Demand for energy remains strong, and, according to Standard & Poor’s, the sector has also been rewarding. Origin Energy and ConocoPhillips recently signed a $90 billion deal to supply China’s Sinopec Corporation with up to 4.3 million tonnes of LNG a year for the next 20 years. Woodside Petroleum is also optimistic, forecasting a robust LNG market for the next 15 years.
Cleo Nanni, of Novus Capital, says Asia’s population growth, urbanisation and rising living standards will continue to lift demand for gas. Nanni says Woodside Petroleum and Origin Energy have a lot to offer and represent good buying at these levels. His list contains three other junior oil and gas plays for those with a heightened appetite for risk and reward.
The oil and gas category, part of the broader energy sector, consists of more than 60 companies for a market capitalisation of $125 billion. According to Standard & Poor’s, the S&P/ASX 200 Energy Index has rewarded investors with a 8.72 per cent annualised price return for the 12 months to June 3, 2011. Over five years, the annualised price return is 37.12 per cent. In contrast, the S&P/ASX 200 booked an annualised price return of 3.00 per cent for the year to June 3, 2011 and a negative 7.71 per cent over five years. Nanni sees the energy sector continuing to post positive returns. “In particular, gas is a solid investment and listed companies should be part of any long term portfolio,” he says.
Woodside Petroleum (WPL)
Market Capitalisation: $36 billion
Share price: $45.70
The company’s LNG projects paint a bright outlook for Australia’s biggest listed oil and gas producer. Woodside estimates the Pluto and Xena gas fields, located about 190 kilometres north-west of Karratha in Western Australia, contain about 4.6 trillion cubic feet of dry gas reserves. Woodside says the Pluto LNG Project is underpinned by 15-year sales contracts for up to 3.75 million tonnes a year with foundation customers and partners, Kansai Electric and Tokyo Gas, each holding a 5 per cent equity interest in the foundation project. Nanni says global LNG production of 210 million tonnes in 2010 is expected to grow strongly. “Woodside’s goal is to be a global leader in LNG production by 2015, when world demand is expected to exceed supply,” Nanni says. “This is our premier gas play.”
Origin Energy (ORG)
Market Capitalisation: $17 billion
Share price: $16.15
This integrated energy company is involved in oil and gas exploration, energy retailing and power generation. It recently acquired New South Wales’ power assets for about $3.25 billion. Nanni says this well managed company also offers a mix of alternative energy reserves and projects, including large coal seam gas reserves and LNG stgelopment. “Origin management knew investing in alternative energy would expose it to strong long term growth,” Nanni says. For the first six months of the 2011 financial year, Origin booked underlying EBITDA (earnings before interest, tax, depreciation and amortisation) of $818 million, an increase of 16 per cent. However, underlying profit fell 14 per cent to $304 million. “Origin has solid financials and paid a solid fully-franked interim dividend of 25 cents.” Nanni says.
Red Fork Energy (RFE)
Market Capitalisation: $73 million
Share price: 39 cents
Red Fork Energy is based in the US state of Oklahoma with land holdings in excess of 130,000 acres. Nanni says Red Fork creates value by securing acreage in lower risk, proven oil and gas provinces. Red Fork is cost conscious when it comes to discovery and stgelopment. “The company is finding value in large resource type plays and overlooked conventional plays by utilising its significant operational experience,” Nanni says. “The company’s projects are all 100 per cent owned and operated.” Gross revenue from oil and gas sales was about $A1 million in the 2011 March quarter, but production was adversely affected by bad weather in January and February. “Red Fork is a speculative stock, but it’s in the right sector to potentially reward investors,” Nanni says.
AusTex Oil (AOK)
Market Capitalisation: $21 million
Share price: 8.5 cents
A relatively new comer, listing on the Australian Securities Exchange in January 2008. It’s also another highly speculative stock, focusing on reworking and stgelopment of oil and gas leases in the US. Since listing, Nanni says AusTex has increased its lease interests from 1000 acres to more than 70,000 and is now cash flow positive. Gross revenue for the 2011 March quarter was about $A1 million. “It has an established business model with preferred suppliers and contractors,” Nanni says.
Challenger Energy (CEL)
Market Capitalisation: 31 million
Share price: 14.5 cents
This oil and gas company has projects in South Africa and the US. Nanni says the company recently announced an excellent result for its Triple Crown Prospect in Texas. This prospect continues to exceed the board’s expectations. The original gas in place assessment is 9 trillion cubic feet across existing land holdings of 45,000 acres. Nanni expects this stock may surprise on the upside.
*Share price close at June 3, 2011
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