Why Verona Capital’s Craig Burton sees opportunity in oil

When Verona Capital managing partner and serial entrepreneur Craig Burton flags an opportunity worth looking at, it makes sense that investors would stand up and take notice.

The co-founder of two companies which cracked the ASX 200 at their peak – Mirabela Nickel and Panoramic Resources – and successful backer of a series of projects spanning diamonds, nickel, copper, gold and oil and gas across the world, Burton knows a thing or two about market trends and opportunities.

Here’s a tip. In 2021, Craig Burton is bullish on oil.

At first pass to the casual observer, it may fly in the face of conventional wisdom. Each day we hear stories about new technologies which will come along and displace the traditional, addressing the global need for a step-change into an emission-reduced world.

That’s a cause Burton deeply believes in. But it’s also a target, he points out, that will take time to deliver on.

“We can’t go from running the world on 80% hydrocarbons to zero overnight,” he told Stockhead at Verona’s Cottesloe offices.

“I believe that we need to encourage carbon reduction, and you need government action to do that – whether it’s a carbon tax, or some kind of cap-and-trade system which provides incentives to make the transition.

“But it’s not a transition which can be made overnight.”

Herein lies a significant oil and gas opportunity, according to Burton, who said the market’s loss of appetite for assets had exceeded a loss in demand around the world.

“We’re of the view that the outlook for oil and gas is strong, and stronger than the market thinks,” he said.

“Post-Covid, oil in particular was adversely affected more so than other commodities, because it’s used for transport and transport was one of the more affected sectors.

“What that’s done is create an outlook for oil that’s particularly pessimistic and has resulted in a massive reduction in investment in new projects, and investment in exploration.

“The fracking industry in the US has been on an overdue reckoning, and basically the capital markets no longer support unrestrained expenditure in the US industry.”

One thing which hasn’t quite matched the sentiment has been movements in the oil price.

Having dropped into negative territory last April, the commodity recently topped US$60 per barrel – its highest point since the pandemic began. But so far it hasn’t been enough to quell fears of a false dawn, according to Burton.

“Even as we watch the price come back, it’s climbing a wall of worry,” he said.

“Every time the price has gone up, everyone has expressed surprise, and then watched it keep on going.

“Those price movements shouldn’t be of any surprise when expectations were that low, the investment levels were that low, and the willingness to deploy capital is so low.

“We’re seeing this around the world – it’s a global, capital strike on the oil industry, and that can only lead to a higher commodity price which will eventually stimulate some reinvestment.”

Capitalising on untapped expertise

An industry contraction has implications beyond commodity prices – it also creates a surplus of skills which can be tapped by those bold enough to pursue opportunities.

“There’s an opportunity to find outstanding people and seek opportunities at a time when the industry is asleep,” Burton said.

“We’ve taken that chance to build a small, high-powered in-house technical team, and we’ve been looking at exploration and potential production opportunities.”

The Carnarvon Basin is home to one of the most promising exploration opportunities Burton’s team has identified – including the Napoleon project, of which a 20% stake was recently sold to Tamaska Oil & Gas (ASX:TMK).

Burton believes Napoleon has the potential to replicate a discovery on the scale of Carnarvon Petroleum’s (ASX:CVN) Dorado project – the third-largest oil discovery in the history of the North West Shelf, uncovered in 2018.

“It’s a large structure in a good location in the North West Shelf with proven production all around it,” he said.

“It’s reasonably deep, at 4200m, which means it will be a reasonably expensive well to drill, but if it comes in it will be a discovery of similar dimensions and importance as the Dorado discovery.

“It’s very exciting, it’s coming together really well.”

The JV has plans to get the project drill-ready over the next four months, and has tapped the expertise of DUG Technology (ASX:DUG) to undertake a detailed 3D seismic reprocessing survey which will guide its next moves.

Burton also has interest in the Carnarvon Basin via a series of privately-held existing smaller discoveries held through Kato Energy.

“The idea of that project is to take the existing small discoveries of oil in the North West Shelf and combine them into one project using a mobile platform to go from one location to another and exploit the discoveries in sequence,” he said.

“By putting say three in sequence, you’re able to make the project more economic. We’ve been working on that one for about four years, and it’s getting quite advanced.”

Kato has submitted to regulatory body NOPSEMA for project approvals expected over the next few months.

With oil prices on the rise and sentiment still subdued, those who pursue opportunities in the space could stand to benefit in the months and years to come.