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Investors looking to make big returns in the oil and gas sector are increasingly looking south.
Way south.
As I wrote last week, one country receiving a lot of attention is New Zealand (NZ), a fully developed economy with a thriving domestic oil and gas industry. It also has potentially massive shale oil reserves, and explorers are just starting to get their drills going.
That potential has drawn the attention of investors who, rightfully so, are comfortable investing in a country with a transparent market and extremely valuable oil – more valuable in fact than what’s produced in North America.
Because of its high quality, NZ oil can be sold into the Asia-Pacific market at up to a 30% premium to West Texas Intermediate. Natural gas pricing is even better.
Over the next couple of years we’ll find out if unexplored areas in NZ justify the excitement. In the meantime, there are several companies that have producing assets that help fund their shale oil exploration programs. These oil explorer companies are the ones investors should be looking at right now.
By far the best understood and most developed area is the Taranaki Basin on the southwestern side of the country’s North Island. In fact, this is where all of the country’s natural gas comes from. The Pohokura offshore field, which began production in 2006, is the dominant producer.
Taranaki is not nearly as explored as most basins of its size and potential around the world. It covers nearly 100,000 sq. km but only around 400 wells have been drilled over the last 62 years. A comparable area in Alberta is more likely to have had 100,000 wells drilled, meaning there is still a lot of upside in Taranaki, let alone the other basins.
There are a number of companies worth monitoring for clues into how and where exploration is progressing.
Royal Dutch Shell (NYSE:RDS-A) is the biggest producer. But given its large scale elsewhere around the globe, investors wouldn’t want to buy Shell just for its NZ exposure. Anadarko Petroleum (NYSE:APC) is also a player but again is too big to have much upside specifically from New Zealand. Check out these companies’ NZ operations for clues into how exploration is progressing, but don’t buy them.
Integrated energy company Origin Energy (ORG.AX) has some exposure to NZ and also offers investors a portfolio of assets in Australia. This is probably the best way to play oil and gas in the broader region.
New Zealand Energy Corporation (NZ.V) is a small company worth keeping an eye on … but I wouldn’t recommend it now. In fact, if you check out Origin you’ll come across NZ.V too; the small company is in the process of buying a production facility from Origin. There is a little uncertainty around this acquisition, and coupled with a good amount of water found in its latest well, New Zealand Energy carries just a bit too much risk right now for my taste. Keep it on your watch list.
A better prospect is New Zealand Oil & Gas (NZO.AX), a company with a $240 million market cap that’s been listed in Australia and New Zealand since 1981. The company has a 15% and 12.5% stake in two of New Zealand’s best offshore oil and gas fields – Kupe and Tui – which help to provide cash flow to fund additional exploration projects.
The company also pays a dividend which is likely to be around $0.06 this year, meaning the stock yields north of 8% (in 2012 the dividend was $0.06). So while small it’s still a fairly established and reliable company as far as microcap oil explorers & producers go.
There is no doubt that New Zealand’s near-term oil and gas production will come from Taranaki (where NZO has six permits, including those covering the Kupe and Tui fields). However, exploration efforts continue to ramp up in the East Coast, Canterbury, Pegasus and Great South Basins. These areas may be where the greatest upside lies, and NZO has land permits in the Canterbury Basin.
With small explorers there is also always that possibility of capturing huge upside. Getting in before major drill results can mean a 100% gain or more in a relatively short time frame. You have to do your homework, but that work paid off for us with Africa Oil (AOI.V) which has become a multi-bagger after discovering oil in Kenya. New Zealand offers similar potential and astute investors can moderate the risks by following some very simple investing strategies.
In a couple of weeks we’ll be hosting a free, LIVE teleconference where we’ll explain exactly how you can capture as much as 100% upside investing in companies like New Zealand Oil & Gas, while successfully managing risk.
This rare event starts Thursday, June 13th at 2 pm ET and is only open to a limited number of investors. Make sure you can attend and get all the details on my strategy for finding stocks that can double in as little as 12 months… Click here to reserve your seat today.
Good Investing,
Tyler Laundon, MBA