Forecasting commodity prices can be fraught with danger at the best of times. So in uncertain times like these, there’s no shortage of differing views as to which direction a particular commodity may move. Crude oil is a case in point. While one analyst predicts price increases, another will forecast falls. And a major global event will push the crude oil price one way or the other. From a demand and supply point of view, George Sakellariou, of Investorfirst Securities, is bullish about the crude oil price outlook, predicting a 20 per cent rise within the next year and up to 50 per cent within two years. A year ago, the spot price of West Texas Intermediate was trading at $US71 a barrel. On June 8, 2011, it was about $US100 a barrel. In May 2011, it reached almost $US115. Sakellariou says Chinese oil demand increased by about 1.2 million barrels a day in the 2011 first quarter compared to the same quarter last year. He says India’s oil demand is also expected to grow by 200,000 barrels a day this year.

Oil and gas stocks are part of the energy sector, which, according to Standard & Poor’s, has rewarded investors with an annualised price return of 13.84 per cent in the past 12 months to May 31, 2011 and 6.07 per cent over five years. Energy compares favourably with the S&P/ASX 200, which posted an annualised price return of 6.29 per cent for the past 12 months to May 31, 2011 and a negative 1.2 per cent over five years. The energy sector consists of 242 companies for a market capitalisation of about $140 billion.

Sakellariou has established a list of stocks he expects to reward investors in line with a rising crude oil price. Potential upside from investing in oil companies is some are heavily involved in gas exploration and production, enabling another earnings stream. The downside is the varying degrees of risk and costs associated with mining in what may be a slowing global economy.  

Santos Limited (STO)
Market capitalisation: $12.3 billion
Share price: $13.95


Chart: Share price over the year to 10/06/2011 versus ASX200 (XJO) 

Santos is Australia’s second biggest listed oil and gas company. Recently, the company announced an oil discovery at Finucane South in the Carnarvon Basin, in offshore Western Australia. The company is considering several stgelopment options. It says the Finucane South result is on the high side of pre-drill expectations and is another valuable find following the Zola gas discovery in April, 2011. Sakellariou says Santos has started gas production at its Halyard-1 well, which is likely to meet around 10 per cent of Western Australia’s gas needs from 2012. In 2010, the company produced 49.9 million barrels of oil equivalent, and claims to have the largest Australian exploration portfolio (by area) across 146,800 square kilometres. “We view Santos as a low risk buying opportunity, with upside potential initially in the $16-to-$17 region,” he says.

Oil Search (OSH)
Market capitalisation: $8.8 billion
Share price: $6.81


Chart: Share price over the year to 10/06/2011 versus ASX200 (XJO) 

This Papua New Guinea oil and gas company has extended its footprint into the Middle East with production in Yemen.  The company has oil exploration interests in Iraq and Tunisia. Sakellariou says Oil Search offers a strong balance sheet as captured in its 2010 results released in February 2011. Oil Search reported a 39 per cent increase in NPAT (net profit after tax) to $US185.6 million, reflecting higher oil prices and a solid production report. Revenue was up 13.9 per cent to $US583.6 million. Sakellariou says total production for the 2011 March quarter was 1.79 million barrels of oil equivalent at an average realised oil price of US$108.58 a barrel. He says Oil Search should hold $6.50 support levels, with upside potential to $7.30 and beyond in coming months.

Tap Oil (TAP)
Market capitalisation: $225 million
Share price:  94 cents


Chart: Share price over the year to 10/06/2011 versus ASX200 (XJO) 

Key interests are in Australia and South East Asia. The company has an interest in the oil discovery at the Finucane South-1A well. Early evaluation indicates the discovery could exceed the pre-drill mean estimate of 8 million barrels. Sakellariou says Tap Oil is the smallest of the Zola-1 well participants (10 per cent), but it will benefit if drilling confirms a potential 2 trillion cubic feet of gas. “From a technical perspective, we see Tap Oil as a low risk buy, with support in the 86 cent region,” he says. “There’s initial upside potential to resistance at $1.14, but a break above this level would suggest a price of between $1.50-to-$2 is achievable over the longer term.”

Pryme Energy (PYM)
Market capitalisation: $32.7 million
Share price: 15 cents


Chart: Share price over the year to 10/06/2011 versus ASX200 (XJO) 

A company with operations based in the US state of Louisiana. Sakellariou says sales of 15,164 cubic feet of natural gas and 10,730 barrels of oil condensate were registered in the first quarter of 2011. He says first quarter highlights include production starting at the first horizontal well in the Austin Chalk formation, drill planning at a second Austin Chalk formation and securing funding to drill another well at the Turner Bayou project (one of Pryme’s high value projects). Sakellariou says success at the Turner Bayou project will turn the company into a profitable oil and gas producer.  From a technical perspective, he says today’s share price should hold, with an upside price target of 20 cents within months.

Woodside Petroleum (WPL)
Market capitalisation: $35.7 billion
Share price: $43.55


Chart: Share price over the year to 10/06/2011 versus ASX200 (XJO) 

Regarded by many as a core stock of any portfolio, Woodside operates the North-West-Shelf Project, which produces about 40 per cent of Australia’s oil and gas. It plans to become a global LNG leader by 2015. Sales revenue of $US4.193 billion in 2010 represented a 20 per cent increase on 2009. Company NPAT was up 6.9 per cent to $US1.575 billion. Takeover speculation doesn’t seem to wane, but Sakellariou says this proven performer offers bright long term prospects. “We view Woodside as a low risk buying opportunity, with initial upside potential to $53, and between $65 and $70 within the next two years,” he says.  

Market capitalisation taken at June 7, 2011
Share prices at the close of June 10, 2011

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