Henderson says that he is increasing his weighting to this area in his Henderson Opportunities fund, a multi-cap portfolio he runs with Colin Hughes.Investors getting in now have to be prepared for a bumpy ride, he explains, but valuations make it worth the risk as part of a balanced portfolio.
“One area of considerable value is in oil exploration companies,” he said. “People don’t want to take on the risk of buying these companies at the moment. We are going to be buying too early, though.”
The manager says that he has taken his exposure to the sector up to 2 to 3 per cent of the Henderson Opportunities Trust, through four stocks. He is thinking of buying another.
“You need a portfolio approach in this area,” he said. “Many of them will disappoint, but you are buying proven reserves for what you would have bought potential reserves in the past. Big companies like BP aren’t buying them up as they were.”
The oil and gas giants such as BP and Shell have become more focused on returning cash to shareholders and demonstrating efficiency, he says, and have been reluctant to conduct acquisitions in the current austere environment.
The result is an opportunity for the long-term investor with the stomach for some near-term losses, he explains.
Here are the stocks he has been buying.
Premier Oil
Henderson has built up a position in FTSE 250 company Premier Oil. The company not only produces oil from the North Sea and Indonesia, but is also exploring in Iraq and the Falkland Islands, as well as in Norway.
In the Falklands it has 60 per cent of the equity in a project developing the Sea Lion fields around the islands and is seeking partners to limit its exposure.
Last month chief executive Simon Lockett announced he would stand down, and shares ticked up on the news.
The company’s results disappointed investors, with after-tax profits falling from $252m to $234m.
Overall capex increased from $771m to $878m, funded by a significant increase in debt from $1,110m to $1,453m. The company refinanced a significant sum at lower rates, however, but increasing levels of debt aren't an appealing feature for many investors in today’s market.
Premier Oil has seen its share price fall by 18.38 per cent over the past 12 months while the FTSE has risen 11.57 per cent, according to data from FE Analytics.
Performance of stock vs index over 1yr
Source: FE Analytics
The stock is trading on a forward price/earnings ratio of 9.7 compared with 14.4 times for the All Share.
Xcite Energy
AIM-listed Xcite Energy is focused on developing the Bentley field in Block 9/3b of the UK North Sea and is searching for extractable resources in adjacent blocks.
The Bentley field is one of the largest proven undeveloped fields in the UK, with 203 million barrels proved.
The company’s former corporate adviser Andrew Fairclough was appointed to the role of chief financial officer last month.
Shares have lost 16.63 per cent over the past year, according to data from FE Analytics, although they ticked up following the confirmation of the reserves in the Bentley field last month.
Performance of stock vs index over 1yr
Source: FE Analytics
Shares are trading on a large forward P/E as earnings are close to non-existent during this development phase.
Circle Oil
Circle Oil is another AIM-listed oil and gas exploration company. Incorporated in Ireland, its main areas of operation are in North Africa.
This has been a volatile part of the world in recent years, but Circle has had a good 12 months off the back of significant discoveries. Shares are up 34.51 per cent on the year, although they are down over 35 per cent over three.
Performance of stock vs index over 1yr
Source: FE Analytics
The company has reported positive results from drilling operations in Egypt and Tunisia in recent months, and appointed Stephen Jenkins as chairman in January, intending to use his reputation in the industry to increase investor interest.
The stock is trading on a forward P/E of just 7.6 times.
Faroe Petroleum
Faroe Petroleum announced this morning it had struck oil at the Pil exploration well in the Norwegian Sea.
The site contains 135 metres of oil and 91 metres of gas, but further drilling will be needed to assess the extractable reserves. Shares leapt 11.51 per cent on the news at the opening of trading, a welcome boost after a year in which they had lost 25.69 per cent of their value.
Performance of stock vs index over 1yr
Source: FE Analytics
The company’s chief executive Graham Stewart said: “Pil is one of three exploration and appraisal wells we are drilling concurrently in our continuing high impact exploration and appraisal programme.”
“The two other wells currently drilling are the Solberg well (Faroe 20 per cent), on the Halten Terrace, and the Butch East well (Faroe 15 per cent), adjacent to the Butch Main discovery (Faroe 15 per cent) in the Norwegian North Sea. Results are expected on Solberg and Butch East in the coming weeks.”
Henderson notes that last year was disappointing for the company, but the exploration programme offers significant hope.
“[The company] had a poor year with the drill bit and found no new material oil fields,” he said. “It also had to revise down its production outlook.”
“In a sector already out of favour with investors, this hurt the share price but the company remains self-funded and the 2014 exploration programme remains significant for a company of its size.”
The company operates around the UK, Norway and Iceland.
Shares are trading on a forward P/E of 12.6 times.
