3 oil stocks

8/6/2019 3 Oil Stocks

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S P E C I A L R E P O R T

BG Group has been a roaring success since its

formation in 1997. The oil and gas exploration

arm of the old British Gas has been transformed

into a world class company.

What makes BG really stand-out among

London’s blue-chip oil companies is that it

offers exposure to three promising themes:

1. Growth of LNG

2. Brazilian deepwater oil

3. US shale gas

The Golden Age of Gas

Firstly, BG has long been known for its leading

LNG division.

Liquefied natural gas is a fast growing and

lucrative market. Demand is growing strongly

because LNG offers some key advantages over

other energy sources: it’s easy to transport, it’s

safe to store and it’s a far cleaner fossil fuel

than the likes of oil or coal.

Producers of LNG, such as BG, enjoy high profit

margins. That’s because production facilities areexpensive to develop, so the market is not very

crowded.

BG is pressing ahead with its next big LNG

project based in Queensland Australia. The

company will invest around $15 billion in the

project over the next four years.

The project is already underpinned by long-

term supply contracts with China, Chile and

Singapore.

BG is very confident that their investment

programme will lead to a big pay-off.Management believe the next decade could

be a “golden age of gas”. One of the main

reasons is China.

China is expected to rapidly increase its use of

gas as it scales back its use of nuclear power

and makes more use of natural gas in road

transport. In fact, China is even helping BG to

fund an expansion of its activities in thecountry. The Bank of China only recently signed

a $1.5bn funding agreement with BG as part of

the Chinese Premier’s trip to the UK.

Brazil - the New Oil

Superpower

Back in 2005 BG began its drilling programme

in the Santos Basin, which lies off the coast of

Rio de Janeiro and Sao Paulo in Brazil.

The Santos Basin sits in waters more than

2,000 metres deep and beneath another 5,000

meters of rock and salt under the seabed.

BG Group (BG)

T: +44 (0) 1872 262622

F: +44 (0) 1872 265326

E: [email protected]

W: www.galvan.co.uk

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http://www.galvan.co.uk/


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BG holds licences in three blocks in the Santos

Basin covering a total area of approximately

7,450 square kilometres.

In October 2006, BG struck oil. Big time.

The discovery, called Tupi, is simply enormous.It’s the Americas’ largest oil discovery since

Mexico's Cantarell in 1976.

The Tupi field lies in a block called “BM-S-11”.

BG holds a 25% stake in the block. The

Brazilian state-run giant Petrobras holds a 65%

stake and the remaining 10% stake is owned

by the Portugese oil explorer Galp Energia.

Since the discovery of Tupi, there has beena string of other major oil discoveries in the

same block – Tupi Sul, Iara and Iracema.

BG is entitled to 25% of these finds too.

It is estimated that the total oil in these fields

contains at least 5-8 billion barrels of

recoverable oil. That is a staggering figure. To

put that into context, these fields could

increase Brazil's total oil reserves by 62%. Itcould propel Brazil into one of the world's major

oil exporters.

In honour of the outgoing Brazilian President

Lula da Silva, the Tupi field was renamed “Lula”

in December of last year. This was meant as a

great honour for a President who enjoyed an

approval rating above 70%. This was so rare

that he was greeted by US President Obama at

the G20 summit as "The most popular politician

on earth." I digress.

BG also has stakes in other blocks in the Santos

Basin. Another major discovery known as Guara

has been made in block “BM-S-9”, of which BG

owns a 30% stake. The field is estimated to

contain 1.1 to 2 billion barrels of recoverable

oil.

As exploration continues across the Santos

Basin, there is every chance of more good

news. In fact, as I write this BG has just

announced a further upgrade to its resourceestimate in the Santos Basin. It seems the

closer they look, the better this thing gets.

Brazil is expected to play a big part in BG’s

growth plans. The company is planning to

invest $30 billion in Brazil over the next decade

funded by cash flow from production.

It October last year BG began shipping the first

oil from the massive Tupi field. Production

should really begin to take-off over the coming

years as more fields come on stream and

additional infrastructure increases capacity.

The profit margins should be really juicy too.

CEO, Frank Chapman, has confirmed that all

BG Group (BG)












T: +44 (0) 1872 262622

F: +44 (0) 1872 265326


W: www.galvan.co.uk








the fields in the Santos Basin are economically

viable at oil prices of $40. That’s a hell of a lot

of headroom, given the oil price is sitting above

$100 a barrel.

Shale Gas – a potential game-

changer

Shale gas is being hailed as the potential

saviour of the US economy’s addiction to

imported OPEC oil. US oil reserves have been

seriously depleted, but the country is blessed

with an abundant supply of shale gas. The

problem is it’s not easy to get hold of.

Extracting shale gas is more complex than

tapping normal gas reservoirs, because it’sstored in organic rich rocks. But production of

shale gas has been steadily rising, and as

technology improves, it is expected to really

take off.

BG doesn’t want to miss out on a potential

“game changer”, so made a $1.3 billion

investment in a shale gas joint venture.

The joint venture is with Dallas-based Exco

Resources. Exco contributed 120,000 acres of

land in the Haynesville shale gas area in Texas

and Lou i s i ana , and a s soc i a t ed ga s

infrastructure.

BG has since expanded its joint venture

arrangements with Exco by investing a further

$950 million in return for Exco contributing

654,000 acres of land in the Appalachian Basin

of Pennsylvania and West Virginia.

The joint venture may not be a majorcontributor to profits right away, but it fits in

nicely with BG's strategy of building a portfolio

of global assets.

Best of the blue chips

BG is now much more than a leading LNG

specialist.

It offers a growth profile that BP and Shell can

only dream of. But there’s a lot more to the oilbusiness than just exploration. To make real

money you need to bring projects to market.

And this is where BG excels even more.

BG is also regarded as a perennial bid target.

Royal Dutch Shell, ExxonMobil, Petrobas and

China's CNOOC have all been mentioned in the

past as possible buyers. You can see why. Who

wouldn’t want to get their hands on BG’s

impressive portfolio.The shares are never dirt cheap based on an

earnings multiple, but in the stock market it is

better to pay up for top quality than let it slip

you buy.

BG Group (BG)












T: +44 (0) 1872 262622

F: +44 (0) 1872 265326


W: www.galvan.co.uk








One of the problems with investing in oil

companies is that there are very few actual

producers. Most of the sector is made up of are

highly speculative explorers. Some will succeed,

most will fail.

But as an investor, if you wait until they’ve

become producers, there is far less potential

upside. By the time they’ve become producers,

their valuation is typically between £500m and

£1 billion. With such a chunky valuation, it’s

then hard for the exploration side to add

significant value.

So it’s not everyday you can find a modestlyvalued oil company that has already made it

through to the production phase.

But one such company is Amerisur Resources.

A new name, a new team and a

new focus

The history of Amerisur can be traced back to a

company called Gold Mines of Sardinia. But

when the gold mines were sold off in 2004, the

company changed its name to Chaco Resources

and moved into oil and gas exploration in the

Chaco region of Paraguay.

To cut a long story short, Chaco failed to

deliver. So in 2007 the company got a new

name, a new management team and a new

focus.

Amerisur Resources was born and the newfocus became Colombia. Since then, things

have been looking up.

Business meets science

The management team consists of an

interesting mix of successful businessman and

mining industry veterans.

The Chairman, Giles Clarke, is an out-an-out

entrepreneur and a really successful one at

that. He founded Majestic Wine and built it into

a national chain. He then co-founded Pet City,

again turning it into a national chain and also

co-founded Safestore, one of Europe’s leading

self-storage companies.

The CEO, John Wardle, is a Mining Engineering

graduate with a PhD in Rock Mechanics and

Geophysics. He reached senior management

level at BP, eventually finding himself in their

Colombian operations. From there he became

the General Manager of Emerald Energy, a

small UK oil explorer in Colombia.

Amerisur Resources (AMER)












T: +44 (0) 1872 262622

F: +44 (0) 1872 265326


W: www.galvan.co.uk








While at Emerald Energy, he was responsible

for two large oil discoveries. The company was

later bought out by the Chinese giant Sinochem

in 2009 for £532 million.

Colombia the key Amerisur operations are currently in Colombia

and Paraguay. It has four main assets in total,

two in each country. All four are currently 100%

owned by Amerisur.

The most developed of its assets is the

Platanillo well in Colombia. Amerisur is

already generating positive operating cashflow through the well.

Production capacity at Platanillo is set to

expand as additional infrastructure is added.

Not only that, 4 to 6 new wells are be drilled

this year.

Production at its Fenix well in Colombia is

modest at present but the company signed an

important farm-out agreement with Reto

Petroleum in April.

Reto will fund the drilling of 10 new wells at

Felix. In return Reto will receive a 20% interest

in the field. If drilling is successful, Reto can

also receive an additional 10% interest in Felix

in exchange for performing a seismic

programme.

The deal looks sensible for Amerisur. Farm-out

deals make a lot of sense for smaller oil

companies. They allow a company to preserve

cash but retain a sizeable stake in their assets.

Amerisur has its hands full with the

development of the Platanillo well this year and

wants to give it the focus it needs. And Reto

has a good track record in Colombian oil

exploration, so it looks to be a good win-windeal.

Amerisur’s two blocks in Paraguay are still in

the early stages of development. The

exploration permit covers a vast area of

800,000 hectares.

The San Pedro block remains the main focal

point of exploration at present. Mapping and

geochemical work have shown plenty of

potential but further data is needed before a

drilling programme can begin. Work on the

Curupayty block is partly dependent on how

things progress at the San Pedro block.













T: +44 (0) 1872 262622

F: +44 (0) 1872 265326


W: www.galvan.co.uk





http://www.amerisurresources.com/projectsinparaguay.html

http://www.amerisurresources.com/projectsinparaguay.html

http://www.amerisurresources.com/projectsincolombia.html

http://www.amerisurresources.com/projectsincolombia.html




Breakthrough year

2010 was a breakthrough year for Amerisur.

Last year saw the company deliver its maiden

profit – always a key milestone for any oil

company.

Perhaps an even bigger achievement was that

the proven and probable reserves increased by

a massive 350%.

Amerisur also has a healthy net cash position,

standing at around £12 million. About 60% of

this has been earmarked for the development

of the Platanillo well in Colombia.

The shares currently trade on a forward

earnings multiple of 25 this year, but this is

estimated to drop to only 5 times 2012

earnings. So if the management team can hit

anything like these estimated earnings, the

shares look very cheap.

The investment case

• Amerisur offers a good blend of near-term

production in Colombia and early-stage

exploration in Paraguay.

• The current management team has broughta new energy and focus to the company.

• The maiden profit, positive operating cash

flow and strong balance sheet make

Amerisur stand out from the mid-tier pack.













T: +44 (0) 1872 262622

F: +44 (0) 1872 265326


W: www.galvan.co.uk








There is nothing quite as alluring as a pure oil

explorer. The key attraction of oil exploration is

that when it goes right, the payoff can be

massive.

But even with today’s advanced technology, oildiscovery is still part-luck, part-science. Let’s

face it, if finding oil was easy there wouldn’t be

any of it left to find.

The London Stock Exchange is home to over 50

pure oil explorers, so there’s plenty of choice on

offer.

One with enormous potential is Chariot Oil and

Gas.

Chariot is a relative newcomer, listing on AIM in

2008. The company owns four oil and gas

licences (covering eight offshore blocks) that

stretch across a huge acreage off the coast of

Namibia.

Namibia – are you serious?

Offshore Namibia could be the next big thing.

While the region remains relatively unexplored,

it has generated plenty of excitement. Its salt

basin shares the same, prolific geology as

offshore Brazil. Geologists believe they were a

single land mass millions of years ago.

This bodes well given the string of giant

discoveries announced over the last few years

in the Santos Basin off the coast of Brazil – see

BG Group for the detail.

It’s no coincidence that the Brazilian oil

giant Petrobas has been sniffing aroundNamibia. In fact, in 2009 Chariot signed afarm-out agreement with Petrobas for 50%

of block 2714A.

Chariot owns 100% of its other 7 blocks, but

the interest from Petrobras has given the

company a lot of credibility. Petrobas also

brings a wealth of experience and know-how to

the table. This will come in handy as Chariot's

prospects lie up to 2,500 metres beneath the

seabed.

Drilling for oil at that depth is not only

expensive, but is technically challenging, so

having a big-hitting partner on board is more of

a need than a want.

Over the last few years, Chariot has carried out

the largest exploration programme in offshore

Namibia to date. Things started to take-off for

the company in 2010 as the exploration has

produced some speculator resource data.

Chariot Oil and Gas (CHAR)












T: +44 (0) 1872 262622

F: +44 (0) 1872 265326


W: www.galvan.co.uk








The estimated resource has been going up and

up. After a series of upgrades, the total

resource is estimated at 16.1 billion barrels of

oil – of which Chariot would be entitled to just

over 70%.

Nimrod – the oil prospect notthe military plane

Almost a third of the resource estimate has

come from one “megastructure” prospect:

Nimrod.

Chariot's chief executive Paul Welch views

Nimrod as a potential "game-changer" for the

company.It spans 500 square kilometres and happens to

lie in the block co-owned with Petrobas

(perhaps Petrobas knew more than they let

on). Chariot puts the chance of success at

Nimrod at 25%.

The next step for Chariot is to kick-off its

drilling campaign. Nimrod is obviously the prime

target, but there are 16 prospects in total.In April this year Chariot raised $140 million

(about £90 million) from a share placing at

250p. The money was raised primarily to help

fund the drilling campaign.

But before the campaign gets fully underway,

Chariot wants to sign more farm-out

agreements to bring in deepwater drilling

expertise. A deal has yet to be announced, but

so far there has been keen interest from oil

majors.

Drilling is expected to start in the fourthquarter of this year.

The investment case As you would expect, Chariot is still loss making

because it is currently an explorer not a

producer. It does however have a strong cash

position to fund its exciting exploration

programme. Its massive resource potential in a

particularly promising region makes it a

speculative buy.

Chariot Oil and Gas (CHAR)









A d M k t A t 2000



T: +44 (0) 1872 262622

F: +44 (0) 1872 265326


W: www.galvan.co.uk





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