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A potential discovery and cash flow to fund exploration forms the nucleus of an oil portfolio established by client adviser Grant Dwyer, of Patersons Securities. Dwyer says he prefers oil producers because the cash flow enables companies to explore, or stgelop wells without relying on capital raisings, which dilute existing holdings. Dwyer’s portfolio isn’t a recommendation to buy, but a selection of oil stocks for investors choosing to take on considerably more risk for potentially higher returns in a volatile sector ruled by demand and supply.  

Dwyer says Cooper Energy has built up cash reserves of $95 million since listing in 2002. The company generated revenue of $11.4 million in the last quarter from oil production in South Australia’s western Cooper Basin. “The company is now at a stage where it can spend part of its exploration budget on higher risk, higher returning targets, which, if successful, would transform the company,” Dwyer says.  He says Cooper Energy has a 35 per cent interest in a Tunisian well targeting 46 million barrels of recoverable oil. Cooper Energy is also exploring for gas in Indonesia, with a recoverable gas estimate of 30 billion cubic feet.  

Nido Petroleum offers strong cash flow, and plans to produce from the Tindalo field it discovered in the Philippines last year. Dwyer says real value lies in 30,000 square kilometres of exploration licences located in the Philippines’ north-west Palawan Basin, of which Nido has a 60 per cent stake. He says Nido has identified more than 100 prospects on these permits, with the top 20 targets ranging in size from 150 million barrels of oil to 1.2 billion barrels. “Some of the larger targets are in deep water and costly to drill, but Nido is working to farm these out to a major player to help fund drilling costs,” Dwyer says. “If one of the largest 20 prospects was to flow oil at a commercial rate, then Nido’s share price would respond favourably.”

Dwyer says oil companies with stgelopment projects in the pipeline, or big exploration prospects appeal because it increases the chances of success. Any discovery will be quickly reflected in a rising share price. Dwyer’s portfolio is built for capital growth so buying and selling disciplines are crucial to success. He says investors can potentially make a fast return buying a stock well in advance of company drilling. Speculators tend to pile into the stock just prior to drilling, sending the price up and enabling others to sell into strength for a quick profit. “When the volume picks up, you know the speculators are starting to get set to buy,” Dwyer says. The other option is for investors to sit tight and take their chances that drilling will be a spectacular success. “This is where investors need to stick to their objectives,” Dwyer says. He says investors need to decide before buying whether they are in for a potentially quick return, or possibly long-term capital gains. Indecisive investors run the risk of going down with a company share price if they hold a stock too long in the hope of a find. Keep a close eye on company activities, data and news flow. Selling is a discipline that can be difficult to do when a share price is rising. “On the other hand, news of a 400 million barrel oil field can be a company maker,” he says.

Dwyer says Horizon Oil is forecast to report a net profit after tax of $47 million in 2010, rising to $104.1 million in the 2012 financial year. The company produces oil from the Maari field in New Zealand, and, in conjunction with its partners, is working on bringing three oil fields in China’s Beibu Gulf into production. Dwyer says the Maari cash flows have dramatically improved its financial position, and several stgelopments are set to provide future growth. Horizon is also targeting condensate (light oil) production from the Stanley project in Papua New Guinea in 2011.   

Carnarvon Petroleum produces oil from unconventional volcanic reservoirs in Thailand. Drilling costs are low at $1.5 million a well. “The company’s been focusing on drilling exploration wells rather than stgelopment wells in the past couple of quarters,” Dwyer says. “Consequently production was lower, but new discoveries were made, which can be brought into production in the future.”

Dwyer says oil stocks appeal as the crude oil price is likely to rise on any signs of an improving global economy. He expects crude oil to trade between US$70 and US$80 a barrel in the immediate future before climbing towards $US100 on any hint of improving economic news in the United States. Demand for oil exceeds supply, painting a bright outlook for the crude oil price in the absence of any viable energy alternative, or a repeat of the global financial crisis. “We are not finding as much oil as we are using,” Dwyer says. “It’s a finite resource and we have used a lot of the cheap oil. The price will rise as it becomes harder to find.” However, Dwyer says crude oil priced between US$70 and US$80 a barrel is very profitable for companies to produce. “If a company has found oil and stgeloped a field, the cash production cost can be as low as US$5-to-US$10 a barrel in some onshore fields close to infrastructure.”     

Dwyer says Salinas Energy generates small cash flow from producing heavy oil in the San Ardo Oil Field in the US state of California. The acquisition of Neon Energy, approved at a shareholders meeting in October, brings new management, and a highly prospective exploration block in offshore Vietnam. “The block covering 8649 square kilometres contains several prospects, with two of the largest estimated at more than 600 million barrels of oil,” Dwyer says.     

It appears no portfolio would be complete without Woodside Petroleum, Australia’s biggest listed oil and gas producer. It operates Australia’s largest resource project on the north-west shelf, and is stgeloping the Pluto LNG project, which, Dwyer says, will lift company revenues when it comes on stream in 2010. Dwyer says Woodside has an enviable earnings track record, is well managed and offers exposure to a higher oil price.  Dwyer says production for third quarter 2009 was 20.6 million barrels of oil equivalent, up 6 per cent on the previous quarter, mostly due to the setup of Corallina 2 and an improving performance at Vincent and Enfield.

Grant Dwyer, Patersons Securities, Oil Stock Portfolio

Company

 ASX Code

 Share Price Close

27 Nov 2009

Cooper Energy

COE

50 cents
Nido Petroleum 

NDO

 13.5 cents

Horizon Oil      

 HZN

32.5 cents

Carnarvon Petroleum

 CVN

50 cents

Salinas Energy

SAE

 15 cents

Woodside Petroleum

 WPL

$49.49

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.

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