Oil under more pressure

Brent Crude is down yet another 3% to just shy of $46 a barrel as the selling pressure on futures appears relentless. A new six year low. Yesterday Goldman sachs forecast average 2015 prices of $50 a barrel from $83.75 a barrel with $42 in the next couple of quarters adding to the bearish tone. US light crude is down a similar amount to $44.63.

The United Arab Emirates’ oil minister, Suhail bin Mohammed al-Mazroui, said today that OPEC’s November decision not to cut output had been the right one. He also said U.S. shale oil was an important part of global oil supplies and that the market would stabilise at a level at which conventional producers could sell profitably, “whether $60 or $70 or $80”.

The sharp fall in the oil price is already starting to have implications on M&A activity. The latest deal to stall was the announcement today that Sound Oil had withdrawn its intended offer for troubled North Sea focused Antrim Energy. Yesterday Afren announced it had written off all proven and probable reserves on the Barda Rash licence in Kurdistan whilst reducing contingent resources from  1.2 billion barrels to just 250 million barrels. The shares crashed down another 30% to 27p and now everyone is wondering whether Seplat will go ahead with its intentions to buy the company before the formal January 19th bid deadline. The deal between Salamander Energy and Ophir Energy is another combination that has a danger of falling through with more than 2/3 of Salamander’s shareholders still to vote for the acquisition. The economies of a sub $50 a barrel environment is making those with deeper pockets think twice before committing precious cash reserves to new acquisitions and many managements are wondering whether assets could be a lot cheaper in a few months time.

Updates from Cairn Energy, Premier Oil and Tullow Oil will be eagerly awaited this week to see just how far these companies are going to curtail exploration and hoard precious cash. The impact on the oil services sector will be severe this year with rig builder Lamprell issuing a profits warning yesterday together with a 15% fall in the share price – back to the dark days of multiple profit warnings of 2012 which resulted in an emergency fund raising. For Petrofac, Amec and Wood Group things don’t look any rosier as oil companies aim to extract savings and intense competition for new projects ensures that prices and hence margins will be at rock bottom levels.

I’m holding fire myself buying into oil stocks but if Brent does slide towards $40 a barrel then plenty opportunities will present themselves. Many companies are looking might cheap and Ithaca Energy looks particularly good with 50% hedged production until mid 2016 and the Greater Stella development coming on stream in Q3 doubling production.

Contrarian Investor UK

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