Changing Times In The Oil Industry, Where Now Is The Tipping Point?

BY TOM BULFORD

News that Royal Dutch Shell is to halt development of its vast Canadian tar sands project is a sign of changing times in the oil industry - and one that will not be well received at the AIM-listed provider of data to the oil industry, GETECH Group Plc.

This is a pity because the company’s annual results statement revealed a share that looked extremely cheap and prompted an 80% rise in its price from 16p to 30p.

The important question for investors is whether Shell’s decision is a one-off, reflecting its unusually complex and expensive project in Alberta; or whether it’s an indication that the oil industry, which has loosened the purse strings in a big way in the last few years, is now ready to tighten them again.

It was not the tumble of the oil price from $140 to $60 per barrel that was cited by Shell’s chief executive Jeroen van der Veer. ‘We will wait for costs to cool down before any new investment decisions,’ he said, and it is true that the dramatic ratcheting up of exploration budgets has seen an even more dramatic rise in the cost of drilling rigs, seismic surveys, qualified geologists and all the other ingredients of exploration.

The tipping point for the oil price?

But still, for the future of oil exploration the oil price is obviously hugely important, and a few assumptions are now being revisited. Only three months ago, in its research note on GETECH, broker W H Ireland said that ‘Even factoring in a worldwide economic slowdown, few commentators are currently forecasting the price of oil to fall below $100, let alone $70.’

How quickly can such forecasts be overtaken by events!

Where now is the tipping point? At what price will oil companies decide that it no longer makes sense to throw huge sums at exploration projects - knowing of course that much of that money will never produce any return? This is a complicated issue. It depends, amongst other things, on the profitability of existing oil production, the complexity of new projects (rising as the frontiers of exploration are pushed back) and those costs of the necessary equipment and other resources.

According to GETECH, this tipping point lies at about $70, so it will not perhaps have been surprised to see Shell’s decision. But it is probably now wondering what this sudden retraction of the oil price means for its own future.

At the frontier of exploration

GETECH was founded by Dr Derek Fairhead of the University of Leeds, who thought it would be a good idea to produce a comprehensive gravity survey for the African continent. He persuaded eight large oil companies not only to contribute their own data but also some money. The Africa Gravity Project was begun in 1986 and was the first in what has become a series of such studies that give oil companies the basic location and structural architecture of sedimentary basins that could contain oil.

Today, GETECH has one of the largest and most extensive libraries of magnetic, gravity and topographic data covering almost every country in the world. It is soon to launch five new studies each of which covers a specific geographical region. These are East Africa, the South Atlantic, the Taoudenni basin of Mauritania, South East China and the Arctic.

The latter is of special interest as the Russian Arctic is considered to be one of the last frontier areas for exploration. As proof that GETECH is a company with international respect, it is building databases in partnership with various Russian scientific organisations.

Profits on a rising trend

GETECH typically has these studies part-sponsored before commencement and subsequently licenses them to additional clients. It sells them for several thousand pounds and, as well as the US Government, its principal customers are big oil companies such as Shell, BP and ExxonMobil.

Having cut back exploration departments in the last downturn, these giants are wary of rebuilding them and anyway cannot see much point in trying to create their own databases when GETECH has built a comprehensive database from information gathered from all sources.

Building upon strong relationships with its customers, GETECH launched its Petroleum Systems Evaluation Group in 2004. Going one step beyond provision of raw data the aim of this group is to provide a more detailed insight of where oil and gas might be found within the sedimentary basins.

The result of this is a rather unusual business with a strong customer base and a minimal requirement for capital investment. Profits have been on a rising trend, reaching £0.9m in the latest financial year and from earnings per share of 2.17p GETECH paid an attractive dividend of 1.3p. GETEC has net cash of £1.6m and owns its Leeds headquarters which is valued in the balance sheet at £2.7m.

So today’s stock market valuation of £8m is well backed by assets as well as by earnings and the dividend. However, while the immediate concern rests with the future of the oil price, perhaps a bigger issue for shareholders lies with GETECH’s avowed ambition to make acquisitions. So far in the three year of its AIM listing it has been unable to strike a deal and unless it can find one, and a good one at that, it may be destined to remain some way below the radar of institutional investors.

Best regards,

Tom Bulford
For Fleet Street Daily

Editor’s note: Tom Bulford is editor of Red Hot Penny Shares and also writes a free e-letter, Penny Sleuth. Tom believes that there’s a great investment opportunity coming your way. He argues that thanks to panic-selling, some of the UK’s most exciting small companies are now selling at prices we haven’t seen for nearly five years. More than that, he believes that many of them are due a huge "bounceback". We’ve asked him to whittle his list down to his "top three" picks - shares that stand the best chance of delivering great gains... even as we stand on the brink of a recession.

It’s going to take a little while before Tom’s research is ready. But we’ll let you know more when the time is right. It should be within the next two weeks. Stay tuned...

In the meantime, if you’d like to receive Tom’s free Penny Sleuth e-alert for all the latest penny share news, advice and market insight, just enter your details here.

Sterling crisis - have you bought your protection?

BY BEN TRAYNOR

Last Thursday’s huge base rate cut is a sign that the Bank of England is seriously concerned about the state of Britain’s economy. For meeting after meeting, arch dove David Blanchflower has voted for a rate cut. More often than not this year, he has been at odds with his colleagues on the Monetary Policy Committee. But one can imagine that, as the situation has deteriorated, Blanchflower’s dovish views have carried more and more weight. He’s the man to listen to now.

There is no reason to believe this is the end of the rate cutting. There are still 300 basis points between here and zero. If things get as bad as they were for Japan in the last decade, we could see a lot of that ammunition being used.

Sterling has suffered a lot since we recommended [our special sterling crash protection investment]. But it could still suffer more. It’s therefore important that you protect yourself.

You’ll not read about this investment in any of the mainstream news channels that are finally reporting the details of the current economic turmoil in Britain. But our small group of investors has the secret. If you’d like to join us, it’s not too late. We’ll show you how to buy some protection for your wealth. Just click here for details.

The Daily Reckoning - No ordinary slump BY BILL BONNER

The world’s press spoke with one voice over the weekend:

"Now, the hard part...!"

"Obama faces huge challenges..."

"Not an easy time for President-elect..."

And for once... the press is right. It won’t be an easy time for Obama’s team. But the President-elect is moving fast; he’s already got a meeting scheduled with an impressive list of advisors - including Warren Buffett and Paul Volcker.

And he’s already got a plan, or at least the beginning of a plan, to deal with the economic threat. He’s leaning towards what the press is calling the ‘big bang’ approach - a combination of reform, quackery, giveaways, larceny, distortions, meddling, corruption and national bankruptcy. It will probably include a new health care plan, an energy program, a moratorium on mortgage foreclosures, higher taxes, income redistribution, loans and more bailouts.

"Obama can be a Roosevelt and not a Carter," writes David Blake, also in the Financial Times. "The cure for inflation is tighter money, tighter budgets and more unemployment," he writes. That is the situation that Jimmy Carter faced. And he faced it well; he hired Paul Volcker to run the Fed.

"The cure for deflation is a mix of interest rate cuts, more spending and lower taxes," Blake continues. What luck for Obama. He can do all the things that people love. He can be a hero... he can be another Roosevelt.

And here is where the press errs. The reporters think a balance sheet depression can be "cured". Just give the patient some of that old time medicine - the sweet syrup of more spending, more money, more credit and lower taxes.

And almost all the reports we’ve read suggest that a combination of bold initiatives from Washington, along with Mr. Market’s natural tendency to bounce back, almost certainly mean that things are bound to start looking up soon.

Not likely... instead, the ‘big bang’ is going to blow up in our faces... as we explain in a moment...

You can read the Daily Reckoning in full here.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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Changing Times In The Oil Industry, Where Now Is The Tipping Point?

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