The latest Opec meeting has been billed as a struggle between Saudi Arabia and Iran over output quotas amidst ongoing proxy conflicts in the Middle East, but Paul Mumford, fund manger at Cavendish Asset Management has taken a more sanguine approach to the possible outcome, including the impact on UK oil and gas firms.
“While a lot of the commentary and coverage has made a song and dance of Saudi and Iran being at loggerheads, the dialogue seems to have steadily improving – we may yet see some sort of accord get worked out,” he said.
“In general, the range of potential outcomes look favourable for smaller UK oil and gas companies. The ideal would be stable average oil prices, with Brent Crude trading in a range between $70/barrel and $80/barrel. This would prove a boon for cash flows and forecasts as every extra dollar at that point goes straight through to cash flow. As well as taking the pressure off highly-geared firms, this would boost the value of reserves making it easier to obtain finance for exploration and development.”
“However, even if Brent Crude falls below this ideal and into $60/barrel, many of these smaller firms will still remain quite profitable. The situation in the sector is very different to what it was during the last oil spike; firms have worked hard to get operational costs way down, and many have taken advantage of the sustained high price to lock-in a price for the immediate future. Whereas these firms were previously trading on razor margins and vulnerable to small falls, they are now far more resilient and can comfortably stomach falls all the way down to $60/barrel.”
“Should Brent Crude go south of $60/barrel, then we start to enter trouble and worry territory – although many will still remain profitable down to $50/barrel. Conversely, a spike above $80/barrel could be counterproductive in that it could cause an overcorrection, triggering volatility. All in all, however, so long as the meeting is perceived to reach an agreement that will keep the price above $70/barrel, the outlook is very rosy.”
A year ago, the Brent Crude price was trading around $45/barrel.
Another reason for a possible positive outcome in terms of an agreement on Opec output is that Saudi Arabia is looking to successfully list Saudi Aramco, which would become possibly the biggest IPO ever, and which could give the company a market capitalisation value of more than $2trn. However, recent newsflow suggests that the listing may be pushed back to 2019 because of difficulties finding a suitable international stock exchange to handle the float. The London Stock Exchange and its international competitors have been trying to find a way to get the primary listing, as a way to generate significant additional business, as it would likely become one of the most widely held energy related stocks.