FT: “The $250m price tag attached to the sale of a 50 per cent stake in a key project should have given a big boost to the share price of Africa-focused oil explorer Bowleven last week. It failed to.
“Analysts said the farm-down of the oil and gasfield off the coast of Cameroon was worth about 68p a share to Bowleven. Yet a day later, its shares were trading at just 40.5p. Its market value is now lower than the cash it earned on the Cameroon deal.
“Something is not working here,” says a person close to the company. “The market is dysfunctional.”
International exploration and production companies – or E&Ps – were once stock market darlings. A string of spectacular discoveries by Tullow Oil in Africa, Cairn Energy in India and DNO in Iraqi Kurdistan grabbed headlines and investors’ attention.
But E&Ps have lost their lustre. That is partly because they seem to have lost the knack of discovering oil.
“It would be great if someone actually found something with the drill bit to remind people of the reasons for holding E&P stocks,” says Brian O’Cathain, chief executive of Petroceltic International, an oil explorer quoted on Aim, London’s junior market. “Discoveries have been too sparse.”
A trading update from Tullow Oil illustrated the point on Wednesday. A pre-tax exploration write-off of $415m was accompanied by a blip in interim production figures. Its share price has almost halved in the past two years.
It is all a far cry from 2012, when small-cap Cove Energy, whose main asset was a tiny stake in a gasfield off the coast of Mozambique, found itself in the middle of a bidding war between Thailand’s national oil company PTTEP and Royal Dutch Shell. PTTEP won out, paying $1.9bn for the company.
….With a few exceptions, “the whole sector is trading below core net asset value”, says Brendan Warn of BMO Capital Markets.
….Big Oil, under pressure from shareholders to show more capital discipline, has pulled back from large corporate deals. Also, E & Ps hoping to sell themselves or their assets are facing a much more crowded market, as the majors pursue multibillion-dollar asset disposal programmes. Witness the difficulties Tullow has experienced in trying to sell down its interest in TEN, a vast oil project off the coast of Ghana.
The sector has also suffered from the US shale revolution. American investors that used to back international E & Ps have switched into shale oil producers such as EOG and Pioneer Natural Resources that offer more secure returns.
….The fall in the E & Ps’ stock price also reflects a big change in the way their assets are perceived by the market. In years past, they gained credit for oil they had discovered but had not yet started to produce, as well as for their exploration potential. Now, investors only seem to ascribe value to assets that are actually producing oil and generating cash. Beneficiaries include Genel Energy, run by Tony Hayward, the former BP chief executive, which extracts oil from two huge fields in Iraqi Kurdistan.
….But what would really transform the outlook for the sector would be another big discovery – something on the scale of Tullow’s Jubilee field offshore Ghana, found in 2007. “There’s got to be another Jubilee out there,” says Jefferies’ Mr Wilson. “The industry just has to find it.”
Even without that, however, some oil executives are confident valuations have hit rock bottom – and the only way is up. “We’ve got 350m barrels of reserves, and an enterprise value of less than $2 per barrel of oil equivalent,” says Mr O’Cathain. “That can’t persist”.”
Future Today
