Panmure Gordon’s oil & gas analyst Ashley Kelty reveals the smaller oil companies he likes right now, and which is his favourite oil major - BP or Shell? He also tells interactive investor’s Lee Wild who he thinks is pulling the strings on the international oil markets currently, and what he thinks oil prices will do over the next 12 months.
Lee Wild, head of equity strategy at interactive investor: Hello. With me today I have Ashley Kelty, director and oil & gas research analyst at Panmure Gordon. Hi Ashley.
Ashley Kelty, director and oil & gas research analyst at Panmure Gordon: Hi, how are you?
Lee Wild: Very well. It’s really interesting to understand who is actually pulling the strings on international oil markets. So, obviously there are lots of actors involved - the Saudis, the big swing producer for decades now, the US, OPEC, lots of others. Who are, or who is the most important player at this time on the international oil markets?
Ashley Kelty: I think what we have seen in recent months is how the commodities markets are driven by sentiment rather than fundamentals and that’s certainly been, I think, clarified in recent months.
The US I think last year would have been a bigger player. However, the muddled foreign policy of President Joe Biden has not helped their position, and I think he arguably looks weak at the moment. I think the panic over fuel prices ahead of the mid-terms and the surprise 180-million-barrel release from strategic reserve, I think certainly weakened the US position markedly.
I think, as a result of that, following the reaction we had from the surprise cut in OPEC, has handed the initiative back to OPEC. However, it is worth realising that OPEC have failed to meet their quotas at any point in the last 18 months and the reductions that they’ve announced means that it’s just more likely that they will actually meet their targets.
And while they are effectively notional, they do drive markets and I think at the moment OPEC has the whip hand in terms of driving prices higher or lower. I don’t think OPEC want prices over $100, I think that is too high. I think they would be concerned about the impact on inflation and choking back the nascent global recovery. I think they would be happier with a sort of $80 to $90 barrel price and that would allow them to meet their domestic needs whilst still having control of the markets.
Lee Wild: And then in terms of oil prices, what’s your view for the next 12 months? Where do you think we’ll be this time next year?
Ashley Kelty: I’m certainly bullish on oil prices, I think we’ll see them above $90 later on this year. They could even reach $100. However, I don’t think we’ll see sustained levels above $100. I think OPEC would increase their supply if it did get above 100. I think they want to choke it back somewhat in order to ensure that the Chinese recovery continues. I don’t think they would want to push too hard for a short-term gain which could slow down the global recovery.
So I think, yes, 80 to $90 would be happy for them, they would balance the books and that would allow them to keep control that they have just now.
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Lee Wild: Those high oil prices might be good for companies, so the drillers, the explorers, the production people. Which companies do you think will deliver the strongest returns over the next year? Do you have a favourite large cap oil play and some small cap idea?
Ashley Kelty: I think there’s been a slight shift in the way people are viewing companies. I think last year when gas prices were so high, I certainly would have been advocating over-weighting portfolios towards companies that are focused more on gas.
However, the recent increase in oil prices and weakness in gas prices, I would be advocating a more balanced approach at the current time. However, the outlook is complicated further by the sort of windfall taxes and increased taxation levels that have been imposed, certainly in the UK and in Europe.
And certainly in the UK the energy profits levy is, it’s not a windfall tax, it’s in place until 2028, and I think that that has certainly hampered the outlook for UK companies, and it will be companies that are able to undertake projects and/or exploration that will be able to take advantage of the investment allowance which will allow them to free a lot of the impact of the energy profit level or levy.
I think we can see that with the likes of Serica Energy (LSE:SQZ). It’s at a position of tailwind which rebounds their portfolio. But it also gave them opportunities to invest. The sort of previous Serica portfolio had little in the way of material projects or exploration, and they weren’t able to really actively invest to affray the EPL [Energy Profits Levy].
However, now with tailwind, they’ve got some sizeable prospects and projects that will allow them to spend some money to grow and mitigate the tax. They’re also more balanced in terms of oil and gas, as oppose to being primarily a gas producer.
I think the terms of the EPL and the negative downside have been highlighted by the likes of Harbour Energy (LSE:HBR) and EnQuest (LSE:ENQ) who have complained bitterly and we have been able to see it in the impact on their financial results with this huge increase in tax paid.
However, I think Harbour have made an interesting move with their sort of push into the Viking Carbon Capture Project alongside BP (LSE:BP.) which looks very interesting. And I think having BP on side will also help massively in terms of getting government support for that as they are two sizeable UK companies that are pushing the project.
Some of the other ones are led by smaller independents and I suspect that the government will be much keener to go for well capitalised, experienced operators for that. So I certainly see the Viking project as being in pole position for receiving government funding.
In terms of other companies that look interesting, I think Kistos Holdings Ordinary Shares (LSE:KIST) looks very good. It has a diverse portfolio in the UK and Netherlands and it has got an high impact west of Shetland well later this year, which will allow them to offset the impact of the Energy Profit Level. And they’re also, they’ve been highly acquisitive, and I would imagine that they should do another deal in the near term, if they can get the terms right.
M&A hasn’t been destroyed by the EPL, as people feared. Saying that with Jersey Oil and Gas (LSE:JOG) managing to get a farm-out recently, that’s a big project for the greater Bucan area and will certainly help to contribute to future energy security for the UK.
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There’s other projects in a similar vein, obviously smaller, such as with the Arcadian Energy. But outside the UK I like Jadestone Energy (LSE:JSE) in Asia. They had a difficult year last year with the closure of one of their fields on the back of a very, very small oil leak, and it’s taken time to get that back onto production. That has now come on stream. Although the shares were, I think, oversold and I think there should be a good recovery in the share price this year.
It’s also worth noting that Jadestone also receives a sizeable premium to Brent [crude oil] for their Australian crude, which is the bulk of their production. And this helps cushion them from any softness in commodity prices that will impact peers.
In terms of Africa, I think Kosmos Energy Ltd (LSE:KOS) looks very interesting. They have got some good portfolio assets in West Africa and they’ve also got the large Tortue LNG project that should come on stream towards the end of this year. And they’ve also got some interesting discoveries and developments in the Gulf of Mexico. They’re certainly partnered alongside perennial favourite Tullow Oil (LSE:TLW), which seems to be going backwards at the moment, but I do think that if you want exposure to West Africa, Kosmos is definitely the player for that.
In terms of the majors, I would prefer BP over Shell (LSE:SHEL), both are sort of well capitalised and have significant projects in the pipeline to allow them to keep generating huge profits and paying a sufficient yield. But in terms of longer-term strategy, I think BP is a bit clearer. Shell doesn’t seem to have quite decided what it wants to be and what direction it is heading in and, as a result, I think I would favour BP over that.
I think an example of the Viking Carbon Capture Project, that I mentioned earlier, shows that they are willing to invest in the UK and in new technology. So certainly they would be my preferred major.
Lee Wild: Great. Ashley Kelty, director and oil & gas research analyst at Panmure Gordon, thanks very much for joining me today.
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