121 Oil & Gas Investor London Conference
29 - 30th October 2018
At the end of October (29th & 30th), 121 held its second annual Oil & Gas Investor London Conference (the “Conference”), of which SPA has been a proud Gold Sponsor since its inception. The Conference built upon the success of the first conference, with 24 companies and 200 investment professionals attended, with more than 400 “121” meetings between the two groups. SPA looks forward to being able to email the dates for the 2019 Oil & Gas Investor London Conference shortly.
Throughout the two days, presentations, outside of the "company/investor" specific meetings, in the main auditorium provided a great deal of context and insight, tackling a range of topics ranging from BP on its Global Energy Sector Outlook, Kerogen Capital’s opinion on the role of natural gas in the UK energy security. SPA also outlined the current status for oil & gas company access to equity and debt liquidity in the London markets.
While there was wide range of views and perspectives expressed, we were struck by the uniformity of the opinion that outlook was improving across the board, albeit with liquidity remaining at a premium.
There were several takeaways that have stuck with us, namely:
- Company to Watch – Faroe Petroleum (LON:FPM): With all the ingredients and strong management, the Company is set to build upon its current base, providing numerous potential revaluation events for investors.
- Outlook – Gas Market Maturing: Increasing liquidity in the gas market and the burgeoning spot segment has underlined the rapid maturation of the gas global gas market, and improves the outlook for a market to rival the oil market.
- Investment Liquidity Deepening & Widening: London has remained open while other markets have closed to oil & gas. Recent evidence, however, suggests that not only is investment appetite returning in the equity markets, but the accelerating sophistry of the structured finance and credit markets means that London is increasingly the market of choice for sub $2.5bn companies, worldwide.
- Investing: Value Versus Worth – A Return to Value Investing?: Startling parallels in investment climate between 1998 – 2003 and now, with growth investing taking favour over value investing, before the trend reversed and capital inflows into the “old economy” drove oil & gas investment to new highs. Signs of this shift in investment are starting to emerge.
- Surprise Package – Exploration – The Returning Fashion Accessory: Exploration has been out of favour, but recent successes in the Guyana Basin has reignited the focus on exploration for the benefit of all participants. However, investors are still selective about what they support.
Company to Watch – Faroe Petroleum (LON:FPM)
At the Conference, Faroe Petroleum (FPM LN) outlined its forward programme and provided insight into the future development of its portfolio, and its attendant risks. While there is always elements out of management control, while there always some measure of a need to rely on third party performance, we were immediately struck by the high percentage of elements fully within the Company’s control.
Consequently, we believe that the near to medium term outlook for production, which is set to see it rise to 35m bpd in the near term, is less “if,” and more “when.” With significant liquidity available (cash on hand, cash generation and credit), we see the medium-term target of 70m bpd by 2025 as eminently achievable, and with recent drilling successes, likely to be upgraded further in the near term.
There remains an element of uncertainty surrounding the future direction of DNO’s ambitions towards the Company. However, we fully understand why it is pushing so hard to acquire it – being able to acquire the Company at current valuation, based on the coming 3 – 5-year programme, could easily see it increase the value of its acquisition threefold, even at “market worth” valuation metrics.
In light of that, it becomes one of belief in whether this management team can deliver the promise of the Company’s portfolio. We believe that the team that has none of the self-aggrandisement of other, less skilled management teams in the sector, and is acutely aware of its capabilities, clearly understanding how to deliver large technically complex projects. We believe that the current team is ideally suited to deliver on the Company’s promise.
Outlook – Intercontinental Gas Market Coming of Age
Throughout the conference, numerous commentators highlighted the increasing rate of maturation of the intercontinental trade in gas, highlighting that while pipelines still dominated, especially in Europe, there has been a marked increase in LNG transportation, which has seen an increase of 20% in the two years.
There was universal acceptance that this had been driven in part by advances in liquefaction and shipping technology, contemporaneously allied with lower costs, there have also been some coincidental drivers that have lifted the gas market, namely:
- Growth in demand: Principally as a reflection of the growth in economic activity, but also as a switch fuel, as the lower greenhouse gases associated with gas, have gained traction as governments and industry seek to meet Kyoto & Paris emissions limits;
- Declining production in more mature markets: the mature European markets have accessed all of the conventional gas accumulations, leaving those that require the application of modern completion techniques, such as horizontal drilling and fracking, to lift. Access to these resources, however, has been arrested by the tide of public opinion against fracking, thereby creating a higher than would be expected decline in domestic production. It has been easier to land spot gas (see below) than to educate the public as to the limited risks associated with oil & gas operations.
- Evolution of Spot Cargos: Historically, LNG liquefaction capacity has been closely tied to long-term “take or pay” offtake agreements, with minimal volumes provided for spot cargos. More recent investment decisions, however, have been increasingly strategic regarding their scalability, which when coupled with advances in liquefaction technology has enabled the achievement of higher turndown ratios, thereby “future proofing” installed capacity, and allowing for the effective short-term “expansion” of production rates to accommodate more lucrative spot cargos.
- Gasification Space Availability: unlike LNG liquefaction, gasification facilities have always been less sophisticated and therefore cheaper to install, with almost infinite turndown ratios achievable. However, recent gasification facilities have installed greater than required nameplate capacity to accommodate not only the production decline induced shortfall in demand, but also the “dash to gas” incremental increase in demand.
All of these actions have served to expand the spot gas market, which is increasing pressure for exchange traded regional spot LNG cargo prices to be developed, again supported by the growing physical volumes. We believe that once this achieved, the drive to provide "open access" liquefaction and gasification facilities will grow, resulting in an ever larger market with more participants across the spectrum of users, from utilities to industrial users.
With this comes an economy of scale and supply resilience, which will provide further confidence to upstream investors and downstream market counterparts alike.
Liquidity – Deepening and Widening
In the plenary sessions, some commentators highlighted the fact that the London markets were once again open for funding oil & gas companies, even though the majority still shun E&P. The interesting point of note was that while the London markets have been open since oil crossed $50/bbl, the range of financing available has expanded, with an increased array of funding options open to the small to midcap companies, ie, those with a nominal market valuation of less than $1bn.
While the London markets have long been the market of choice for companies outside of the Americas, an interesting development still emerging is the fact that even those companies with assets in the Americas are finding a more receptive audience in London if they’ve got a valuation of less than $2.5bn.
This, coupled with the increased range of funding options, has meant that the London is once again gaining the reputation of being an engine for growth in the oil & gas segment, not just for the larger companies, but the smaller end of the spectrum too.
Investing: Value Versus Worth – A Return to Value Investing?
There was the consensus at the conference that the oil & gas segment is out of favour partially because oil prices remain volatile, but also that investor focus has been on growth companies. This was encapsulated by one investor who observed that in the US or Canadian markets that “unless it is cannabis or crypto, it is unlikely to receive an audience.”
The parallels between 2000 and currently are striking. Both are approximately two years after a significant retrenchment in the oil price, and against a backdrop of a period of under-investment in exploration.
Before 2000, “bits & clicks” growth stories were the focal point for investors, with PE ratios sometimes exceeding 100x, driven by the explosion in internet & technology-based businesses and the huge potential provided by marketing to the web. This was to be contrasted against the comparatively sedate “bricks & mortar” type business whose valuation was driven primarily by growth in cash flow.
Post the “dot com” bubble, however, independent E&P companies found favour as investors could participate in the similar kind of explosive revaluation events while maintaining some sanity in being able to point towards realistic cash flows.
The retrenchment in exploration spending between 1998 – 2003, resulted in forward supply attrition. When set against the fact that at the time, the production base declined at a minimum of 8% per year, it led to fears of a supply shortage, precipitating a surge in the oil price, peaking at ~$140/bbl in 2008.
Fast forward to today, it is irrefutable that the “new” economy synonymous with “bits & clicks” is based on the “old” economies, which is the bedrock of “bricks & mortar” companies, meaning that oil & gas is just as in demand today than it ever has been, if not more when you factor in demand for composite and specialist materials.
The underlying decline rate in global production has not diminished, and if anything has increased, which to our mind exacerbates the problem. With demand at all-time highs, which means that falling short of meeting demand by a nominally identical qualitative amount, will have a greater impact on the markets, either shortening the price cycle, or heightening the upward pressure, but probably both.
Against this backdrop, investors are starting to also draw such parallels, hence the green shoots of recovery in oil & gas investment. We also foresee these a return to above $100/bbl oil in a short period; our estimates suggest 2022.
While the oil & gas segment has matured and become significantly more sophisticated, so too has the investor base. The underlying business remains the same today as it was in 2003 but the added investor sophistication means that the market is more selective about the investments it makes, favouring those that combine the explosive growth of the “bits & clicks” sector with the fundamental cash flow basis of the “bricks & mortar” sector.
Signs from London, have been positive, and although broadly limited to production ready assets, that appetite in the markets is returning is the key thing. However, against this is the backdrop of volatile oil prices, which variously provides headwinds in varying degrees.
Surprise Package – Exploration, The Returning Fashion Accessory
While the London markets are open to financing Appraisal and Development, the funding of exploration has been somewhat more limited. Recent evidence, however, suggests that the appetite for Exploration risk is starting to return.
While it is primarily limited to exploration in the “hot” basins such as the Guyana Basin (offshore Guyana & Surinam), there was some evidence to support the opinion that the market is beginning to look at select exploration stories.
Although this is limited in size and scale, reflecting the fact that investors are still selective, it is nonetheless an interesting development and underlines the extent to which the market is becoming comfortable with higher risk exploration.
We may provide a further update on one, or all, of the stories above later today. However, if there is anything that you would like to discuss, please feel free to contact us.