Fairfax media's coverage from the recent HIS Ceraweek Energy Conference in Houston, USA, showed another side to the recent decline in the value of crude oil.
Major companies like Royal Dutch Shell, Exxon Mobil, and Total SA are now debating the risk that delayed capital expenditure will lead to a world shortage of oil and gas in five to ten years' time.
ASX-listed producers like Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) have wound back their capital expenditure plans – aiming to preserve capital and reduce risk while uncertainty around the value of oil and gas persists.
Junior producers like Senex Energy Ltd (ASX: SXY) have also reconsidered their expenditure plans, with a focus on higher-yield wells generating immediate production in order to boost cash-flow and 'de-risk' operations.
Considering the very long lead times – from field discovery, to evaluation, to environmental and regulatory approvals, to a final investment decision on projects, shareholders run the risk of lower returns over the medium term as existing reserves dwindle, if a company is not investing adequately in keeping them topped up.
To give an example, the idea for Woodside Petroleum's Browse LNG (now Floating LNG or FLNG) project was initially floated back in 2009.
The project is now set to receive a Final Investment Decision – to decide whether to build or not – in mid-2016.
More than 7 years after the idea was floated, Woodside Petroleum will decide whether or not to actually build the FLNG plant.
So are delays in oil/gas project development caused by low oil prices at risk of causing future shortages? You bet they are.
Here's how you can profit from the situation:
- Buy companies with a strong financial position and extensive tenements
Woodside Petroleum is a great example, as is Senex Energy on a much smaller scale. Senex recently opened its first debt facility which gives the company a great amount of flexibility going forward.
(In fact investment bank JP Morgan tipped Senex to rise 78% this year; you can find out more here)
A strong financial position will allow companies to continue to fund projects and repay debt even during weak market conditions.
Extensive tenements allows continued exploration or development even during a shortage, at which point potential oil fields will probably command premium prices.
- Buy companies with a 'look-through' view of the market
$50 oil prices won't stay around forever. The market might go up or down, but one thing I can guarantee is that it will move.
Find a company with a five to ten-year viewpoint that is organising its business based on where they expect the market to be at those times. This will put them in a better position if there is a shortage.
Naturally if a shortage does eventuate, those who own shares in healthy oil producers will stand to make a killing.
I don't believe a shortage is all that likely, but as with all investing it pays to take a long-term view.
