FPM18 Feb 2011 17:03
City broker Northland reckons the small and mid-cap explorations and production sector is ripe for consolidation.
It sees mid-tier players such as Ithaca Energy (LON:IAE) and Faroe Petroleum (LON:FPM) as potential predators along with the larger players such as Tullow and of course the voracious majors, who are struggling to replace their reserves.
However Nortland’s analyst Andrew McGeary reckons acquirers may target assets rather than individual companies.
“With the majors struggling to replace reserves, we believe we have entered a period of consolidation in the oil and gas industry, though this may be more at an asset than PLC level,” Northland’s Andrew McGeary said.
Meanwhile, the instability seen in resource rich Egypt and Tunisia, which appears to be spreading to Iran and Libya, means the predatory oil companies are obviously keen on assets in more politically benign regions of the world.
“In terms of the UK small cap E&P sector, these dynamics should provide value realisation opportunities from potential disposals or farm-ins, as well as helping underwrite the valuation of producing assets,” the Northland analyst explained.
He favours stocks with significant exploration programmes of interest to the majors such as Tower Resources (LON:TRP), Providence Resources (LON:PVR) and Northern Petroleum (LON:NOP).
“Smaller producers may still be interesting on a case by case basis in a benign pricing environment but are unlikely to benefit from these dynamics,” McGeary added.
Separately, the oil and gas team at Shore Capital met with Northern Petroleum’s finance director Chris Foss and Sophie Hull, the head of corporate communications, on Thursday.
Onshore UK, the company expects testing of the Markwells Wood appraisal well to commence mid-year while onshore Italy, it is waiting for planning approval for the La Tosca exploration well, with an anticipated spud date in the second half of 2011, Shore analyst Craig Howie reported.
Offshore Italy, in the West Sicily Thrust Belt, Northern continues to expect a drilling decision from Shell by the end of the current quarter, when spudding of the Tullow-operated Zaedyus well offshore Guyane is also anticipated, Howie revealed in a note to clients. Meanwhile, Northern’s assets in the Netherlands are progressing to plan.
“Although we see scope for upgrades to our assumed Dutch gas price, we leave our forecasts unchanged for now,” the analyst said, repeating his hold advice and 125 pence a share price target.
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