Oil and Gas Juniors Surging with 52 Week Highs

Both the 52 Week Rolling High and Low lists are favorite fishing spots for investors looking to add to their portfolios or watchlists.  One day on either list can be a relatively meaningless indicator of nothing more than a temporary overnight affair, lasting only a few days or even a few hours.  However, patient investors can use simple price movement charts to detect downward or upward trends in share price that have momentum to remain in place for a period of time.  The shares of interest are those that make repeated appearances on these lists, continuing with new highs and new lows.

A visit to the 52 Week Rolling High list for 27 March 2012 revealed something interesting.  Twenty nine shares reached new 52 Week Highs on that day and seven of them were junior oil and gas companies.  That represents about 25% of the total and six of the seven could be classified as penny stocks.  

Some may claim this should be no surprise as concerns about the disruption in the global supply of oil from the situation in Iran are driving up the price of oil.  In theory rising prices for a barrel of oil should push the share price of oil and gas producers and explorers higher.  Fair enough.  Then let us look at how Australia’s two premier oil and gas companies – Woodside Petroleum (WPL) and Santos Ltd (STO) – have fared over the last 52 weeks, compared to the ASX Energy Index, the XEJ.  Here is the chart:

Although the index and both companies began an upward trend in January of this year, they have yet to make new 52 week Highs.  In fact, the 52 Week High for both STO and WPL was reached almost one year ago.  As we will see in a moment, the picture is dramatically different for the seven shares on the recent 52 Week Rolling High List.  But first, let’s identify the companies:

Buru Energy (BRU)

Note that the share price of all these companies has wavered a bit as the rise in the price of oil has stalled for the moment.  However, every share on the list has seen at least a 28% increase from their low to the current share price, with most above 100%.  Buru has been the best performer.  Here is their one year price movement chart:

If you have never heard of them and you check the standard business summary found on most financial websites you will learn they are involved in oil and gas exploration and production here in Australia.  Headquartered in Perth, they have exploration permits and production licenses within the Canning Basin in the Kimberley region of Western Australia. They are a very new company, with incorporation in 2008.  

That description fails to mention Buru’s shale gas potential in the Canning Basin.  Australia is a late entry into what is called unconventional gas resources but the big players like Conoco and Hess and others are sniffing around any Australian company with shale gas or shale oil assets.  Buru has them in a mine called Valhalla and they will be commencing additional drilling in 2012 to determine the size of the deposits there.  If you have heard of the fraccing (hydraulic fracturing) drilling revolution in the United States, it is coming to Australia in a major way.  On 19 March 2012 the Executive Director of Buru was interviewed on the company’s plans and prospects.  The interview concluded with the statement that major players are approaching Buru with interest in joint ventures.  That is what investors should be watching for.

Cooper Energy Limited (COE)

Cooper is the only one of our prospects actually generating revenue from their oil operations.  They have a lofty P/E of 59.7 but a low P/EG of .97 and a 2 Year Earnings Growth forecast of a healthy 61.5%.  They currently have 12 producing fields in the Cooper Basin in South Australia with 7 additional wells under development.  They also have producing fields in Indonesia and exploratory assets in Tunisia, Poland and Romania.

Cooper also has potential shale gas assets in the Otway Basin in southeast of South Australia on the border with Victoria.  Drilling there is being funded by two other major players in Australian unconventional gas exploration – Beach Energy (BPT) and Somerton Energy (SNE).  Here is a one year price chart for COE:

New Standard Energy (NSE)

New Standard bills themselves as an aggressive oil and gas developer, with its largest interests in Australia’s Canning Basin with a minority interest in projects in the US Texas Gulf Coast Region.  They are actively pursuing shale gas opportunities in Western Australia where the demand and the prices are high enough to make unconventional gas drilling profitable.  As of 2010 they had a small equity interest in Buru Energy but have yet to show comparable drilling results.  You may recall from the BRU price chart, that company’s share price is up almost 600% year over year.  Here is the one year chart for NSE, which shows an almost 400% increase:

Norwest Energy (NWE)

Norwest has oil assets in the UK they feel are underexplored, but right now the important news from this company is the 19 March 2012 announcement they are ready to start “fraccing” in their holdings in the Perth Basin inWestern Australia.  Halliburton Australia is providing the drilling equipment for NWE’s Arrowsmith 2 Well.  Earlier drilling confirmed the presence of shale gas and this new effort, scheduled to begin in June of 2012, will be the first unconventional well drilling in the Basin.  Here is Norwest’s one year price chart:

Oil Basins Ltd (OBL)

Oil Basins Limited is principally an Australia based oil and gas explorer.  It has assets in the Canning Basin, the Carnarvon Basin, and the Gippsland Basin.  Although their primary focus in these areas is oil, they have a partnership with Liquefied Natural Gas Ltd to evaluate and develop an LNG production facility in the Canning Basin.  

In case you didn’t know, the United States Energy Information Agency has estimated the reserves of shale gas found in Australia’s Perth Basin and Canning Basin represents the fifth largest asset reserves in the world.  Here is OBL’s price chart:

MEO Australia Ltd (MEO)

MEO has oil interests but its principal focus is the development of methanol and liquefied natural gas properties.  At the present time they have no shale gas assets.  Although the company outperformed the XEJ over the past year, their 35% increase in share price lags far behind the gains of the other companies with shale gas potential.  Here is their chart:

Sino Gas and Energy Holdings (SEH)

The final company on the list has no oil or gas assets in Australia, although the company is headquartered here.  They are engaged in the exploration and development of gas assets in China.  The company was founded in 2005 and acquired the gas assets in the Ordos Basin in China it now holds from Chevron after that company took over Texaco China.  Substantial work had already been done on these assets, making them “drill ready”, in the words of the company.  They began trading on the ASX in 2009

The Ordos Basin has the second largest gas reserves in China and the gas there is methane based from coal seams (CSG or Coal Seam Gas.)  CSG is also considered an unconventional source of gas.  The company plans to complete 17 appraisal wells in 2012.  China is already the world’s fourth largest natural gas market and has set a target of increasing domestic gas production two-and-a-half times.  Although not Australia based and lacking the glamour and hype associated with shale gas, SEH has performed well year over year, with a share price increase of almost 30%.  Here is their one year price chart:

The common denominator in the best performing junior miners is the presence of unconventional natural gas assets, most notably shale gas.  It is probably no accident that the best performer – Buru Energy – is also the company with the largest potential reserves and the closest to moving some of their assets from the exploration column into the production and revenue generating column.

While Australians to a great degree have focused on the mining boom, some investors have noticed we are well positioned to cash in on the anticipated energy boom when natural gas surpasses oil as the world’s principal energy source, as many experts expect.  Oil is not going away anytime soon and note that the most of the junior miners we highlighted also have oil assets.

Finally, you might find it useful to know while known reserves of oil in the world are dwindling, reserves of recoverable natural gas are rising, largely due to new extraction technologies.  Exxon Mobil – the world’s largest oil and gas explorer and producer – released its reserve replacement ratios (RRR) for both oil and gas as of last year.  The RRR is simply the ratio of a resource extracted to the same unit of resource in a recoverable asset.  For example, if for every barrel of oil extracted the company still had a barrel recoverable, the ratio would be 100%.  Exxon’s ten year average oil RRR was 95%.  For gas, the ten year average was 158%.

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