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EY’s Oil and Gas Eye Q1 2014

Hydrocarbon Engineering,

EY’s Oil and Gas Eye Index continued to trend lower in early 2014, falling 15% in Q1, the largest decline in 18 months.

The index has fallen in three of the last four quarters. Investors remain risk averse, and larger oil and gas companies with more stable cash flows and a more balanced portfolio of exploration and producing assets, continue to outperform their AIM peers.

The Eye’s continued decline is perhaps more a reflection of underlying company performance and exploration success than wider macro industry factors. It was not uniform across the AIM oil and gas universe, with significant variation in the performance of individual stocks this quarter.

Those with decreasing stock values were hit by poor drilling results and media speculation around potentially transformational projects.

Junior oil and gas companies are looking to preserve capital through a continuous focus on cost reduction. According to EY, a key challenge when significant cost cuts are needed is to ensure reductions are consistent with the business’ strategic direction and will not cause further value erosion.

Those businesses that have not delivered tangible results, or at least movement in the portfolio either in terms of asset development or M&A, are likely to find it hard to maintain support from institutional investors. Just 14% of companies successfully raised funds through further issues this quarter.

Main market movers

  • Royal Dutch Shell and Soco International were the only two FTSE 350 oil and gas companies to register a share price gain in Q1, with modest increases of 3% and 0.2%.
  • Cairn Energy’s share price ended Q1 down 38%. Pending the resolution of a tax dispute, it has been restricted by the Indian Income Tax Department from selling its remaining shares in Cairn India, which were valued at US$ 1.0 billion on 31 December 2013.
  • Ophir Energy’s share price fell 27% over Q1 following disappointing drilling results.
  • Tullow Oil’s share price fell 12%, also due to drilling disappointment.
  • In Janaury, BG Group issued force majeure notices under its LNG agreements in Egypt reflecting ongoing diversions of gas volumes to the domestic market. The following month it announced final results from 2013, which showed total operating profit had decreased 5% to US$ 7.6 billion. Its share price dropped 14% over Q1.
  • In February, Essar Energy said it has received a possible offer from its 78.02% shareholder, Essar Global Fuel Limited (EGFL), for the ordinary shares it does not currently own. In March, EGFL announced a firm intention to buy the outstanding shares. In response, Essar released a statement saying its Independent Committee Board considers that the 70 pence per ordinary share offer materially undervalues the company and its future prospects. Essar’s share price fell 6% over Q1.

Edited from various sources by Emma McAleavey.

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