After my previous list of ‘What I look for when I look at oil and gas companies’, I have, based on the feedback received, created a smaller list, stating the top ten things that I look out for when looking at an oil and gas company. Hope this helps:
1. First and foremost, what does the company do? Does it have exploration licences (Bowleven - LON:BLVN), appraisal licences (Antrim Energy Inc - LON:AEY), producing licences (BP), or does it have a bit of them all (Ithaca Energy Inc - LON:IAE, Afren - LON:AFR)? Next look to see how many licences they have, are they diversified with an example being Nautical Petroleum (LON:NPE) who have a diversified asset base, and Xcite Energy (LON:XEL) who have just one.
2. Where are the company’s assets based, as this has implications for a number of reasons, with the most important two being 1) if they are located in a region with large political risk, there are nationalisation risks (i.e. the company could lose its assets), tax change risks, and even potential risks of war, and 2) If they are exploring in a new frontier (the Falklands for example) the costs and odds of success are much higher than say the North Sea, which has relatively low exploration risk, and due to strong infrastructure, reduced drilling costs.
3. What type of oil does the company specialise in, Nautical Petroleum and Xcite Energy both deal in heavy oil (though Nautical do have their 15% stake in Catcher), which gets a lesser price and can be more expensive and difficult to produce, whilst Ithaca Energy and Antrim Energy deal in light oil, therefore are less risky propositions, and better able to handle a faltering oil price. Just to note to check this look for the API of their prospects, anything below 25 is deemed heavy, and below 10 extra heavy. The most preferable for refineries is between 30 and 40 (Intermediate), though this number is falling as lighter oil is becoming scarcer.
4. Next, the management need to be checked out, as it will be their job to utilise their assets.…
