Investec mapped out its investment thesis in the second of its Roughneck Reports (the first was issued in September) in which it also looks at the increasing activity in Morocco and re-visits Kurdistan.
Broker Investec has adopted what it calls a “cautiously constructive approach” to oil exploration and production in which it sees pockets of value emerging from the sector.
It mapped out its investment thesis in the second of its Roughneck Reports (the first was issued in September) in which it also looks at the increasing activity in Morocco and re-visits Kurdistan.
This second edition is a more upbeat assessment of prospects than the first, in which the group advised clients to take their money off the table.
“Given the poor performance of the sector over the last six months we now believe that pockets of value have begun to emerge and selectively recommend longs,” it added.
However, Investec pointed out that African-focused explorers and producers (E&Ps) have underperformed, with a “more sobering” picture emerging on the value of prospective resources. Moreover, companies looking to farm down acreage have, in the broker’s view, experienced tough negotiations with farminees driving hard bargains.
“This dynamic has been accentuated when funding risk is present, or is perceived to be present,” Investec added.
Its top picks are Afren (LON:AFR), Genel (LON:GENL), Ophir (LON:OPHR) and Salamander (LON:SMDR). Also on the ‘buy’ list are Rialto (LON:RIA), Premier Oil (LON:PMO) and Circle Oil (LON:COP), while Tullow (LON:TLW) is its sole ‘sell’.
Its wells to watch include Tullow’s latest in French Guiana, along with holes in Mauritania, Kenya and Mozambique.
Ophir, meanwhile, has a Jubilee-style play in Ghana, while Afren has two Nigerian wells preparing to spud.
Investec reckons the key risk to the sector remains the oil price and whether it can maintain a level around US$100 a barrel.
“Given the capital intensity in E&P, balance sheet and funding can be impacted by a sharp decline in commodity expectations,” it added.
“We also highlight risks to fiscal terms and political risks. This reflects our coverage’s leverage to emerging geographies.”
No investment advice
Proactive Investors North America Inc, trades as “Proactiveinvestors USA & Canada”.
