6 Top Oil & Gas Shares For 2012

Published in Investing on 9 May 2012

What's in the pipeline for private investors' favourite oil and gas shares?

Oil and gas companies are always popular with investors -- and never more so than during a period of high oil prices, such as we have seen over the last year.

In this article, I am going to take a look at the current fortunes and prospects of some of the most popular medium-sized oil and gas explorers -- many of which stand on the brink of a make-or-break transformation.

Not regular shares

The share prices of resource companies are heavily correlated to the commodities they sell, rather than the wider equity market.

Even FTSE 100 giants like BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) are affected by this, but smaller companies focused on exploration and production are much more vulnerable as raw commodities are their sole source of income.

Global meltdown?

Oil prices have been falling recently, and the global fears caused by weaker US economic data and the Greek and French elections have driven a fall in share prices for most resource stocks, as investors worry that demand for oil and metals will fall.

The result is that most of the shares in this article have fallen heavily in recent days. However, it's worth remembering that these companies are all about exploration -- a major success will lift their share price, whatever happens to the market. Tullow Oil (LSE: TLW) provided a good example of this yesterday, rising following an important oil find in Kenya, while all of its peers fell.

All of this means that recent falls could be a good buying opportunity.

Gulf Keystone Petroleum

Gulf Keystone Petroleum (LSE: GKP) operates solely in the semi-autonomous Kurdistan region of Iraq. Here, it has large and growing reserves based around its Shaikan block, which is currently thought have a 90% probability of containing at least eight billion barrels of oil.

Political concerns and the fact that all of its eggs are in one basket heighten the risk for investors, but these risks seem manageable, and Gulf Keystone is currently gearing up for a big increase in production. Some questions remain over funding and export arrangements, but it has big potential.

Xcite Energy

Xcite Energy (LSE: XEL) regularly features in broker TD Direct's list of most traded companies. It operates in the North Sea and recently upgraded its proven oil reserves -- a key value indicator -- to 96MMstb (million stock tank barrels). Its main asset is Bentley field, which is currently being drilled for production in the first part of a three-phase development programme.

Xcite still needs to raise funds to complete the development programme, but if Bentley lives up to expectations, it should attract interest and money from larger players.

Range Resources

Range Resources Ltd (LSE: RRL) is an oil and gas explorer with interests in Puntland, USA, the Republic of Georgia and Trinidad.

It's the opportunities in Puntland (an autonomous state of Somalia) that have really captured investors' imaginations over the last year and some definitive news on the highly prospective Shabeel-1 well should be due shortly.

Rockhopper Exploration & Falkland Oil & Gas

In my recent article, Who Will Win The Falklands Oil Race, I looked at the five London-listed companies currently vying for exploration success in the Falkland Islands.

Rockhopper Exploration (LSE: RKH) and Falkland Oil & Gas (LSE: FOGL) are probably the cream of the crop: Rockhopper because it is the only company to have found any oil, and Falkland Oil & Gas because its licences are considered to include the best prospects in the area. It is due shortly to start drilling its flagship Loligo prospect, which could contain as much as 4.7 billion barrels of oil.

Rockhopper is currently looking for a partner to help develop its Sea Lion oil field. Expect developments from both companies later this year.

BowLeven

Africa is one of the world's most resource-rich areas, and BowLeven (LSE: BLVN) is focused on the West African state of Cameroon. It has significant oil and gas resources in this area, and a fully funded exploration programme to develop these further.

Back in February, BowLeven's share price took a dive after an aborted takeover attempt by Dragon Oil (LSE: DGO) and it currently looks quite cheap, considering its resources. More importantly, BowLeven recently signed a Memorandum of Understanding with German company Ferrostaal to provide gas from its offshore Cameroon Etinde gas field to a fertiliser plant onshore.

Both plant and gas field are currently being developed, and the deal is to provide the plant with gas from the end of 2015. This is a key step forwards as it starts the monetisation of BowLeven's assets.

Where next for oil and gas prices?

Despite the recent fall in oil prices, it isn't exactly cheap, and the Saudis -- who produce 10m barrels of oil per day and claim spare capacity of 2.5m barrels per day -- have indicated that they intend to manipulate supply to keep the price of crude at or close to $100. Most oil explorers base their resource valuations on prices below $100 per barrel, and I would steer well clear of any that depend on prices over $100 to be commercially viable.

Gas prices vary much more widely around the world, as BG Group's (LSE: BG) recent results highlighted, but the general trend is likely to be upwards over the next few years, thanks to rising global demand.

Buyer beware

Despite their mid-cap valuations, companies like these are risky investments that can go from hero to zero in no time at all. If you consider investing, you should do your own research, form your own opinion and only invest what you are prepared to lose.

Oils, Pharmaceuticals, Banks, Telecoms -- just where should you invest today? "Top Sectors Of 2012" is the Motley Fool's latest guide to help Britain invest. Better. The report is free.

Further investment opportunities:

> Roland owns shares in Royal Dutch Shell but does not own any other share mentioned in this article.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Proselenes 10 May 2012 , 8:44am

I think you should differentiate between recoverable barrels of oil and oil in place figures.

Some companies like to only promote the larger "oil in place" figures as they are bigger and recovery factors might be low.

Some companies correctly quote P50 mean recoverable resources, which is the potential recoverable barrels, a smaller figure but based on estimated recovery figures.

For example Loligo is potential 4.7 billion recoverable barrels figure (from an OIP figure of potentially over 15 billion barrels oil in place).

Therefore to assist people I think you should state whether a figure quoted by any company is potential OIP or it is potential Recoverable barrels of oil.

sopavest 10 May 2012 , 1:55pm

@Proselenes,

Thanks for your comment, I agree that the difference between OIP and P50 mean figures is significant, but that level of detail was slightly beyond the scope of this article, which was only meant to be brief introduction to the companies listed.

In the case of Loligo, I deliberately chose the lower figure as I wanted to minimise the hype effect for investors who may be less familiar than you are with the situation. Even a P50 figure is fairly optimistic, after all.

Unfortunately, I could easily fill a whole article solely with an explanation of all of the different metrics O&G companies use to describe what they might find, have found or hope to find.

Regards, Roland (article author)

mrj111 10 May 2012 , 4:26pm

Why not Valiant Petroleum, PE of <4! and much less political risk and with exploration upside?

PS with oil companies of this size quoting the correct reserves is the most important figure, small investor should be made aware of recoverable reserves not "In Place Reserves" which are meaningless.

chubbybrown 10 May 2012 , 9:17pm

Nice to see Range getting a mention on fool,its hardly mentioned here; a once darling of the AIM but shorted to hell.
perhaps another article on p1's,p2's and P3's etc would be nice

glamgrooving 14 May 2012 , 3:54am

Rockhopper has brought me much joy over the past few years. After the peak in Sept 2010 are they again poised to reach new heights?

wellington101 20 May 2012 , 12:16pm

Thanks the P50 thing will make a difference to what I buy. Hold BP.L GLEN.L and SQZ.L for my first small cap oiler?

drillernic 05 Jun 2012 , 12:17pm

@Proselense

Any time you see "Reserves" it must, by definition be talking about recoverable oil, including an economic calculation and not oil in place.

Now as reserves are a bit of a moving target (what fraction of the oil in place might be produced; what will the long term price of oil be, how much will it cost to drill the well and put the production infracstructure be) people talk about reserves definitions. there are two types of definitions:

Deterministic ones like the The SPE/ NYSE/ WPC rules (aka "The yellow book rules") that classify reserves as Producing (ie oil flowing right now up a well and likely to continue flowing) Proved (reserves that the company knows are producable but hasn't yet drilled a well to access them yet); Probable (reserves that are pretty certainly there) and Proabable (reserves that might be there) often seen as 1P 2P, 3P and 1P+ 2P and 1P+ 2P+ 3P reserves. There are all sorts of rules about what defines a type of reserves- a well has been drilled and logged but not tested (ie flowed)... which category does the oil in the 100m of oil saturated rock the well saw go?

As the SPE rules are very deterministic, some companies and regulatory authorities allow probabilistic methods to estimate reserves. The UK is one of them. So P90 reserves = reserves that there are a 90% chance of these reserves being produced, P50 = reserves that there are a 50% chance of being produced (NOT 50% of the oil in place!!!) and so on. Deterministic ruels struggle with resource type plays like shale gas, shale oil (NOT oil shale- two different things!) and Coal Bed Methane.

P90 roughly corresponds with "Proved"; P50 roughly corresponds with "Proved + Probable" and P10 roughly corresponds with "Proved + Probable + Possible"

suse9 06 Jun 2012 , 3:58pm

What about US Oil and Gas (USOP)?
Yhey seem to be having some very positive drilling results.

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