Angelos Damaskos, CEO of Sector Investment Managers and fund adviser to Junior Oils Trust, on the outlook for oil…
The three main sources of the 1970s supply growth, Alaska, Mexico and the North Sea, are now all in steep decline. In 2000, these three areas produced 11.3 mb/d and by last year, their combined output had declined to 3.4 mb/d.
As these easily accessible fields declined, the search in more challenging locations and alternative methods begun in earnest, stimulated by much higher prices for crude oil. Exploration and production capital expenditure rose from USD200 billion in 2005 to USD600 billion in 2012. Not surprisingly, the returns for the majors peaked in 2005 when Brent averaged USD54/barrel. Newer finds have been much smaller, decline rates are quicker and newer basins have much higher marginal cost of production. With China and other emerging regions requiring ever increasing energy inputs to support their rising middle classes, demand has kept growing. In our view, with demand for oil expected to grow by about 1 mb/d per year, the oil market will require prices to stay well above USD100/barrel.
With the shine coming off defensive equities and bonds, oil shares appear attractive again. The larger cap oils have performed well year to date and we believe the smaller ones are likely to follow with a rerating soon. Acquisition of quoted oil companies continue to offer a cheaper option to acquire reserves than investing in individual projects, and corporate activity is set to continue. Last month saw Parkmead Group, one of the fund’s larger holdings, acquire Lochard Energy, which holds interests in areas highly complimentary to Parkmead’s portfolio. The skills fostered by Tom Cross, Parkmead’s CEO, are likely to generate significantly higher value in the medium term. We believe that the second half of this year is likely to see a return of investors’ interest in the oil sector and result in a rerating of the fund’s portfolio.