The West hasn’t really trusted OPEC since the 1973 energy crisis, when Arab oil producers imposed an embargo as punishment for supporting Israel in the Yom Kippur war against Egypt. This forced up the price of crude from $3 per barrel to an unthinkably high $12 by 1974.
Over the last year OPEC, or rather swing producer Saudi Arabia, has collapsed the oil price to $45 to punish the US for threatening to become energy self-sufficient thanks to shale. This risky strategy is hurting fellow OPEC members, slashing their annual income from around $1 trillion a year to $550 billion, and even Saudi itself, which has been cutting state spending and issuing bonds to cover the lost income.
Black Gold
Saudi will come under massive pressure to shift its supply stance at the next OPEC meeting in December. If it caves into external – and internal – pressure smaller oil explorers will breathe a sigh of relief. As will the investors who hold their beleaguered stocks.
Pricier oil can’t come too soon for North Sea heavy oil appraisal and development company Xcite Energy (LSE: XEL). Trading at 20p, it is well below its year-high of 54.50p. Few are quibbling about the quality of the assets in its flagship Bentley oilfield, or the quantity, for that matter. The problem is raising the investment it needs given frazzled oil investor nerves.
Future Shock
Xcite reckons it can still pump up black gold with projected costs of $35 a barrel, but the margins are becoming thinner every time oil falls. If OPEC does gift the industry a higher oil price in December, Xcite might find it easier to fund its planned mobile offshore production unit, floating storage and offloading vessel. This week’s tie-up with Azinor Catalyst will help to de-risk the project as its new partner will take on many of the costs, but production and profits are still years away. Where will oil be then?
Falcon Oil & Gas (LSE: FOG) looks more promising than most oil explorers following its recent drilling success in the Beetaloo Basin, Australia, where it retains a 30% stake with co-venture partners Origin and Sasol. With no debt and a nine-well programme running until 2018, this looks safer than many in the sector, and an OPEC-fuelled leap in the oil price could lead to a spike in its share price as investor confidence returns. Less risky than most, but still risky.
Premier League?
Investors in Premier Oil (LSE: PMO) will grab any gift from OPEC with both hands, as the share price continues to tank, down 13% in the last week alone. Like every oil company, it is slashing capex and production investment to stay afloat, although the hit to production may be mild as Solan development is now complete and Premier has limited committed expenditure beyond its ongoing Catcher project.
As chief executive Tony Durrant pointed out this week, Premier also benefits from stable production and valuable hedging contracts. Barclays reckons it can “navigate a prolonged sector downturn” despite its growing debt levels, but says there are more compelling investment opportunities elsewhere. OPEC could change the market’s view of Premier in a moment. For that we must wait until its meeting in Vienna, Austria, which begins on 4 December. The world will be watching.
