The Good Oil

WHILE the oil price has experienced some recent volatility - rising to $99.29 a barrel in November before plunging to around $87 a few weeks later - there is little doubt it will continue to rise over the coming years. The reason is that countries like China and India - home to the two largest populations in the world - are modernising. As they industrialise, there will be a huge influx in people driving cars, and subsequently a need for oil and petroleum. This will in turn put the squeeze on the current oil supplies and effectively push up the cost.

As Austock oil and gas analyst Simon Oaten explains, the instability in key oil producing regions will also drive up the price: “Political tensions in the Middle East have caused a spike in the commodity. Over the long term - so 10 or more years - the current oil prices will be seen to be very cheap.” He added: “Over the medium term, the price will depend on the control of resources by various state owned oil companies in and around the Middle East - aka Mr Putin’s Gazprom.”

Tensions in oil-rich countries such as Iraq, Iran, Venezuela and Nigeria continue to threaten the supply of oil to western nations. In Nigeria, an attack by rebel groups on a French owned Total oil installation last year sent oil prices above $70 a barrel. Attacks on oil company infrastructure and the kidnapping of oil workers has become common in the African country, where rebels are wrestling with the government over oil revenue. These problems, combined with an increased global demand, has seen the oil price rise from around $50 a barrel in late 2006.

Simon Guzowski, senior equities analyst at Wise-Owl, said that while the commodity had retreated in recent weeks, it would continue sky-wards from 2010. “The volatility will certainly continue, but over the medium to longer term it will definitely go up. As China and India industrialise, oil reserves are not rising fast enough to meet the growing demand.” He added that institutional investors would also buy back into the market: “When oil went above $90 a lot of investors, such as hedge funds, said it was overvalued. Now that oil has come back, sellers are moving back into the market.”

So how do investors take advantage of the oil price rise? They invest in sound, stable oil companies with strong fundamentals. Guzowski gives his top stock picks.

OIL WINNERS

OEL Otto Energy (Spec Buy)

This promising oil explorer is on the verge of earning strong oil revenues. Otto Energy is on track to buy into the large Galoc Oil Field that is scheduled to start production in April 2008. The good news for shareholders is that all this revenue is going to be invested straight back into the drilling of new exploration targets. Tenements scheduled for exploration include low risk gas targets in Turkey as well as high risk, high impact targets in the Philippines and Argentina. Drilling success in Argentina or the Philippines has the potential to quickly launch this junior to mid cap status.

RFE Red Fork Energy (Buy)

Red Fork Energy is an up and coming oil and gas producer with a difference. Your typical oil and gas company will focus on headline grabbing high risk high reward targets, which often end up unsuccessful. Red Fork on the other hand is focusing on low risk targets in the US that offer a high chance of drilling success. The strategy is working well for the company and Red Fork is quickly shaping up to be the next big thing in onshore oil and gas. They boast a large onshore land holding in the US and a busy drilling schedule which could drive a re-rating in the stock.

NMS Neptune Marine Services (Spec Buy)

It’s not just oil and gas producers who will benefit from a booming oil and gas sector. Businesses servicing oil and gas companies are also enjoying boom times as the demand for their services sky rockets. Neptune falls neatly into this category through its unique patented underwater welding technology. The method they use gives results similar to dry welds which means considerably lower ongoing maintenance costs than would be the case when a traditional underwater welding method is used. As a result Neptune Marine is gaining market share, a trend we expect to continue.

MRM Mermaid Marine Services (Buy)

Mermaid Marine is also enjoying boom times as an oil and gas services provider conveniently located on the door step of the huge North West Shelf oil and gas province. The company offers a variety of support services to the offshore oil and gas sector including vessels for hire, tug services, supply base services, and a ship repair facility, all of which are enjoy strong levels of demand. With oil and gas activity at record levels in this region, Mermaid Marine has built up an impressive list of blue chip clients including BHP Billiton Petroleum, Woodside Energy, Santos and Chevron to name a few.