Not many people predicted the bounce in the oil price. As I type, Brent crude is hovering around $65 per barrel, a good way above the lows experienced in January this year, which left investors running for the exit, and a few oil producers struggling to keep their heads above water.
For those investors who bought into fundamentally good stocks whilst others remained fearful have seen a market-beating return on their investments, as oil staged a recovery. We have also seen a fair amount of corporate activity, most notably, Royal Dutch Shell (LSE: RDSB) swooping for sector peer BG Group (LSE: BG) in a deal worth £47 billion, not to mention rumours of BP (LSE: BP) being bid for by a larger rival.
Whilst these will clearly be subject of headline news in the business section, I prefer to look elsewhere in the market at quality operators, quietly doing their business away from the headlines. With that in mind, let’s take a look at Amerisur Resources (LSE: AMER) to see how it stacks up against two of the FTSE 100 big boys…
Is Bigger Always Better?
With a market cap of around £350 million, Amerisur is the 602nd largest company in the UK… compare that to Shell at number 7 and BP at number 11, and that makes it look like the runt of the litter.
Whilst it is true that both BP and Shell are fully integrated and diversified — operating across the planet, giving them scale, access to better credit terms and the ability to withstand market downturns, whilst still rewarding their shareholders with quarterly dividends — I think that investors would be wrong to write off operators like Amerisur, an independent oil and gas production and exploration company focused on South America.
Amerisur owns assets in Colombia and Paraguay, where it operates and holds a 100% working interest in the Platanillo block in Colombia. The 11,048 hectare block is located in the Putumayo Basin in the south of Colombia. It operates and holds 60% working interest in Putumayo-12, a 54,444 Hectare block, which is adjacent to Platanillo. The company also holds 100% of the Fenix block, a 24,117 hectare area in the Middle Magdalena Basin of Colombia. It holds 100% ownership of five blocks, holding two exploration and production and three prospecting permits extending over 6.4mm hectares. That adds up to proven and probable (2P) commercially viable oil reserves in the region stand at 24.5 million barrels, worth nearly $1.6bn at current prices. In addition, the oil-rich fields in which it operates allows it to take oil out of the ground very cheaply, and profitably, even with the black gold substantially cheaper than this time last year, something that other operators have struggled to do. Indeed, some have been forced into the red as oil prices plunged.
Cash, Quality and Management..
If one thing can kill a company when things turn bad, it’s debt — and both BP and Shell have plenty of it! The gearing ratio shows how encumbered a company is with debt. Depending on the industry, a gearing ratio of 15% might be considered prudent, with 22.7% and 14.3% respectively, although I expect Shell’s ratio to rise once the BG Group deal is factored in. Anything over 100% would certainly be considered risky or ‘highly geared’. As a general rule, net gearing of 50%+ merits further investigation, particularly if it is mostly short-term debt. A highly geared company is more vulnerable to a sudden bump in the road, either operationally or due a change in the economy – or, as we’ve seen, a change in the oil price. With $96 million in cash at the year-end, Amerisur boasts a ratio of -46.1% — that figure should keep investors warm at night.
The CEO, Dr John Wardle, is a drilling engineer veteran, with 28 years’ experience. He is well regarded by investors in the industry having first worked in Colombia for BP’s division in the country back in 1994, where he ran a medium-sized oil venture. Wardle has navigated Amerisur well since joining the board in 2007.
Finally, looking at ROCE (return on capital employed), ROE (return on equity) and operating margins, three quality metrics used by investors, it is clear that Amerisur stands head and shoulders apart from its bigger brothers:
| ROCE | ROE | Op Margin | |
| Amerisur | 18.8% | 14.3% | 21.2% |
| BP | 0.4% | 3.14% | 0.25% |
| Royal Dutch Shell | 7.45% | 8.45% | 4.72% |
The icing on the cake…
For me, the event that could well cause a re-rating of the shares will be when the Ecuadorian pipeline interconnector comes online, which will substantially reduce operating expenses and give potentially significant production growth optionality. At present the company is completing the necessary environmental permits and permissions, but all being well it is on target for commissioning in the last quarter of this year.
With both BP and Shell, I can see the attraction — particularly for income seekers. However, they have a lot of work to do across a huge portfolio, indeed, I suspect that Shell in particular will have its work cut out integrating BG.
