Stock pickers rarely do a proper analysis of sectors and stocks within each sector to find the hidden gems, or standout stocks that may provide much-needed diversification in a portfolio. In today’s column we study the middle part of the energy sector (XEJ), focussing solely on companies with a market cap of $100-$500 million.
In looking at the chart below, you can see that the energy sector has mirrored the ASX200 over the past year, highlighting how much the sector is currently correlated with the broader market. If energy is up, the market rallies in tandem, although it has lagged marginally over the past few months.
Chart: XEJ 1 year price chart as at 2/2/2012, source: Yahoo
Dominated by oil and gas, the Energy sector is made up of a range of different groups, including oil, gas, uranium and coal. Market gyrations aside, all four areas have had better years. None more so than uranium stocks, which have had a year to forget after the Japanese nuclear disaster sent investors running for the door. Energy Resources Australia (ERA) haemorraged 87% and Paladin dived 66%.
Despite the fallout from the Japanese disaster earlier this year, some contrarian brokers believe that uranium stocks have been oversold and the future is looking brighter, with demand set to rise over coming years. Others think you’re best off employing your resources elsewhere, particularly in oil stocks.
US analyst Adam Hamilton from Zeal is bullish on both oil and uranium stocks. “Its technicals are looking increasingly bullish…after recently bouncing out of a major correction, oil appears to be embarking on a new bull-market upleg. If one is indeed brewing, speculators and investors alike ought to capitalise on this excellent buying opportunity in oil stocks.”
Certainly some oil & gas stocks have had great gains over the past year, with five of the mid-caps in the table below posting gains of more than 90%. However there are thirty other stocks in the list, and 24 of them posted a share price loss for the year. 20 lost more than 20% and 11 lost more than 40%.
Sector: Energy (mid caps)
1 year return: -15.99%
Top gainers (12 months): Buru Energy (BRU) +176.8%, Neon Energy (NEN) +117.1%, Red Fork (RFE) +111.7%, Maverick (MAD) +100.0%
Biggest losers (12 months): White Energy Corporation (WEC) -86.2%, Deep Yellow (DYL) -67.1%, Dart Energy (DTE) -61.8, Nexus (NXE) -57.5%
Winner – Buru Energy (BRU)
Chart: Share price over the year versus ASX200 (XJO)
Up 52% over the past three months, 87% over the past six months, and 168% over the past year, Buru Energy shareholders certainly enjoyed a stellar 2011. Its oil discovery in the Canning Basin – the first significant discovery in 30 years – was the catalyst for the massive 115% jump after its announcement in October 2011.
Buru’s Managing Director Eric Streitberg was quick to talk up the find: “This is a stunning result and validates Buru’s faith in the prospectivity of the Canning Superbasin,” Streitberg said.
“Although it is too early to say how large the accumulation is due to uncertainties in regard to the depth of the oil-water contact and the exact configuration of the structure, seismic mapping indicates that the overall Ungani feature is large and therefore has the potential to contain significant reserves,” he added.
Two months later in December 2011 Streitberg had another opportunity to crow about the company’s prospects when Japan’s Mitsubishi Corp announced it was going to fund Buru’s gas exploration program in 2012 to the tune of $40 million. Mitsubishi is entitled to 50% of the find in the deal.
Streitberg said the Mitsubishi deal gave Buru “the financial strength and long-term partnership that we need to unlock the vast potential of our shared acreage”.
“While we have not yet finalised the work program for next year, 2012 is shaping up to be just as exciting as 2011, and we look forward to continuing to work with Mitsubishi in what is proving to be the most prospective onshore basin in Australia,” he said. And the stock continued to climb, hitting an all-time high on the news. Sure, the stock fell away sharply as the hype died down, however it has climbed back to those toppy record highs in recent weeks.
Streitberg certainly knows how to talk to the market, having previously established and run a number of listed Australian oil and gas companies. He is a former director of New Standard Energy, which owns 10% of Buru Energy. What’s more, Streitberg was also a director of Adelphi Energy and Managing Director of Arc Energy, which in turn owned a portion of Buru Energy. Arc bought Adelphi, then AWE bought Arc, picking up a 13.3% stake in Buru, which it then offloaded last year.
Confused? Well, in short, it seems that Streitberg does a lot of manouevering in the oil and gas sector, making use of his ties in various company board positions. Buru and New Standard shareholders would point to the share price performance of each company over the past two years as proof that shareholders do quite well from his involvement – New Standard is up 244% and Buru is up 453% over a two year period. He has even managed to land the position of Chairman of the Marine Parks and Reserves Authority of Western Australia. An oil baron running marine parks?
While it’s hard to knock a stock that has more than doubled in just five months and the stock may have some way to run, investors need to remind themselves that many a “hot stock” has run hard only to come crashing back to earth. You only have to look at another stock in the table below, Matrix Composites & Engineering, or the biggest loser for the year White Energy Corporation (down 88% in 2011, profiled below). Matrix was less than $2 two years ago and soared to hit almost $10 in March 2011. It is now wallowing at $3.34, having halved in the past six months.
Loser – White Energy Corporation (WEC)
Chart: Share price over the year versus ASX200 (XJO)
White Energy Corporation’s shares have been in freefall since April 2011, with the clean coal company taking out the ignominous title of worst performing stock in the ASX200 for 2011. It ended the year down 88%. The stock had lost half its value by the end of October, however the worst was yet to come in early November when the stock dumped 55% in a single day on news that its Indonesian joint venture partner was backing out.
PT Bayan, White Energy’s partner in Indonesia, is now going to sell its coal directly into the market rather than selling it to the White Energy JV for upgrading. This is due to the spike in the coal price, which means that PT Bayan can make $18 million more going direct to market. While this is bad news for White Energy, worse still is that it raises the issue as to whether coal upgrading – White Energy’s core business – remains economic in Indonesia.
Previously bullish brokers quickly turned bearish on the news, with a cloud now hanging over the future for this clean coal company. Up until November Citi had a Buy with a price target of $4.30 on White Energy. Following the news it not only downgraded the stock to Neutral, it removed its price target altogether. Bell Potter changed its call from Buy to Speculative Buy, and slashed its price target from $3.50 to $1.40. Bell Potter notes that it has changed its rating to Speculative Buy from Buy. “We believe that the technology works, but the commercial application of the technology is yet to be proven.”
Citi can’t see a way out for the company in the near future. “Without a steady supply of cheap coal, it will be either hard or expensive to prove that it can produce 1Mtpa as designed (at the plant),” it says in its November report. “The remote location of Tabang makes WEC almost entirely reliant on Bayan for coal supply.” And Bayan is out.
Despite all the bad news, the whiff of a takeover or positive turn of events is in the air. In early January the stock spiked 30% in a single day, earning the company a speeding ticket from the ASX (although the stock has since lost much of that one-day gain). As expected, White Energy said it was unaware of any information that would explain the share price spike.
Stock to Watch – Tap Oil (TAP)
Chart: Share price over the year versus ASX200 (XJO)
When we profiled Tap Oil in October last year, the company had had a difficult run. Despite all the hype, the oil & gas explorer simply hadn’t been able to deliver. Over the past five years Tap has spent hundreds of millions of dollars in an attempt to increase reserves – but came up empty. This has left investors frustrated, with the company’s share price sagging while other companies have soared.
However 2012 has brought about a change in fortunes for the oil minnow, with the stock up 32.5% over the past month on the back of news that it had sold its Finucane oil field interest to Santos for $21.7 million.
In 2011 Tap had two back-to-back discoveries – the massive Zola gas find in the Carnarvon basin (near Gorgon) where it has a 10% stake, and the more modest find at the Finucane South oil field. With Finucane offloaded to Santos for a cool $22 million, 2012 could be the year that Tap strikes oil. Or gas, for that matter, with its stake in Zola potentially a game changer for Tap. The company is also undertaking further gas exploration off the coast of WA as well as oil stgelopment and exploration in Ghana and Thailand.
Macquarie recently reiterated its buy recommendation and increased its price target to $1.60 following the independent confirmation of the size of the Zola gas discovery, in which TAP has a 10% stake.
Meanwhile George Sakellariou of Investorfirst Securities also has a buy on TAP. Sakellariou has been keen on Tap for some time, seeing it as a low risk buy. “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,” he says.
Patersons is a third broker with not only a buy, but also a healthy price target of $1.45 on the oil explorer. In Patersons Oil and Gas Review in May last year, Patersons said that it liked TAP on the basis that it is a growth stock that is leveraged to funded exploration programs, and is backed by cash and producing assets. “The key challenge for driving success at any oil and gas producer is the ability to provide growth, typically achieved via the early stage entry of prospective acreage, work-up and farmout for a low risk carry through potentially company changing exploration,” it says. “In the previous oil and gas review we highlighted TAP as a key BUY, given its improved portfolio of opportunities and were rewarded with the Zola gas discovery.”
Patersons mentions that TAP is underpinned by $63m in cash, two producing assets plus a lucrative 3rd party gas sales agreement. What’s more, it is leveraged to the ongoing appraisal of the Zola-1 gas discovery plus a maturing and exciting growth portfolio across the Carnarvon Basin, Thailand and Ghana.
“TAP remains one of our key small cap stocks, continuing its successful run in 2011. Recent highlights include the Zola gas discovery, the re-sale of a high value stake in WA-351, completion of 3D across the deepwater of its Ghana exploration acreage and progression of prospects for drilling in WA-351,” it says.
Recent discoveries mean that Tap is well positioned to drag itself out of the slump it has been in, allowing the company to put the last five years behind it. Tap Oil has promised much in the past but hasn’t delivered, due to a mix of poor choices and bad luck. And luck certainly has its part to play in this business where huge investments are made into potential oil and gas fields before knowing whether there’s anything to find. New management, a change in fortune and a bullish outlook for oil all bode well for Tap in 2012. Whether it can capitalise on this opportunity or whether it will drop the ball remains to be seen.
Industry Group – Energy*
|Company||Code||Last price||Market cap||52-wk high||52-wk low||1 yr change||Div yield||EPS||P/E|
|NZ Oil & Gas||NZO||$0.57||222,418,349||0.735||0.475||-15.9%||2.8||-0.15||-3.83|
|Samson Oil & Gas||SSN||$0.11||183,889,652||0.23||0.082||-20.8%||0||0.03||4.01|
*Only stocks with a market cap of more than $100,000,000-500,000,000 have been included, there are other small-, large- and micro-caps in the industry group.
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