Bombed out oil and gas sector finally has a better day – Tullow and Xcite Energy looking positive

A report today that Statoil is considering a major acquisition seems to have rejuvenated a few names in the oil and gas sector. Tullow oil was up nearly 7% on reports it is looking at reducing its focus on Norway and potentially for the government looking to cut its stake from 67% to 51%.

Xcite Energy was also up 6% at one point and is now 5% dearer at 104p.

The value in several oil companies listed in the UK is clear. Tullow is down over 30% in the last year, Premier Oil, Ophir Energy, Xcite Energy, Gulf Keystone all look very cheap with Brent stuck stubbornly above $100 a barrel and forecast to remain there for 2014 and 2015.

An article in Forbes was very interesting.

The article says, “2013 was a decidedly lackluster year for oil exploration. Worldwide, there were no discoveries as big as 1 billion barrels. And some gifted explorers had dreadful drilling results, with Tullow Energy suffering some 20 dry holes.

Indeed, there were expensive disappointments all around the globe. According to analyst Anish Kapadia of Tudor, Pickering & Holt, of his 25 high-impact “wells to watch” in 2013 only 4 were discoveries.

Having monitored 400 total exploration wells drilled last year, Kapadia’s rough estimate is that the industry discovered 20 billion barrels of conventional oil (and equivalent natural gas) last year, against global consumption of 50 billion barrels worth.

The big discoveries that were made tended to contain more natural gas than anticipated. Gas is simply not as desirable as oil because it’s harder to get to market (especially when in far flung locales), and on an energy equivalency basis it sells at a deep discount to oil.”

Given many smaller AIM oil and gas companies, notably Xcite Energy and Gulf Keystone have large resources or reserves valued at less than $2 a barrel and with the costs of oil exploration estimated at between $25-27 a barrel,given the risk of wild cat drilling, they look rather appealing to oil majors right now. Why waste your money drilling dusters in Greenland, the Gulf of Mexico, and off Africa when you can buy proven assets for a much lower price than drilling yourselves, appraising the fields and getting the field development plans off the ground. Its time for a real re-rating of AIM oil and gas in 2014, after a dreadful 2013. Now we need just one acquisition by a big player to kick off the frenzy!

Contrarian Investor UK

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