Riots in Egypt amid a tense Middle East is pushing crude oil prices higher, with Brent recently breaching the psychological $US100 a barrel. Freezing winters in much of the northern hemisphere and a de facto moratorium on drilling in the Gulf of Mexico, despite a lifting of the ban since the BP oil spill in April last year, have pundits and speculators predicting crude oil will spike to $US120 a barrel and beyond this year.

The benchmark West Texas Intermediate, approaching $US90 a barrel on February 9, 2010, is $US12 a barrel higher than a year ago. Equities analyst Michael Feller, of Lincoln Indicators, has established an oil portfolio that he believes should reward investors in line with higher crude prices.

Investors can consider Woodside Petroleum, as the share price is lagging the rise in crude oil prices. Although exposed to gas more than oil, Feller says delays and cost over-runs at its Browse and Pluto projects have inhibited performance and consequently its share price. Yet while calendar 2010 production fell 10 per cent on 2009 to 72.7 million barrels of oil equivalent, revenue rose 20 per cent to $US4.193 billion in response to higher commodity prices and a positive conclusion to certain liquefied gas negotiations. The company attributed the production fall primarily to selling its interest in Victoria’s Otway Gas project and a natural oil field decline. Feller believes Woodside is trading at a significant discount to its analyst consensus target price of $47.50. “If oil keeps rising, gas becomes a more attractive substitute, belying any concerns of a gas glut,” he says.

Another company to lift 2010 revenue on the back of declining production is Santos. Production of 49.9 million barrels of oil equivalent in 2010 represented an 8 per cent fall on 2009, but revenue rose 2 per cent to $A2.228 billion. The company says the average realised oil price in 2010 was $A87.35, up 11 per cent on 2009. Feller says Santos is trading at a higher than average price/earnings multiple, but its earnings per share are reportedly forecast to grow 30 per cent in calendar year 2010 and between 8 and 9 per cent in 2011. Furthermore, he says, the company is about 11 per cent undervalued based on the median price target of 14 brokers who cover the stock. “While floods, delays and the national skills shortage have hampered stgelopment projects, from a big picture perspective, this asset-maker remains undervalued by the market,” he says. “Santos is in strong financial health, offers attractive assets and a number of projects aren’t priced in.”

Feller says Horizon Oil offers potential growth after the Beibu Gulf stgelopment plan in the South China Sea gained approval. Projects in Papua New Guinea are also expected to increase the production profile of what is otherwise currently a New Zealand-focused producer. “Horizon is undervalued and trades at a lower forward price/earnings ratio than its peers,” Feller says. “Furthermore, its earnings per share are expected to grow 11.2 per cent to June 2011 and 21.9 per cent the following year.”

Supply interruptions in response to a myriad of factors, such as Middle East tension, can result in a rapidly soaring crude oil price. However, the price can fall just as quickly if demand eases in response to slowing economies, or a possible viable energy alternative. Investing in ASX-listed oil companies requires more than a fleeting interest in the oil price. Explorers generally carry more risk   than producers in the absence of earnings. If an oil discovery fails to materialise, or live up to expectations, the share price will almost certainly be punished. As Feller says: “It’s a sector not without its risks – investors can get burned, not just on commodity price movements, but also on the inherently unpredictable nature of petroleum geology. However, some stocks stand out, where reward could more than justify the risk. Ranging from the very big to the very small, the stocks I have put forward for consideration stand to benefit if our prediction of oil beyond $US100 (a barrel) bears fruit.”

Feller says Nido Petroleum may be the riskiest stock on his list, but potentially offers the most upside in percentage terms. The company focuses on offshore oil drilling in the Philippines. Although recently suffering some poor results at its Tindalo well, its projects elsewhere are attracting the attention of some very big names. Shell recently farmed-in to Nido’s (SC54B) permit, where a new semi-submersible rig is due to be mobilised at the Gindara-1 exploration well. Nido, with a market capitalisation of about $134 million, posted a half-year net profit of $A20.6 million for the six months to June 2010. Revenue from crude oil sales increased 32 per cent on the 2009 first half to $A34.1 million.

Feller has included two oil services companies. “They say the man who sells the shovels makes the money in a boom and this logic applies to oil services companies, chief of which is Mermaid Marine Australia,” Feller says. Mermaid operates vessel, supply base and slipway services to the buoyant offshore oil and gas industry. Trading at a lower forward price/earnings multiple than many other oil companies, Mermaid also delivers a more reliable income stream. “This has been more than reflected in trading to date, with Mermaid returning investors an annualised 50 per cent per annum, including dividends, over the past five years,” Feller says. “We expect further growth on increasing demand for energy.”

Matrix Composites & Engineering provides engineering products, subsea buoyancy solutions and pipeline insulation for the offshore oil and gas industries. It only listed in late 2009, so it doesn’t have the earnings history of Mermaid Marine, but its share price growth has been spectacular, with the stock closing at $7.85 on February 9, 2010, after debuting at $2. Feller expects earnings growth to continue. The company posted an $A18.16 million net profit after tax for the 2010 financial year, representing an increase of almost 140 per cent on its prospectus forecast of $7.6 million. The company had an order book of about $170 million at the end of October 2010.


 Woodside Petroleum






 Horizon Oil


 38 cents

 Mermaid Marine Australia



 Matrix Composites & Engineering



 Nido Petroleum


 10 cents

 Price current to market close, 15 February 2011