and prospective resources are over 86MMboe.
Unconventional resources cover shale gas (2C of 24TCF), tight sandstone gas (8TCF) as well as potential for CSG.
BG has farmed into ATP940 for 60% by spending A$130m with DLS being carried for A$90m of the first A$100m expenditure. BG is looking to use Cooper Basin gas to be delivered 1200km to feed a possible third train of 8.5mtpa of LNG.
Buru Energy
BRU is focussed in the Canning where it operates over 64km2 (16m acres) in a frontier basin area with multiple plays in proven oil and gas systems. Mitsubishi entered into a JV with BRU in 2010 to earn up to 50% in unconventional hydrocarbon projects by spending up to A$150m of which over A$100m has been spent. BRU had earlier entered into an agreement with Alcoa to supply gas to its alumina projects south of Perth from discoveries in the Canning Basin. BRU currently has three Canning projects with Ungani, Laurel and Goldwyer/Acacia.
The Ungani field discovery in dolomite reservoirs is part of a trend that has high quality conventional reservoirs and prolific source rocks providing over 150 prospects. The underlying Fitzroy Graben hosts the Laurel Formation which has extensive and continuous tight gas accumulations. Additional shale oil and wet gas potential is recognised at Goldwyer and Acacia.
Ungani expects to be in production at 5,000bopd in June Half 2014 from around 10-20MMbbl recoverable but potential for is recognised as drilling along trend has confirmed thick 40m oil columns and additional contingent resources.
The Laurel Formation has been independently assessed at around 100TCF in a Basin Centred Gas System with 2 billion bbls liquids (47TCF and 1 billion bbls net to BRU) whilst the Goldwyer Shale has 7.2TCF and 4 billion bbls net to BRU.
| Qtr | 31 Dec 2012 | 31 Mar 2013 | 30 June 2013 | 16 July 2013 |
| US$/A$ | 1.039 | 1.042 | 0.914 | 0.918 |
| Brent | 110.4 | 109.8 | 102.0 | 107.9 |
| A$ oil price | 106.2 | 105.4 | 111.6 | 117.6 |
| Index in A$ | 100 | 99 | 105 | 111 |
The onshore oil exploration boom is surely well underway and the share prices should soon better reflect these fundamentals and send these stock much higher to follow their North American brethren.
It is also clear that the new unconventional oil and gas focussed companies are approaching important milestones in exploration, development and production. Expect a major rerating of these companies including Armour Energy (AJQ), NWE and Falcon Oil and Gas (AIM/TSX/Dublin).
Other companies in the oil and gas business that look good are Cue (CUE), Horizon (HZN) and Petsec (PSA) which show outstanding value with large cash reserves, increasing production and exploration activity and LNG Ltd (LNG) that is utilising its LNG technology in much lower capital and operating cost LNG plants in Australia and the US.