The “Arab Spring” appears to be gaining strength across the Middle East. Syria is following Libya’s footsteps, engaging in a bloody civil conflict that does not seem easy to resolve.
Iran, next door, is increasingly aggressive towards the developed world, now refusing to supply oil to Europe and the UK and UN inspectors visiting its nuclear processing facilities. As a result, oil prices are rising, with Brent approaching $125 and the storage-constrained WTI at $108 a barrel.
The unrest in the world’s most important region for supply of oil is certain to push oil prices higher. It is not inconceivable that we may see the all-time highs of $147 a barrel set in July 2008 again, should military action commence in Iran.
Saudi Arabia has stated that they need oil prices to stay above $100 a barrel to finance their social programmes designed to suppress militancy, so it seems unlikely that they would increase production should prices spiral again.
In this environment, oil-producing companies are enjoying a healthy growth in profits. Smaller companies controlling reserves and development-stage projects are being re-rated after the sell-off in 2011.
It is not surprising that corporate activity is accelerating; Larger, cash-rich oil companies seek to capitalise on low stock-market valuations that make it cheaper to buy listed companies controlling reserves rather than invest in the development of individual projects.
Below are companies we hold in the Junior Oils Trust portfolio and consider particularly attractive due to their re-rating prospects and M&A potential.
Amerisur Resources (AMER:LN): Operating in Colombia and Paraguay, it is operationally cashflow positive with a strong balance sheet and experienced management. Near term production is expected to grow as a result of its exceptional acreage position and there is strong exploration potential within its existing licence areas. The company’s Market cap of £180 million is backed by £10 million in cash and revenue of £8.4 million that will grow as new oil fields come into production.
Caza Oil & Gas (CAZA.LN): operating in Texas, Louisiana and New Mexico Caza has enjoyed recent success in exploration drilling, transforming the company with growing production and development potential. Due to the growing value of transactions in neighbouring properties, Caza is considering divesting one of its more mature assets to realise the gain and reinvest in other opportunities. Due to its established position and large database of seismic data in its licence areas, it is well placed to deliver value to shareholders. The current market cap of £24 million is supported by cash of about £9 million and growing cashflow.
Circle Oil (COP.LN): Circle holds material licenses in North Africa with production in Egypt and Morocco and exploration prospects in Tunisia and Oman. The shares have suffered as a result of instability throughout the region, however, its operations are far removed from the centres of unrest and did not suffer even during the peak of the crisis in Egypt and Tunisia. The market cap of £136 million is backed by £20 million of cash and the projected annual cashflow is in excess of £12 million.