Oil Exploration Companies As Investments?
Call me old-fashioned, but I have never been able to view oil exploration companies as investments
. Earnings visibility can never be anything but guesswork, hardly any ever pay dividends, most seem to disappear, one way or another without becoming Shell or Exxons...reminds me of a religious belief, professional explorers like to remember the one or two which became ten or twenty baggers and will not be dissuaded from their addiction to gambling, and the rest of us, agnostics and atheists, tend to avoid them.
I notice that the Investors Chronicle devotes more and more space to mining and explorers and trading CFDs, but I think this is more a reflection to the falling quality of the UK quoted universe. A serious investor would be hard pressed to put a portfolio of transparent high quality simple businesses at reasonable prices from the UK quoted sector I think.
For the next few months, like the past couple, I intend to hold only very liquid FTSE dividend payers and write options on them, aiming for a return of 20-25%. With BP for example, 5%+ of that is already in the bag from the dividend
Apart from BP/Shell, Glaxo, Vodafone, Sainsbury, I think most of the rest are poor value and trading them using contracts for difference would be too risky. As I write this, I have 50% of my funds in just two FTSE stocks, but I feel safer there than in a couple of explorers like GeoPark and Cove.
Comparing BP to AFR
BP
- Let's compare BP with AFR, both shares on a forward price earnings of around 10.
- BP current price/earnings 7.5, this year's forecast census 57p = 427p
So unless the market re-rates BP the yield of 5% will be of little comfort.
AFR
- H1 production of 15,000 bopd, rising to 35,000 bopd, an optimistic IMO target of 100,000 bopd by the end of 2012.
Several areas of exploration, not least Ghana which has the potential to be a huge discovery, expected to be drilled end of this year, will most probably slip into early 2011. So looking into early 2012, if they find oil in Ghana and production is confirmed around the 100,000 bopd, would most probably make them a likely takeover target, so it appears the more risky share could be BP. All IMO, DYOR etc., opinions make markets and you need opposing views for the market to function.
Investors rarely mention size, but this is a critical variable imho, if you think something is going to double, why not put 50 or more per cent of funds into it? Otherwise, so what if it is a triple bagger for example, if it is one of ten or twenty in a list of holdings?
by: luckystrike
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