Q1 Review of 2015
Spring is firmly in the air and green shoots are beginning to show after what can only be described as a very harsh winter. Too many dark days and as stated in the opening review of 2015’s hotlist picks… it was always going to be a tough Q1 for commodities.
Understandably, investors are weary, tired and sentiment is at lows across the sector. The majority of O&G based growth funds are looking in a sorry shape. Meanwhile, FTSE100 trackers are flying. The index posted its highest ever close a few weeks ago. Mario and QE4 can be thanked for that. Easy money has been the thorn in the side of any risk-on trading. The city/market just doesn’t need the stress or exposure when cheap money is handed to them on a plate. Chasing an uncertain sector like Oil & Gas makes little sense right now. But that doesn’t mean a few II’s are not nibbling away behind the scenes. In fact quite a few holdings have increased as the deep pocketed funds buy in cheap ahead of the inevitable recovery. Inevitable why? Because OIL always comes back and comes back hard. With rig counts dropping and projects across the globe on hold or even binned in some instances, the snap back to higher prices will come and history is your guide.
There are hurdles ahead. Iranian oil volumes have been pegged back due to US/UN sanctions as have Iraqi oil supplies over the last few years due to political stalemates. But both countries are on the verge of producing record number volumes. Iran may not be in a position to flood the market just yet, but the hope is that supply vs demand is at a level that can take the increased supply. Looking back at the Shale revolution, one has to cast an eye at the ‘gap’ that was either created or filled by chance by the US shale developments. When Sanctions hit Iran, volumes were significantly reduced. The Shale boom could be said to have come directly because of this drop in supply from Iran. It’s perhaps no surprise then that as Shale dies down, it makes way for the return of Iranian volumes. Equilibrium or was US Shale just the house sitter?
Looking ahead, key events in Q2 are of course the Iranian deal which is expected to be pen’d in around late June or July. By coincidence or not, OPEC are set to meet again around the same period to decide on their next course of action. The way the Saudi’s are operating (record volumes) I’m not expecting any change in policy. To date, they’ve played a blinder. It’s turned the Oil industry upside down in the process but with rig costs at $350k per day on some exploration projects it’s a chance for the industry to refocus and reduce all operational costs. The Industry party’d when the times were good and should have put money away for a rainy day. But as seen by politicians across the world, most look no further than the end of their noses.
Q2 looks like a quarter that might confirm the bottom is in POO and with that the dark days for many could be over.
The very fact that Goldman Sachs is working its derriere off to get as many negative views out there suggests they are running out of time filling their boots at low prices.
I can understand their focus. They want capitulation and a faster end to the US Shale era. Why? Because they know the recovery will be stronger and more stable especially with Iranian supplies parked around the corner. With POO at high 50’s, some Shale players will just about scrap along. The faster the fall over the better.
Thesharehub has moved to quarterly reviews due to the near catatonic nature of the commodity sector. There just isn’t the momentum or news flows to warrant more regular reviews at present. But hopefully that will change in Q2. Next review is up in 11 weeks or so.
Thesharehub will continue to give heads up posts or highlight individual stock developments if and when they happen. The coming weeks and months should see some corporate action taking place such as mergers and takeovers. Shell and BG have (at last) kicked off M&A season in style with one of the largest energy deals made in the last decade.
Stock picks summary:
The sharehub’s hotlist is commodity focused so no surprises to see it heavily down. But that said it’s down by over 32% and almost 10% of that decline is down to Afren. If investors needed a cold shower , then Afren is it. It’s a classic example of how Boards/directors can single handedly be asleep at the wheel. Companies are run by people not machines. These people are either high calibre or average or poor calibre. In Afren’s case – poor management resulted in the business effectively being handed over to bondholders. Was it complacency or did OPEC’s move really pull the rug so swiftly?
One stock that thesharehub did pick well (a feat in this downturn) was Faroe Petroleum. Run by smart management with a clear goal to avoid excessive debt levels and make progress as and when the company is in a position too. Faroe is a benchmark in my opinion of how to run an oil and gas business in the small to mid tier level.
Charles Stanley’s picks for 2015 rule the roost in Q1 with the Independent in the unusual position of second. Gains are moderate considering the FTSE100 tested all time highs and the majority of picks across these two are FTSE100 based.
Stocks to watch in Q2 are Gulf Keystone – finally this story may be coming to end soon. Shell’s large purchase of BG suggests the majors are keen to take advantage of the correction in the sector. Whilst GKP has its woes (lack of cash/funding opportunities) a deep pocketed super major could be just the ticket the KRG need at present.
And…it’s not just Super majors that will be looking at M&A. Many middle tier players like Premier and Ophir will be looking over their shoulders wondering who’s prowling. Companies of this size would likely be seeking mergers or acquisitions of their own to help bolster their values ahead of any predatory approaches. Ophir’s purchase of Salamander is a prime example of buying in production but also adding in additional reserves/2c numbers.
As mentioned earlier Faroe are worth keeping an eye on as they have a mix of exploration wells underway and due to kick off. A rare event in current market when exploration is nil excluding FI’s of course. Some drills have greater success than others – so do your research.
And best not forget Sirius (SXX) could finally be on the verge of gaining the much needed planning approvals. Any good news on that front could see the stock double. Equally, bad news or delays to planning app could see it half. Risky but potentially high reward upon success.
More updates to follow over coming months.
Current standings / Q1 Results
1. Charles Stanley’s Broker Top Ten 2015 +6.30%
2. The Independent’s Top Ten 2015 +1.04%
3. TheShareHub’s 2015 O&G Hotlist -32.31%