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Oil investors to rely on drillers as crude prices remain range bound

Published: 08:41 16 Oct 2012 EDT

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Investors in oil stocks are relying increasingly on exploration drilling, according to Deutsche Bank’s London office.

This comes amid range bound oil prices and a dearth of mergers and acquisition activity, says analyst Phil Corbett.

“Apart from general market forces, E&P share prices and sentiment levels are heavily influenced by four factors: oil price movements, M&A, funding availability and exposure to the drillbit,” he said in a note.

“Brent oil prices are stuck in a range (albeit a US$100-120/bbl spread which most producers are no doubt happy with). A dearth of high-profile M&A, compared to sustained activity elsewhere (i.e., N. America) suggests Euro E&Ps neither have the scale or focus to generate industry interest.”

Corbett does however point out that he has no major near term concerns over balance sheets and the drilling roster remains ‘well stocked’. There are a number of high profile and potentially transformational exploration wells coming up, he explains.

The analysts preferred stocks in this environment, which provide material exposure to the drill bit, are Africa Oil (CVE:AOI), Premier Oil (LON:PMO) and Salamander Energy (LON:SMDR).

He meanwhile cuts Africa focussed Ophir Energy (LON:OPHR), which has gained xx% since xxx, because he reckons there’s scope for profit taking into a ‘catalyst light’ end to the year.

In the broader oil market prices (Brent crude) remain steady in a range, as described by Corbett, trading broadly between $105 and $115 in recent weeks.

This comes as traders balance supply concerns based on geopolitical tensions in the Middle East and North Africa – specifically clashes between Turkey and Syria, and the Iran sanctions – against a broad weakening in demand indicators mainly coming as a result of the debt crisis in Europe, America’s slow recovery and China’s slowdown.

Traders in London saw Brent crude futures down 25 cents trading at $115.50, while US light sweet crude gained around 30 cents to $92.16 barrels per day.

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