This year, oil companies have been pummeled both by the Covid-19 pandemic and investors shifting cash into greener investments. Even those sticking around face slashed dividends and multi-year share price lows, particularly in London’s two supermajors, Royal Dutch Shell (RDSB) and BP (BP.).
Amid the talk of stranded assets and the BP plans to let production drop by hundreds of thousands of barrels a day in the coming years, juniors are still hard at work on developing new assets. The market is reflecting this. Share prices for oil and gas companies on Aim are flat year-to-date, according to FactSet, compared to members of the FTSE 350. The average decline in that group, year-to-date, is 37 per cent.
Shell and BP are the biggest drag on the cohort, with 60 per cent and 55 per cent declines respectively. Panmure Gordon analyst Colin Smith said the two former FTSE 100 dividend leaders were facing long-term headwinds. “The oil sector continues to de-rate against the market in a process that appears to have started in the middle of last year and has accelerated in 2020, taking the sector to the lowest [point] relative to markets since records began,” he said.
Mr Smith said one driver of the sector weakness was the equity cost of capital going up, which he said would result in a “prolonged dislocation” in company valuations compared to how they were rated by the market previously.
Now investors might have to look further down the ladder for growth in the oil and gas sector.
Getting on with it
Bahamas Petroleum (BPC) was looking at years of work going up in smoke in March. The explorer, then only focused on a single offshore oil project, had declared force majeure to extend its drilling licence and postponed the arrival of a rig once Covid-19 hit.
“In the first week of March, we were three weeks away from spudding the well,” said chief executive Simon Potter. “We entered Covid lockdown in quite a forlorn mood really, having spent so many years building up the case to go drilling, having pulled all the various bits and pieces together, having ordered, bought and paid for the critical items and long-lead items.”
The company had the added difficulty of waiting until the Bahamas’ hurricane season between July and November was over. It wasn’t idle in this time and completed an all-share merger with Columbus Energy and won an auction for an offshore bloc in Uruguay.
The company’s share price has not recovered from the excitement before postponed drilling in March, when it hit over 4p. Bahamas Petroleum is now trading around 2.1p. A discounted fundraising at the end of September dropped the shares further from the rig announcement just a week earlier.
While the restart is on track for the company, circumstances are different for the Perseverance well now. Its net present value (NPV) is less than half of what it was when oil was above $60/bbl, at $2.5bn. The price is unlikely to recover quickly as Opec producers have kept supply high despite demand not recovering in the second half because of continued Covid-19 restrictions.
Another Aim junior getting on with exploration is Reabold Resources (RBD), which spudded the UK onshore West Newton B-1 well in the first week of October. The company is evaluating two prospects, one the more-certain Kirkham Abbey formation and the other the deeper Cadeby formation. There’s a base case resource estimate for Kirkham of 65m barrels of oil equivalent (boe) and a less certain prospective resource of 79mboe at Cadeby.
Reabold will be hoping for a major share price re-rating once the test drilling is done in 6-10 weeks. It is trading around a quarter down from its 2020 peak of almost 0.8p, although swings like this are common for companies at this stage.
Plandemic
Oil dropping to $40/bbl and staying there for some time - as current Covid-19 spikes and Opec’s commitment to keep supply high indicate - means new projects have to re-evaluated.
The Bahamas Petroleum boss said the field Perseverance-1 was tapping was big enough to warrant continuing the project, even if oil stays low. “This is a company maker,” he said. “The target structure that we're looking to drill is some 80km long, the segment of the structure that we're drilling is 770m barrels.”
Reabold is less exposed to oil because of the gas content of its 56-per-cent owned asset. The split between pure oil explorers and those with gas is best demonstrated by Touchstone Exploration (TXP), one of London’s best performers this year. The company had confirmed a major find in Trinidad and Tobago before Covid-19 really hit, and is up 270 per cent since the start of the year. It dipped during the March crash but recovered within two months.
Bahamas’ moves to diversify during lockdown show an awareness that exploration is a tricky business. Investors diving into the murky world of early-stage oil and gas companies are taking much more of a punt than buying established players, although the majors have shown plenty of ability to destroy value as well.
The dual sets of risks faced by explorers and operators are shown well by two partners in the Orinduik project, offshore Guyana. Tullow Oil (TLW) is the operator and Eco Atlantic Oil and Gas (ECO) has a 15 per cent stake. Tullow had reported promising results from an offshore Guyana wildcat well in August last year, which saw its share price climb almost a third. The Joe and Jethro wells had a much greater impact on junior partner Eco Atlantic, which does not have any producing assets.
The promising drilling news triggered a doubling of Eco Atlantic’s share price over the following month to 175p, before a crash back to 60p when Tullow said there was little commercial value in what it had found. Tullow proved with its guidance cut and removal of the chief executive and exploration boss in December that having risk spread over several assets is not enough to protect shareholder value, of course. It is now trading at less than 10 per cent of its valuation of 12 months ago.
