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David Kempton: buying oil shares as Mideast turmoil spreads

by David Kempton Mar 08, 2011 at 00:01

While the media frets about the breakup of Libya, and who gets the 2% of the world’s sweet oil, as an old Saudi Arabia hand, I worry about the stability of that kingdom.

Saudi Arabia is connected by a causeway to Bahrain - where protests are ongoing - making it is all too easy for insurrectionists from Bahrain to enter. Undoubtedly Saudi’s King Abdullah would hit hard immediately at any sign of trouble in the kingdom, where such anticipated swift brutal action has calmed Western fears of any supply failure from the world’s biggest oil source.

We can only hope that the authority’s actions can hold peace in the kingdom, but if not, we are in real trouble. Hold your breath that the king’s $36 billion ‘bribe’ (not enough) fed into education, industry, unemployment benefits and a universal 15% pay rise last month will act as a sufficient sop to the educated youth, where 40% of the 20 to 24-year-olds are out of work.

The US, which imports 13 million of its 20 million barrels of oil a day, seems confident that Saudi can turn up the taps to cover the shortfall from Libya, but so far this has not happened. Perhaps they choose not to, or – frightening thought – perhaps they are less than truthful about their reserves, and can’t increase output.

Indeed it is surprising that oil production from the kingdom has been static for the last five years.

However it is encouraging that Opec’s share of world oil production has fallen to 40%, whilst production is increasing fast in Russia, Africa and Latin America, whilst the massive shale gas potential, now exploitable with modern drilling techniques, has transformed the world’s estimated fossil fuel resources.

The last 10-month price increase has raised world spending on all products by over 2%, and if it holds these current levels it would trigger a noticeable global slowdown. This hits the energy intensive emerging nations much harder than the developed world, and coupled with a food spend typically 70% of income, not unsurprisingly leads to riot.

Buying oil companies

From an investment perspective, in the last two weeks I have added to my oil holdings. All of the companies below are listed on London's Alternative Investment Market (AIM).

Chariot Oil and Gas

I bought more shares in Chariot Oil and Gas after they raised their resource asset in offshore Namibia by 700 million barrels (bbls) making their share of the field 10.4 billion bbls. They made a very upbeat statement regarding the interest they are having in plans to partner with an oil major, with several conducting due diligence. There is a view that they might hit 20 billion bbls when the seismic 3D data is fully analysed.

On 7 March they announced a share placing at 250p which is a discount to the market. This raises them £90 million and gives them more leverage in negotiations with the majors in the farming out process. This enhances the value in the long term.

Global Petroleum

In the same region I bought a few shares in Global Petroleum which will own two sizeable blocks to the south west of Chariot, once they have completed the acquisition of Jupiter Petroleum, presenting a very interesting prospect at a £32 million market cap.  Global will have an 85% interest in the 11,730 sq km Namibian acreage, lying adjacent to Arcadia Petroleum, which recently announced 1 billion bbls – a number which is likely to increase with more seismic exploration. This is speculative, but it would be surprising if Global didn’t find similar amounts.  They look very cheap at a market cap of £30 million.

Amerisur

I bought more Amerisur, an oil and gas producer and explorer mostly in Colombia, where I think the potential value is still under-appreciated. Last month the company quadrupled their 2P (proven and probable) reserves at one site to 3.6 million bbls where the lifting cost has been reduced to $10 per bbl. Six further wells are planned in the second quarter targeting 35 mbbls and production of 5,000 bbls per day. The company has received a number of offers for participation in other blocks. They have a lot going on which looks increasingly interesting.

Gulfsands Petroleum

Finally I have gone off piste and back to Arabia. I do like Syria where the youthful, erudite president Assad and his wife, a Syrian Sunni Muslim from Acton (London), seem to move informally at ease amongst their people.  

Foreign banks are encouraged, there is a stock exchange, the US identifies the country as a friendly supportive regime.  However, most interestingly, on 14 February Syria raised $64 million in six-month bills yielding 1% and three-year bonds, yielding 2.7%, bought by nine banks and oversubscribed. This is an enormous act of faith in the economy. And it makes Gulfsands Petroleum wrongly priced for risk.  They are producing in Syria 11,000 bbl per day of exceptionally low cost oil, now piped to port, with all capital expenditure from cashflow. They produce 650 bbl per day in the Gulf of Mexico and also have operations in Tunisia and Iraq.  

Alternative energy - Impax

As a final thought, look at alternative energy, which becomes increasingly relevant. We have no idea whether it will be wind, solar, geothermal or biomass energy that will fuel our electric cars, but Impax Asset Management manages over £2 billion in the renewable energy and environmental sectors, and will cover all the options as they gain preference. Perhaps not a short-term play, but I would not want to be out of that long-term market, which could eventually prove to be the ultimate winner.

David Kempton is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He is on the board of one of Impax Asset Management's offshore funds.

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Comments  (12)

  • alan franklin: 

    Good, well informed article. Thank you. I disagree with one conclusion: Syria is not a country to invest in. It constantly stirs up trouble against Israel via proxies in Lebanon, a country where it also meddles repeatedly to the detriment of the people. My Lebanese friends dislike and distrust Syrian intentions which have contributed greatly to the problems in Lebanon, formerly a prosperous nation now in deep trouble.

    Syria has a repressive, sinister regime which is riding for a fall just like those in other nations led by despots. So I would strongly dispute your picture of a benign leader and would avoid investing there at any price- it is not a bargain.

    07:43 on 08 March 2011

  • Frank Watson: 

    Important point missed. Saudi Crude which is high gravity and sulphur rich does not suit European Refineries which are tuned to refine North African and West African crudes.

    Saudi Crude can only be used in some sort of swap arrangenment with other users US???

    Just providing extra volume on its own does not help.

    10:22 on 08 March 2011

  • sarah b: 

    I have followed some of your tips with great succes thank you.

    Regarding Allan Franklin.s comment could you please state which shares you are referring to?

    11:19 on 08 March 2011

  • Leonard Madgwick: 

    What about Fortune OIL

    19:10 on 08 March 2011

  • Graham Hacker: 

    I would make the same comment as sarah b - I have followed some of Davd's tips with success - Bowleven (oil - over 100% increase in 6 months), GGG (Minerals), Kalahari (Minerals - now subject to takeover). Thank you David, very good thought through advice - excellent investments, and so much better than the so called tipsters that keep emailing me!

    10:33 on 12 March 2011

  • Malcolm Gliksten: 

    As always a good article and recommendations. I buy the Namibian oil story- the Gondwanaland theory. (Brazil/West Africa split apart x100m years ago ?)

    Tower,( carried by Arcadia) seems very undervalued with a lot of upside -plus UNX Energy (TSX) coming on strong south of Chariot on the coast.

    10:56 on 12 March 2011

  • Malcolm Gliksten: 

    Also, forgot to mention, you can buy Global Petroleum for your ISA (as I have)- as its dual listed .

    11:06 on 12 March 2011

  • MikeS: 

    Thank you for your article and recommendations. I also thought that oil would be a good thing to buy into if the situation continued to be unsettled in the Middle East. I took the option of buying ETFX STOXX 600 Oil & Gas Fund £(OILS), last week. However, having already seen a 3% drop in value, I am now wondering if this was sensible and whether I should having been looking at individual E&P companies instead. I should be grateful for any comments.

    11:08 on 12 March 2011

  • max201342: 

    When would be the best time to buy in Chariot Oil and Gas and Global Petroleum. As I have already used my ISA Allowance for this year I am hoping to invest in Global Petroleum if share price has not already gone up.

    18:58 on 14 March 2011

  • Graham Hacker: 

    Re: Max201342

    Like many things in life you pay your money and take your chance, or put another way - it's your judgement call......that's the fun of it.

    However, if anybody has a crystal ball out there, I would be grateful for a look :-)

    19:21 on 14 March 2011

  • max201342: 

    Re: Graham Hacker

    I also bought similar to yours on David tips Bowleven, GGG (Minerals), Kalahari and few others but some of them i bought too early and price went down.

    I know Chariot Oil and Gas are waiting for farm out deal but they big drillings are in 4th quarter.

    I am not sure when we are expecting news on Global Petroleum

    18:50 on 15 March 2011

  • Graham Hacker: 

    Re: max201342

    Re: max201342

    Sorry, I do not follow Global Petroleum

    I am buying for the long term but I will always sell early if the price is good.

    I also believe todays market turmoil is an opportunity and I wish I was braver with my own convictions, although having sold Kalahari last week when they soared to 300p (on takeover speculation, a lucky move given todays price), I did repurchase same again today at 245p in the belief that, despite an understandable sudden lack of confidence in Nuclear, the demand for uranium cannot suddenly stop we have to power existing stations), especially for China, and therefore the price must rebound over the coming months.........fingers crossed.

    I am also unsure why GGG has taken such a hit (down 18% today), and wish I was brave enough to take this as a buying opportunity. Perhaps David Kempton would offer some pearls of wisdom?

    19:43 on 15 March 2011

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