Here’s why it could be time to consider buying junior ASX oil stocks
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Global oil supply is tightening — but that’s yet to translate into investor interest for oil juniors.
The latest price pressure comes from a US move this week to re-impose sanctions on Iran, limiting their oil exports.
The price of Brent Oil — the global benchmark — has eased over the past month after reaching a near four-year high.
But Wood Mackenzie executive Ann-Louise Hittle says the latest move by the US will pull 1 million barrels a day from global circulation. On top of a similar loss in supply from Venezuela, global spare capacity is now only at 700,000 barrels a day.
The International Energy Agency puts the shortage even lower, at 580,000 barrels in October.
“That means the market is vulnerable to strong demand in a cold winter or any new supply outage,” Ms Hittle said.
>> Scroll down for a table showing the recent price performance of ASX oil juniors
ASX investors are yet to read the tea leaves though.
“I’m a bit miffed to be honest,” says Key Petroleum (ASX:KEY) managing director Kane Marshall, referring to a lack of interest in his fully-funded plans for 2019.
“I’d like to think that sentiment has picked up in the last six months, but it hasn’t translated in activity.
“There’s been a lot of damaged confidence in the industry.”
Fund managers and brokers are showing little interest in ASX oil juniors despite growing oil demand, a lack of major exploration and uncertainty for supply.
“Discoveries have to be made or prices are going back to $US100,” says Mr Marshall.
“That’s not rocket science, it’s a fundamental thing — a single macro economic theme that people are overlooking. Then it’ll be FOMO [fear of missing out] as prices start to run.
“When things change it they will change very quickly.”
Only 17 of the 55 or so oil small caps Stockhead monitors have seen double digit growth in the last six months and only a handful of those have Australian operations. (See table below).
The biggest mover was IPB Petroleum (ASX:IPB) but only because of reflected glory: its offshore exploration permits are neighbours to those snapped up by Santos when it bought another company in August.
Investor interest underwhelms
Players in the Australian upstream oil market — including explorers Key Petroleum and Carnarvon (ASX:CVN) and producers like Buru Energy (ASX:BRU) and Beach Energy (ASX:BPT) — expected activity to kick-start the sector mid-year.
In the first half of the year Brent and West Texas crude oil prices were heading upwards thanks to efforts by OPEC a year earlier to cut supply, and US President Donald Trump announced sanctions on Iran oil would restart on November 5.
Carnarvon made the biggest offshore oil discovery in North West Australia in years in July.
A month later it seemed that merger and acquisition activity was on the rise too as Santos bought Carnarvon investor Quadrant.
Even Bureau of Statistics data indicated seasonally adjusted spending on petroleum exploration — oil and gas — rose 84.8 per cent to $326.6m in the June quarter.
But after a flurry in May that saw services company Baker Hughes’ active drilling rig count bounce from 17 in April to 22, that number has slid to 20 and 21 in September and October.
The rig count data is a proxy for how much exploration is taking place.
Graeme Bethune, founder of energy sector analyst EnergyQuest, told Stockhead exploration had been improving but from a very low base and spending is still “fairly low”.
Don’t frighten the horses
Volatile markets are causing already-skittish investors to be gun-shy around a sector that has failed to capture consistent support — even brokers who covered the junior sector earlier in the year told Stockhead they no longer do now.
There are buds of optimism however.
Mr Bethune says higher oil prices are helping to boost exploration.
US crude is back down to $US62 but Brent, a measure for North Sea oil, veered towards $US90.
Seven of 21 offshore exploration permits offered by the federal government were taken up. While until now exploration has largely been left to the juniors, four of those permits were taken by global giants BP, Shell and Inpex.
The ASX also has a handful of oil juniors operating in Australia which range from very speculative explorers to producers.
Producers include Cooper Energy (ASX:COE), Triangle Energy (ASX:TEG), Bounty Oil & Gas (ASX:BUY), Senex and Buru are all producing oil in Australian dollars at home and selling in US dollars.
Buru reckoned it would crack the $100 a barrel mark in October, Triangle and Bounty took almost that per barrel in the September quarter, and Senex says it was topping out at $114.
Others like Key and Carnarvon are prepping to start drilling programs in early 2019 while IPB and 3D Oil (ASX: TDO) are selling ‘proximity plays’ near the Quadrant areas and in the Bedout basin, respectively.
Here’s a table showing the recent price performance of ASX oil juniors:
Scroll or swipe for full table. Click headings to sort
|ASX code||Company||Six-month price change||12-month price change||Price Nov 6 (intraday)||Market Cap|
|IPB||IPB PETROLEUM LI||2.375||1.45454545455||0.027||5.4M|
|PVE||PO VALLEY ENERGY||0.4||0.4||0.042||24.9M|
|CUE||CUE ENERGY RES||0.149253731343||0.283333333333||0.077||54.5M|
|RLE||REAL ENERGY CORP||0.021978021978||0.27397260274||0.093||28.0M|
|ATS||AUSTRALIS OIL & GAS||-0.0125||0.717391304348||0.395||349.4M|
|BUY||BOUNTY OIL & GAS||-0.166666666667||-0.285714285714||0.005||4.8M|
|ABL||ABILENE OIL AND GAS||-0.285714285714||-0.615384615385||0.005||2.0M|
|TMK||TAMASKA OIL & GAS||-0.333333333333||-0.333333333333||0.002||3.9M|
|LKO||LAKES OIL NL||-0.333333333333||0||0.002||45.4M|
|FDM||FREEDOM OIL AND GAS||-0.47619047619||-0.0833333333333||0.165||188.5M|
|RAW||RAWSON OIL AND GAS||-0.555555555556||-0.375||0.02||2.3M|