Business | Markets
Oily solutions amid seismic shifts
Something must be changing: Afghan poppy growers are dumping opium to grow wheat.
- By Sean Kelleher, Special to Gulf News
- Published: 00:11 May 25, 2008
Dubai: Something must be changing: Afghan poppy growers are dumping opium to grow wheat.
Markets are now gripped by a new phrase: "Agriflation" (rising food prices), and all around, clear evidence of seismic changes are afoot as investors adapt to markets dominated by rising commodity prices and indices. Of all the commodities, the shine this week has been in the black stuff - oil.
Where to now, oil price? Over $200 a barrel has been mentioned by the class of "$100-a-barrel", buoyed by their earlier success. "If I had to average out the oil researchers", says Stan Lock at Brewin Dolphin in London, "I would guess that the market is confident of prices rising to $200 a barrel. Although such a result might be driven in the short term by speculators, it's also fair to say that I don't see too many people calling the price down below $90 a barrel in the short term". This would be a fairly significant range for oil investors as most energy funds are currently pricing their oil between $75 and $85 a barrel, according to Laura Lau at Sentry Capital.
In this environment oil bulls will rage. Eric Sprott of Sprott Asset Management has given his name and 10 per cent of the monies towards an energy fund driven by what he calls the "oil peak" story: "we are believers for a number of years (that) we are in the peak oil scenario where the prices will rise essentially forever because the world needs more oil than it can possibly produce and, in fact, production will go lower".
Short-term attraction
Not that Lock cares much about long-term macro-economics. He has been pushing the short-term attractiveness of oil explorers for about six months in and around the Gulf News presses. The prices over six months have done exceptionally well, so what's the probability of profit moving forward, I asked? "I wished you had invested over the last six months, when I told you the price would move to 130", starts the lecture, "there is probably still some upside".
"However, I would remain concentrated on the second liners - not the majors; forget Shell and BP and the other big boys. My focus would be on the explorers who have actually already found oil," says Lock.
You always need a disclaimer on such statements so, now hear this: if the oil price wobbles downward it would be reasonable to expect the majors to wobble less, or not at all. If the oil price drives forward the second-liners will enjoy a bigger gap between their costs and revenue. Huge further potential.
So which stocks does Lock favour? The response suggests both holding and buying more of four stocks.
Choice No 1: BowLeven (price on November 22, 2007 - 270p; on May 22, 2008 - 420p). This company focuses its attention around Cameroon and Gabon. "Africa is getting a great deal of attention in energy markets given the on-going political instability of the Middle East," says Lock.
With such a large price movement already accounted for, new investors might get nervous. However, for those who buy on the back of the world's continued need for oil, BowLeven are committed to both organic growth and acquisitions through selected purchases.
Choice No 2: Afren PLC (price on November 22, 2007 - 163p; on May 22, 2008 - 173p). This is another company with a West African focus. It was founded in 2004 by the Nigerian former Secretary General and President of the Organisation of Petro-leum Exporting Countries (Opec), Rilwanu Lukman. You have to think he had some mates in the business. They are focused in seven countries around Nigeria and Ghana, and for the quiz-freaks among you, look up Africa's smallest country: Sao Tome where they are looking for the "big cat" strike.
Choice No 3: Oilexco (price on November 22, 2007 - 680p; on May 22, 2008 - 850p). Another Lock choice already showing considerable gains but he continues to like it because it is in the North Sea and "does not have a lot of hedges".
Choice No 4: Regal Petro-leum: (price on November 22, 2007 - 163p; on May 22, 2008 - 248p). This is a company with a chequered recent history. A story within a story. Currently under the scrutiny of the AIM disciplinary committee and FSA scrutiny following the alleged overhyping of oilfield benefits in Greece; an 18 month court battle over an oilfield in the Ukraine; and a clash of egos between the founder, Romanian Frank Timis ("we don't need Shell"); and CEO Neil Ritson ("we should JV with Shell"); the company is "under new management", and Lock doesn't care as long as the company is well managed and has access to oil and exploration in Eastern Europe. "It's still a buy," says Lock. But for how long, we don't know, the oil price movements will let us know.
- The writer is chairman of Mondial Financial Partners.
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