Investing in Oil?

[Serendipity]

Hi All,

This thread was prompted in part by Kohler's article in the Saturday SMH:
http://www.smh.com.au/articles/2004/07/23/1090464862106.html

(It could also possibly be accused of continuing this excellent thread:
http://www.somersoft.com/forums/showthread.php?t=15724)

Key quote from the Kohler article: it seems undeniable that energy will become relatively more valuable over the coming decades. Producers of both oil and its substitutes will win; energy users will lose.

So my question is: for a humble property investor who doesn't know too much about investing in anything except bricks & mortar, but wants to direct at least some of his future investments in line with the above quote, is there a relatively simple way to get involved in "the energy game"?

(where "relatively simple" is anything less daunting than individually analysing all the companies in the world that have anything to do with oil production :))

Thanks,
S

[Aceyducey]

Yes there are Serendipity.

Investing in Australian oil companies is one approach. Investors in companies like Innaminka, Woodside & Stuart have done very well in the last few years.

Seed or IPO investment is another. I'd like very much to recommend that you take a long hard look at the Merlin Petroleum (www.merlinpetroleum.com.au (http://www.merlinpetroleum.com.au/)) prospectus. However I really can't as I'm involved :).

The company is looking to comprehensively explore & hopefully open up a very large new oil field in Northern Australia. Pllus they have excellent territory and a strong drilling program in the inner ring (most prospective areas) of the established Cooper Basin oilfields - so IMHO plenty of upside & the downside is limited.

The company has a world class board as well and is currently conducting a dual listing on the Australian Stock Exchange and AIM in London.

Take a look & draw your own conclusions.

Happy to chat to you about it within the bounds of the prospectus.

I look at it as property development...only 2Km underground.

We (my company Accelerated Farm-ins) intends to put together more deals like Merlin over the next few years. These will allow investors to seed invest in energy & resource companies before they list or get trade sold.

Cheers,

Aceyducey

[Thommo]

As a broad brush statement, I think oilers have a brighter short/med/long term outlook than bricks 'n' mortar, but that is just me talking. By that I mean that 100g spread across a spectrum of Aussie oilers will outperform the same investment in an "average" 3br B/V suburban Syd residential prop. The caveats are that nobody would agree on what the "average" property actually is and that a high income earner can leverage property higher and gain tax advantages which are not available to Joe Six Pack who rings his broker and asks to buy some shares.

The next problem for a property investor turned share investor is the shock of having a daily score card. Yesterday's closing price can be disturbing. "Buy and hold" is a dangerous attitude with shares because shares can loose 100% of their value: property can't. On the other hand a leveraged property investor can, possibly, loose both his investment and his home. Next problem is watching too closely and over-trading. I like to think of the "happy medium" as "weeding the garden".

BHP is our largest oil producer but is so diversified it is not considered an oiler. This is not advice but you could do worse. Santos and Woodside are mid-tier companies who pay dividends and whose price will increase with any sustained oil price increase (or even a continuation of current price). Hardman is going gangbusters with the only downside being soverign risk. Then you might even follow the advice Acey didn't give and try the more speculative end of the market. (I do)

Please accept this post in the spirit it is given: Just my humble thoughts.

THommo

[Serendipity]

Thanks for the replies, gentlemen... I thought I might hear from you two :)

Acey:

Thanks for the link to the Merlin prospectus. Not sure what I can & can't ask but the following questions come to mind: Are some energy IPOs significantly less speculative than others? And, if so, what should a prospectus-reader possessing (hopefully) general intelligence but lacking mining smarts be looking for?

If your relationship with Merlin hamstrings you too much then you might be able to comment with reference to the Strike Oil prospectus (www.strikeoil.com.au) which I discovered in my investigations over the last 24 hours. Maybe the two are nothing like each other but to my untrained eye they both seem to be seeking funds to convert potential oil into the real thing over the coming years.

Thanks to both of you for throwing a few stocks into the ring. I did a little poking around in the Energy section of InvestorWeb and found if I filtered the list by either AUD Turnover or #Trades then nearly all of the mentioned stocks came up. There were a few more that came up that seemed to be both performing well and paying dividends that haven't been mentioned yet but I should probably PM you with any questions about those rather than risk too much discussion about individual stocks.

One last general question I can ask (with all the usual disclaimers) is:

Is investment in "oilers" speculative by its very nature and thus should be limited to a tiny percentage of your investment portfolio? Or are there times when the opportunity cost of having too little of your portfolio in "the energy game" means you should be raising that limit?

Cheers,
S

[Aceyducey]

Hi Serendipity,

A long and involved post, but if you bear with me I hope you learn a great deal about the sector :)

Producing oil & gas companies are not speculative. You can work out the assets they have, the amount they spend on 'R&D' (exploration) and figure out what they are worth. Based on trends in oil & gas prices you can figure out their prospect.

For example, Stuart Petroleum has a market value of about $45M and located oil & gas reserves in the ground with a net value of around $60M at current oil prices...it has an active drilling program funded out of cashflow from wells & a number of good exploration prospects....if 1/3 of their wells in the Cooper Basin have commercial-level reserves (42% is the Cooper average) they stand to grow significantly.
(BTW - yes they are undervalued by the market & IMHO a VERY good buy!)

With an exploration company such as Strike, Moby or Merlin there is a significantly higher risk - they have no assets to begin with, other than the land & contracts they control & their management team (plus the cash they raise).

Essentially they are risking the cash in drilling wells that may be dry.....the level of risk depends on their strategy, the quality of the drilling prospects, the previous work done in the area and the capacity of their management to adjust to changing circumstances.

In this situation you have to look at the quality of the management team/board, the business's strategy and the prospects themselves. IMHO this is the correct order, but everyone has a different view.

Looking at three examples, and note this is my opinion only:

Strike Oil has an assortment of prospects in the Carnarvon Basin in WA and in the Eromanga Basin in QLD (an extension of the Cooper Basin, but less prospective). It's management team is OK, but the board is basically the 'usual suspects' for the junior end of the industry. They don't have any real corporate strategy besides 'drill for oil'. The prospects are fine - not as prospective as the Cooper Basin, but well worth some exploration dollars, their management are OK, but not exceptional & their strategy is non-existent (a reflection on the management). How will they do? Decently I reckon and investors will make some money, but the company will remain a smaller producer as they have no large targets, a small company board and are unlikely to have the funds or will to acquire and explore significant targets.

Moby Oil is drilling an offshore gas target, paying 3x their share of the potential profits (a 3:1 promote). There are some weaknesses in this strategy....firstly offshore is very expensive, secondly gas in Australia is very cheap (AU$1.70 per thousand cubic feet) thirdly this is a very expensive buy-into a well at 3:1. The owner of Moby owns the company that Moby is paying to get a share of the prospect. Basically IMHO, the owner of the other oil company listed Moby so that investors would pay for him to drill his well & he pays very little...This is an excellent strategy for him - but pretty lousy for investors. You'll notice that Moby is trading below it's list price....oh - BTW the owner of both Moby and the other oiler also underwrote his own float - now that's incestuous! However if the well comes in, Moby shareholders should do well....given the other better oil floats to invest in that 'IF' is pretty compelling to me to put my money elsewhere.

Finally Merlin, which I've had a large hand in, has a strategy of drilling highly prospective targets in the Cooper Basin & using cashflow to fund high risk exploration targets in other areas (mainly the NT, a bit of SA as well). The board was put together with the intent of being able to take the company from being a small producer to being a medium-large (for Australia) oil company based on success in the Northern Territory. You'll note that several of the board members have run billion dollar companies in the past (Gas de France's Energy Division, VIC State Super Fund, BHP Japan & North Asia).

The company's Cooper acreage is jointly owned by four other companies who have all reviewed and decided to put money into drilling in those areas - basically five sets of geologists & managements have separately determined that the areas are worth drilling, it's not the views of a single person or company. Based on six wells being drilled this year & a 42% Cooper strike rate, it's reasonable that several are commercial discoveries. There are a number of other prospects in the Cooper area that will be worked up in the future...so this provides ongoing opportunities for further success.

The company's NT assets are lightly explored & considered high risk - there are all the elements there for discovering oil...but this is no guarantee. However even with zero success in these areas the company has a nice floor under it's share price due to the Cooper drilling. If the company does have success in this area it opens up an entirely new Australian oil province & potentially could see the company growing to a value of $1 Billion or beyond.

To give an example, the company currently has 5 targets in one part of the areas mapped out - there may be a hundred other targets, but these have been identified with the limited amount of exploration done so far. These targets have a P50 rating of around 40-60 million barrels. If only one of them comes in at this level, with Merlin having a partner taking a 50% share (so Merlin owns 20-30M barrels), at a net value of AU$12 per barrel of oil in the ground, that's worth AU$240- 360 Million to the company directly.

PLUS this will have proven the province....generally investors value based on 3-4x that amount of oil still being in the ground to find. ergo, a billion dollar company...which the board is well equiped to deal with.

Even a 5 million barrel strike (worth AU$30M net to Merlin at a 50% share) more than doubles the value of the company (which is worth AU$20M on listing) and proves the entire area....


So given the examples above, oil exploration is a risky business & definitely should involve only speculative dollars. However there is significant upside if you choose the right companies - so a few dollars from your portfolio in that direction is justifiable.

Energy production companies should be considered in a less risky light. Given the price you pay for petrol today, I think it is prudent to have an interest in the other side as well.

Woodside, Hardman & Santos are all decent, big, stable Australian oil & gas producers. For smaller, more nimble & higher risk/return look at Cooper Energy, Stuart, Pan Continental & similar companies.

For high risk/high return speculation, look at companies like Merlin, Tomahawk or Strike....just weigh up the relative risk/reward in light of their management, straegy & prospects & form your own conclusions :)

BTW if you have invested $2K in each of the last 5 oil listings your portfolio would be up 28.5% over the last few months (by prices today) - that's a rise from $10,000 invested to $12,850). If you excluded Moby you'd have done even better.

Their prices as of my last glance are:

EPE 14
EXR 35.5
MOG 18
STX 22
THK 39

Oh, the next oil float Entek closed oversubscribed just a few days ago...and opens on the 16th August (BTW they're one of Merlin's partners in the Cooper.

Merlin opened for subscriptions at the start of this month & closes at the end for a listing in early September.

Cheers,

Aceyducey

[Serendipity]

Hi Acey,

I've messaged you privately (since this doesn't seem to be the most wildly popular of threads :)) but just wanted to publicly thank you for the generosity of your reply.

Cheers,
S

[jym]

Hi Guys

Here is a copy of an email I got today promoting the Merlin IPO on this side of the Tasman:

As oil prices hover near record levels, Merlin have advised there has
been strong interest from investors for the IPO. Approximately 1500
prospectuses have been sent out to date.

Jack N. Mulready, the independent geologist who assessed Merlin and
principal of Mulready Consulting Services, said: "Merlin Petroleum has
compiled a portfolio of petroleum assets which are noteworthy because of
the balance between low, medium and high risk plays. The strategy
provides the opportunity for establishing early cashflows."

Merlin Petroleum Ltd is an Australian petroleum exploration company with
rights in the Cooper Basin in South Australia. This region has known oil
and gas fields.

The company is seeking A$15 million and will seek listing on the ASX and
AIM market of the London Stock Exchange.

Recent ASX listing prices of other companies with rights in the Cooper
Basin area have risen to significant premiums on the offer prices.
(Refer table http://moneyonline.co.nz/offers/merlin/)

NZ currency strength also improves the appeal of Australian dollar
assets for New Zealand based investors.

We advise that prospective investors should not delay in submitting
applications.

SUMMARY

Issuer: Merlin Petroleum Limited

Offer: 75,000,000 Shares at AUD $0.20 (20 cents) together with one free
attaching Option for every two Shares subscribed for and allotted.

Closing Date: 31 August 2004

Expected date of admission to ASX and AIM: 10 September 2004

Minimum Application Amount: AUD2,000 (10,000 shares)

Regards

[Peter 14.7]

FYI for those interested. For discussion purposes only. Not a comment either way.

regards, peter 147

Newly formed Perth-based junior oil explorer Merlin Petroleum Limited is ready to get stuck into the South Australian portion of the Cooper Basin, hoping activities there will provide cash flow to fund other riskier – but potentially more rewarding – ventures in the Northern Territory and across the border in South Australia.

Merlin Chairman, Jock McGregor, said the company was predominantly seeking oil in the Cooper Basin but there would be gas in some areas.

"The strategy is to put together farm-in arrangements in the Cooper Basin, a known area where a lot of drilling is taking place because of the old Santos leases that have been relinquished, and there is acreage available", McGregor said.

McGregor said the company was entering the basin with partners on a cost/revenue/share basis. The partners are: Victoria Petroleum subsidiary VP Oil Exploration 1977 Pty Ltd; Impress Ventures subsidiary Springfield Oil and Gas; Roma Petroleum subsidiary Permian Oil Pty Ltd; ASX listed Lion Energy; and Tacnas Pty Ltd.

He said the company was seeking $15 million to fund the program – which is admittedly around three times more than what many junior oil explorers are seeking for their programs.

McGregor said the short term goal was to move very quickly on an aggressive drilling program and hopefully get some results which would lead to cash flow, enabling the exploration of high risk/high reward Northern Territory leases in the longer term.

Merlin was founded by Managing Director John Heugh, who said some of the Cooper Basin blocks were better than others in terms of their proximity to already-producing fields. "The Squadron block in PL115 is a big slice of the country – 245 km² and it contains eight prospects of which we believe three are ready to drill straight away", Heugh said.

"It has a common boundary with the Narcoonowie oil field and also the giant Toolachee gas and oil field. In fact, some of the 3D seismic survey that was acquired over the Toolachee field extends into our boundary. We're looking at a mid-point there of about 30 million barrels of oil – that's potential recoverable reserves – from those eight prospects.

"What makes these prospects a little bit different from many of the other prospects in the Cooper Basin is that a lot of them incorporate some stratigraphic component in addition to more conventional structural culminations. There are two types of traps mapped which incorporate a stratigraphic component: flanking Permian sands about partially denuded palaeohighs and Permian sands onlapping Warburton Basin sediments.

"There's another two blocks on the western side, the Flight and Formation Blocks, and between them they are approximately 600 km², situated in between the Fly Lake, the Brolga and Tirrawarra producing fields. So we're in the right area and we're talking formations with primary target zones that are deeper – somewhere between 2,500 to 3,300 m.

Heugh said the whole of that basin between the Fly Lake and Tirrawarra fields could rightly be charged with hydrocarbons because it is the source, or 'the kitchen', for the oilfields either side. "Wherever we are in that part of the basin, we're in mature source rock", he said. "Everything should be fully charged… we're trying to find structures that have the right timing but also, because we're deeper, we're trying to find structures that have the right sort of porosity."

Heugh said Victoria Petroleum planned to use Jim Dirstein's frequency response based seismic analysis "… whereby you get attenuation of the higher frequencies on reflection coming back from a gas field reservoir."

"Two of the blocks don't have 3D [seismic] but they do have 2D [seismic] coverage", he said. "In both of the Flight and Formation Blocks, they're undergoing reprocessing as we speak. Certainly, after that has been completed, we've got two prospects there that are ready to drill and there should be a third prospect ready to drill in about three to four months time.

"There's also some more seismic acquisition going on in both of those areas. In fact, the farm-in deals call for this for all of the blocks combined, which is about 800 km², and we're looking at a total of six wells plus $2.5 million worth of a mix of existing seismic reprocessing and acquisition of new 3D and 2D seismic.

"We're funding all of that at the 60% level."

Heugh said there were five different joint venture partners involved on the ground in the farmin areas. "We're actually farming in to three permits on those blocks – 115, 104 and 111 – and we'd like to think we're farming in to the better portion of those blocks, particularly in the western blocks which are the Flight and Formation blocks", he said.

"We're in about Year-2 of the permits and, under the program, the joint venture people have already approved five wells, so we'll be about a year in front on what the minimum commitments are.

"We don't have anything specific planned for next year under the existing farmin arrangements but if the results of this year are good, we'll want to follow that up. And if results are bad, we'll have an, surplus in our budget able to be applied to the drilling of other wells."

It's a fairly complex joint venture: a requirement of the agreement is that Permian and Victoria have to vote to complete the wells in Merlin's ground to allow the company to complete its six-well program by July 2005.

"I would say, though, that at least three or four of those wells will be drilled before Christmas this year – that's going to be on average one well every two months or so, which is about right", Heugh said.

"Two are probably going to be drilled back to back in the Squadron Block, so you might see them being completed by August/September. Hopefully, we'll get a winner out of one of those."

Blocks are only 5-15 km from the nearest gas pipeline. Heugh said with Santos fairly hungry for gas, securing a deal shouldn't be difficult.

"As far as oil is concerned, most of the oil that is being produced in the Cooper Basin at the moment is being trucked to Moomba and then sent down the pipeline to South Australia, so we would being doing the same thing", he said.

"So if it is oil, we could get into production more or less instantly and if it's gas, it depends upon the economics of the individual field and the proximity of other potential fields close by."

McGregor said funding arrangements should be in place by late July.

The company's long term Northern Territory and South Australian ambitions are based on 32,000 km² of acreage that Heugh has acquired rights to. McGregor said the areas had not seen any significant exploration since the 1980s when the Sydney Oil Company was active there and was stymied by a combination of low oil prices and the general stockmarket crash of 1987.

"You'd appreciate that the tech-nological and geological require-ments in the area were quite different in those days, so John staked his claim there, which became the basis of what we want to do as a long-term goal", McGregor said.

He said Merlin would do things a little differently to other companies of its ilk. "I would say that quite often people try to fund these arrangements by getting backers, saying 'we've got this idea, we're going to drill a few wells', and what happens next? Well, we've got our next step planned already.

"We have two other points of difference as well. One relates to the board, which was put together quite independently."

McGregor said Heugh and some independent consultants had worked together to find appropriate board members, who all have quite different backgrounds but seem to have predominantly managerial experience, as opposed to, say, being geologists who've worked their way up.

"The board that we have now is truly independent – none of us knew each other before", McGregor said.

"We have a woman, Emma Stein, on the board and I think that would be unique for a junior explorer. She's highly qualified and emigrated to Australia in September last year."

To be part of Merlin, Stein left behind a considerable career that included stints as managing director of Gas De France Energy and of British Fuels, both petroleum retail concerns. She was seeking a non-executive director position and had heard about Merlin through a venture capitalist.

McGregor's distinguished career in the petroleum industry began 40 years ago with BHP. From 1994 to 1998, he was company secretary and head of global investor relations, followed by four-years heading up BHP Billiton with the double title of Japan and North Asia President.

"Denzil Griffiths, also an independent director, has worked for the Federal Government in the area of business and consumer affairs and also as Regional Director of Customs in the State of Victoria", McGregor said. "He then worked for the State Treasury Corporation and ended up running their superannuation funds.

"Then, they were seeking a chairman and contacted Paul Anderson, the previous Managing Director of BHP, who suggested I become involved."

McGregor said the plan was to become a mid-sized company in five years, having an annual production base in excess of 5 MMbbloe. "It's a well thought-out strategy with a target in mind that is significant in the total scheme of things", McGregor said.

Heugh said inde-pendent geologist, Norrie Hamilton, was the mainstay of the process to investigate the acreage. He said Hamilton's report on the prospectivity of the ground, for internal use only, gave the project a fairly resounding 'thumbs up'.

"I've looked at a lot of the seismic cross sections and contours, and looked at some of the completion reports of wells that have been drilled, for example, in the Squadron Block area where four previous wells have oil shows and/or gas shows in them, so we know there's oil in the system", Heugh said.

"And the same thing in the Flight formation blocks: there's a group of wells that have been drilled that are not really commercial, but certainly they show that the system is charged with oil and gas.

"One of those, Spectre-1, had in excess of 12.2 m (40 ft) of pay zone in the Permian, Patchawarra – fully gas charged, but porosity was a problem in this particular spot that they drilled. We're working hard, or rather Ron Prefontaine (contracted to Victoria Petroleum) is working hard, with the desire to develop a better understanding of where the porosity may be better developed."

Prefontaine, who formerly worked with Oil Company of Australia (which went on to become Origin), conducted all of the prospect generation alongside Dr Mike Swift, who has worked for MIM, a number of Cooper Basin operators, and OMV internationally. Heugh said Prefontaine was also ex Santos, so "… he already knows this area quite well."

"We believe that this represents a new paradigm for Victoria Petroleum, who, it's fair to say, had some difficulty in the past with their exploration success", Heugh said, adding that it was a good thing Victoria was increasing its focus on the Cooper Basin permits.

Heugh said that in the Northern Territory, drilling of the first well (EP 93) is already budgeted for regardless of success in the Cooper Basin – although some cash flow is definitely required to fund other work in the Territory.

He said the 32,000 km² held by the company were relatively grassroots, high risk but high reward frontier basins that are prospective for various reasons.

"If we get some success in these areas, we stay there. If we don't, obviously we'll be looking further afield for other prospective or more prospective acreage – somewhere that holds these big, company-maker type prospects that Merlin is targeting as part of its corporate growth strategy", he said.

Heugh said EP 93 should be granted by mid-July to August. "We've now signed off on all the relevant access agreements with the Central Lands Council and the native title side of it has all being finalised", he said. "We've done an equitable deal with them and are just waiting for the final govern-ment side of the paperwork to be done. (Subsequently, word has come from the NNTT that there are no objections to the grant so it will proceed)

Heugh said that in EP 93 the company had two prospects ready to drill.

"We've got unrisked preliminary, low, or P90, oil in place figures combined of 130 MMbbl, so we're talking very big structures. The primary risk there, from drilling down to the east of the actual permit concerned, is seal. We don't know if there is going to be a seal there although seismic analysis indicates better developed sealing horizons at top Poolawanna horizon levels than wells drilled through similar sequences to the east of the permit area.

"It's a matter of some debate as to whether there's sufficient seismic to warrant drilling the first well or whether we should be acquiring more seismic, and the best advice we've got is that, sure more seismic may better define the prospect more accurately, but it's not going to tell us whether we've got a seal.

"We've got a valid structure and no matter how much seismic we acquire, we won't be able to tell until we drill a hole in the ground. We're sold on the idea, hopefully in joint venture with another partner but depending on cash flow, might end up doing it alone."

Heugh said EPA 93 and PELA 77 combined covered prospective ground with deep Permian troughs, larger than the Patchawarra or Napamerri troughs.

"We're talking a total of 16,000 km², which is a big slice of turf that hasn't been drilled yet", he said.

"There's been some drilling close by to the troughs – I think the closest well drilled would be PELA 77 about 10 km from the edge of the trough. And they struck good source, good seal, good reservoir, and they did have a good structure, but what they were missing out on was maturation profiles. That area was the uplifted side of the McDill's fault and very clearly in-situ generation of hydrocarbons was just not on.
"So we want to drill further to the west at the other side of the bounding fault for structures where we've got access to the deeper part of the kitchen area in the troughs themselves…

"There's a lot of data out there, so all the right prerequisites are there for generation and entrapment of large volumes of oil. It's a matter of 'is there a seal?' – that's the primary question on our mind and others who have written about it."

The company would like to be close to spudding its first well by December 2004/January 2005 in EP 93.

"On the budget that we're planning, we've funded 50% of that well regardless of results in the Cooper Basin although, clearly, if we've drilled six wells in the Cooper Basin and haven't got a strike, we may reconsider our options in terms of drilling that somewhat higher risk well", Heugh said.

"We would farm out up to 50% in principle at this stage – we don't have a deal on the table. We're talking to a few different people: they'd like to see a bit more seismic reprocessing and maybe the application of Dirstein's frequency response based approach.

"… it's not infallible, though. Even if we get negative results, we still may feel justified in drilling, but if we get positive results, we'd definitely drill. If frequency results don't give us the results we're looking for, there's a whole raft of geophysical methodologies we can apply and attempt to find some direct evidence of hydro-carbons prior to drilling."

Heugh concluded that success in PEL 93 could provide an opportunity to open up a whole new petroleum province. "We wouldn't want to get ahead of ourselves, though, because we've got a planned strategy which we will follow", laughed McGregor.

[Aceyducey]

For example, Stuart Petroleum has a market value of about $45M and located oil & gas reserves in the ground with a net value of around $60M at current oil prices...it has an active drilling program funded out of cashflow from wells & a number of good exploration prospects....if 1/3 of their wells in the Cooper Basin have commercial-level reserves (42% is the Cooper average) they stand to grow significantly.
(BTW - yes they are undervalued by the market & IMHO a VERY good buy!)
BTW for anyone interested....

Stuart's moved up fro 70c to over a $1.10 in the last few days, now stabilised around $1 ......and has a new well about to start drilling.

This well is a personal favourite for me - as it was the one I negotiated with Stuart to buy into at the start of the year - but the board decided to cancel all their farmin deals (not just with us).

Since then they've upgraded the well's prospects - bummer :)

Cheers,

Aceyducey

[jym]

Hi Guys

Article on the Dailyreckoning yesterday brought up the fact that the world may have a problem transporting oil around the world in coming years due to the fact that single hulled oil tankers will have to be replaced by double hulled tankers in the next few years.

Here are some paragraphs from the article:

It's the business of running oil tanker fleets. Approximately 46% of the world's oil production is seaborne. And today, most new oil finds occur offshore rather than onshore. As a result, a staggering 80% of all new oil production capacity coming on-stream worldwide relies on oil tankers. By 2011, it is estimated that 95% of all new oil production capacity will use oil tankers.


Charter rates for tankers are already exorbitant. They've rocketed more than fivefold during the last two years...but now they're likely to go even higher.

In China and India, energy demand is soaring. Just as everywhere else in the world, "energy" primarily means "oil." You can't build a pipeline from the Middle East to China or India - which is why demand for oil tankers is on the up.

At the same time, it can be said with great certainty that supply is not going to keep up, thanks to a little-noticed change in regulations. In December 2003, the International Maritime Organization, an arm of the United Nations, agreed to eliminate single-hull tankers by 2010 and to accelerate the timetable to phase out certain single-hull vessels by May 2005.

The following is hardly known by the public...but this agreement means that 13% of the world's tanker fleet will have to be scrapped by April 2005. By 2010, a staggering 40% of the world's oil tanker fleet needs to be replaced.


About 80% of the world's tanker fleet is owned by independent operators, with a vast chunk of that owned by Greek shipping tycoons - many of whom have bases in the City of London or in Monaco. It's a fragmented business with little transparency and few publicly listed companies. But that's about to change, too.

Nowadays, customers chartering oil tankers are asking for much more than a ship to transport oil. Most oil tankers are chartered by mega-size oil corporations, many of which are public or at least in the public's eye. There are important issues to take into consideration, such as the quality of the ships and their crews. The safety record of a tanker fleet operator is also crucial. And customers have caught on to this, asking oil tanker operators to prove that they have an organizational structure that supports compliance with environmental and safety regulations.

This means the end of the cozy world of chartering oil tankers by shaking hands over a glass of ouzo. As a result, the world will see the emergence of the publicly listed oil tanker company. This would have been an abomination to the likes of Onassis, who had little time for transparency or accountability and instead chose to spend his days (and nights) with film stars and models.

It won't come as a surprise that a number of other Greek shipping operators are already investigating a listing on the New York Stock Exchange. In the past, the few oil tanker operators listed on the stock market usually traded around the company's estimated net tangible asset value. If the typical oil tanker owner managed the company from his local coffee house, there wasn't much point in attributing any value to the company's organization, its brand name or its track record.

The lack of transparency within the industry led to valuations hardly ever venturing into double-digit P/E territory. By and large, oil tanker shares traded at P/Es of 5 to 8, which is low compared to the general stock market.

The more oil tanker companies are listed on the stock market, the more visible the industry becomes. What's more, oil tanker companies will be rewarded with a valuation premium for their corporate structure. After all, the more professionally a company is set up and managed, the easier it will be to gain and retain customers - which in turn makes earnings easier to sustain and grow.

The net asset value of the ships will remain a factor when valuing oil tanker companies, but factors such as earnings and cash flow should soon take over as the prime factor. Indeed, the sector has three factors weighing massively in its favor right now - a low stock market valuation, at least two more years of high charter fees, plus the increase in the sector's visibility and, therefore, valuation. What's more, the sector could also serve as an insurance against oil-related acts of terrorism.

Of course, there is hardly an investment analyst not peddling oil investments at the moment. Having analyzed the sector myself, I believe that oil is going to rise a lot more. But even if OPEC found a congenial way to pump a lot more oil all of a sudden, and the price of crude oil plummeted, it would merely increase the need for oil tankers further.

The oil tanker industry is the one missing piece of the oil puzzle yet to be discovered by investors and analysts. But it shouldn't be long before they catch on.

Anyway it looks as if investing in publicly listed oil tanker companies may become the next big investment opportunity.

Regards

[Aceyducey]

There's a global shortage in LPG gas tankers as well - and fast rising demand in the US & Asia.

It's the Achilles heel of the Australian Gas producers' market. We have lots of gas, but transporting it to where it's needed (and the prices are high) is too difficult.

Cheers,

Aceyducey

[Thommo]

There's a global shortage in LPG gas tankers as well - and fast rising demand in the US & Asia.

It's the Achilles heel of the Australian Gas producers' market. We have lots of gas, but transporting it to where it's needed (and the prices are high) is too difficult.

Cheers,

Aceyducey
LNG tankers cost ten times as much as VL oil tankers to build and the freight rates are up to ten times higher. And the US where the major gas shortage is occuring is not building gas recieving terminals, I believe.

[Thommo]

This a rig hit by one of the recent hurricans.

http://www.rodnreel.com/UploadPics/Modified/2004/P0044626.jpg

A bit more detail

http://www.rigzone.com/news/article.asp?a_id=16453

[Aceyducey]

And the US where the major gas shortage is occuring is not building gas recieving terminals, I believe.
Yeah they are.

There's some big deep offshore ones going through feasibility off the coast of California right now.

Howard met with Schwarzeneggar about it a few months back.

And the cheap oil tankers you were talking about are the ones that tend to spill the most oil.

According to my research you'd pay almost as much for a good oil tanker as for an LNG one....

But it's still way too much for a small investor syndicate or I would have started one ;)

Cheers,

Aceyducey

[qaz]

Acey, did the wizard Merlin get enough public support to pay for his expedition to find the magical black potion?.









In other words, did Merlin Petroleum raise enough $$$ to list on the stock exchange?

[Thommo]

Acey, did the wizard Merlin get enough public support to pay for his expedition to find the magical black potion?. In other words, did Merlin Petroleum raise enough $$$ to list on the stock exchange?

The wizard fell flat on his face in the middle of TYBR!

"There's some big deep offshore ones going through feasibility off the coast of California right now." So you agree that none have been built. Hard to prove a negative but commentators I read say two things: That they are not being built and that "greenies" resist any new construction. BTW, Whats the lead time from application to completion?

"And the cheap oil tankers you were talking about are the ones that tend to spill the most oil." No! The comparison was with new (under construction now) double hulled tankers. VL tankers flex in seas the way an aircraft wing does so they are (comparitavely) light. LNG needs expensive pressure vessels. No comparison when considering the weight of steel and the technology in construction.

I have no idea about the depth of research you did, I simply Googled the topic and found what looked like authorative (industry based) sites. (a month ago) You can never repeat a Google search. LOL

T

[agent 86]

The wizard fell flat on his face in the middle of TYBR!


BTW Thommo, WTF is TYBR. :)

A86

[Thommo]

BTW Thommo, WTF is TYBR. :)

A86
The Yellow Brick Road. :)

[Aceyducey]

Acey, did the wizard Merlin get enough public support to pay for his expedition to find the magical black potion?.

In other words, did Merlin Petroleum raise enough $$$ to list on the stock exchange?
Nope Merlin did not raise the funds. The gap was in the UK where the broker could not come up with the sum required for the listing.

The fat lady is still in her dressing room however, lots of work being done on other strategies.

Cheers,

Aceyducey

PS: Shouldn't it be TBBR ;)

[Thommo]

Hurricane Lilly bearing down on an oil rig Looks scary :eek:


http://www.toolpusher.co.uk/images/hurricane_lili.jpg

The aftermath.
http://www.toolpusher.co.uk/images/lili.jpg