RIU GoodOilConference Perth speaker Argonaut Limited research director Michael Eidne says the oil and gas industry is re-entering a period of growth and encourages investors to jump in at this stage of the economic cycle.
Eidne also spoke directly to junior companies, encouraging them to pursue a market capitalisation of at least $100 million so they would attract the attention of Australian institutions and their investment dollars.
The conference is being held at Hyatt Regency Perth until tomorrow.
The research director, who held a similar role at DJ Carmichael, said crude oil was back and it would be a long time before renewable energy sources disrupted convention energy sources.
Eidne said: “With my apologies to Mark Twain, the death of crude oil has been greatly exaggerated.
“This is a popular view from the media and certain sections of society, but make no mistake, renewable energies are important … but the growth in energy demand will support demand for hydrocarbons and renewable, there is enough room at the table for all fields.”
Eidne described oil and gas as an exciting industry.
He said: “It’s an industry that brings together engineering, geology and finance, and it’s a great pleasure to be part of that industry.”
Eidne’s address this morning covered supply-side and demand-side factors, financial markets and opportunities for investors.
Argonaut’s research director gave a background to the changing energy mix since the 1850s.
Looking to the present day, Eidne argued “energy is essential for the modern way of life.”
“Hydrocarbons are still the primary source of energy in our world and will remain so for some time.
“Coal has dropped off but it’s starting to rise again, the use of oil is growing very strongly and gas is still growing incredibly strongly and I think we can still see that in LNG markets, and LNG prices have increased in imports into China.
“Nuclear (power) is flat, hydro has grown – but remember hydro is constrained by geographical factors – and renewables have made a strong influx but it’s going to be a long time before they can disrupt (conventional sources).”
Eidne said the increase in prices was “basic economics”.
This year the crude oil price hit US$80 a barrel for the first time in four years. WTI crude has been hovering around the US$70 mark.
Eidne said: “Supply has fallen and demand has stayed strong and has increased oil prices, which is a good thing for those of us that are industry, not so good if you’re driving a car.
“Fuel (will be) petrol and diesel for some time.”
Eidne forecast a period of growth.
“The contraction in supply has been largely due to OPEC production cuts, there’s also been turmoil in Venezuela and more recently in Libya.
“It’s also getting harder for the older players to turn on the taps in the conventional field … those fields are tired and that is going to continue to constrain the supply side.”
The GoodOilConference also includes company display stands.
Argonaut’s investment director stressed the importance of investment in the sector.
Eidne said: “Investment is key.
“Upstream investment (was) growing very, very strongly until the crash in prices and we’ve got a 44% drop, and now we’re really going through a period of growth in investment capital expenditure.”
The research specialist compared the current growth rate of 6% to the 12% experienced previously.
Eidne predicted: “Investment in supply is still going to be constrained going forward.
“(Argonaut is) also thinking a lot of this growth is going to come from Tier 1 countries in places like North America … there are some larger projects that have been reasonably sanctioned but it’s going to be a long time before the frontier markets make a return to the oil and gas space.”
Eidne pointed to a cost curve to explain the importance of timing an investment in oil and gas.
He highlighted costs follow prices with an 18-month lag, as “rent seekers” such as governments jumping in at times of high prices in an effort to grab a share of the profits.
Eidne noted that for a while after the last crash it took some time for prices to come down, but now they were lower it presented an investment opportunity.
Eidne said: “As an investor, you don’t want to invest at the top of the cost curve … you want to stay to the left.”
The research director asked the question, how can an investor benefit from the economic factors he outlined.
Eidne said: “The best time to invest in an oil project or oil companies is in a rising market, in a stable market or a stable market because you have a reasonable … margin.
“Demand is going to remain robust and supply is going to be constrained, and this is going to (affect) oil prices.”
The North Ballroom is playing host to presentations.
Eidne acknowledged companies with small market capitalisations had the capacity to grow at greater rates than the market.
He argued there were not a lot of places to go on the ASX for investors wanting to put their money into energy companies, especially the smaller ones.
Eidne said: “There’s been a lot of focus on small-cap stocks of late, and the returns for investors here have been really good.”
He highlighted the creation of a number of small and micro-cap funds in the investment space over the past few years which are attracting capital for projects.
Eidne said: “The size they are looking for is 59 to 200 million, 100 million to 2 billion dollars.
“Where they invest, there’s not much choice.”
Sino Gas’s last day of trading on the ASX is expected to be today.
He noted Beach Energy Ltd’s (ASX:BPT) (FRA:BPS) (OTCMKTS:BEPTF) transformation from an $800 million company to a $4 billion player and Sino Gas & Energy Holdings Limited’s (ASX:SHE) (FRA:7SE) disappearance this week from the ASX.
Today is expected to be its last trading day after the Federal Court yesterday approved a scheme of arrangement from Sino Gas’ buyer Lone Star Fund X Acquisitions, LLC.
AWE Limited was another energy company that made an earlier disappearance from the Australian market after accepting Mitsu’s $602 million takeover offer in February after a bidding war.
Eidne said: “Managers still have to allocate to this sector, because if they don’t … they risk underperformance, and this presents opportunities, especially for the companies in the room.
“If you can grow your business, especially above that $200 million mark, you will attract the attention of investors.”