by Aaron Levitt | February 11, 2014 2:23 pm
For most investors, Africa is a place where many don’t tread. Years of bribery, military coups and violence have tainted positive perceptions of the continent. And even in many emerging market funds, Africa plays third or fourth fiddle to Asia, Latin America and Europe when it comes to exposure.
However, for many international oil stocks, Africa is seen as the modern day gold rush.
That’s because the untouched continent features a vast amount of shale and offshore energy deposits — in some instances rivaling our deposits here at home. And with many African nations eager to spur development of their own economies, accessing this bounty is becoming easier and easier for many oil stocks.
Given the sheer size of its reserves, the rewards in African oil could just outweigh the potential risks.
For long-term energy investors, the oil stocks tapping its bounty could be one of the best opportunities over the next decade.
Mineral mining has traditionally driven Africa’s economic growth in the past, particularly with gold and platinum. Today, that growth is being driven by the oil and gas sector.
Like here in North America, horizontal drilling, fracking and advanced deepwater drilling have changed the game for Africa. Technological drilling advances have lengthened the list of nations who are now significant producers of petroleum beyond the long-established players like Nigeria, Libya and Algeria. New oil discoveries in places like Ghana, Cameroon and the Congo are rewriting African history.
Overall, energy production in Africa has moved south and eastward from the once dominant west.
That shift now includes tapping Kenya’s oil rich Somalian Plate and prolific natural gas fields in offshore Mozambique. From South Africa to Tanzania, exploration efforts by major oil stocks in Africa continue to grow. And with many governments offering friendlier mineral concessions — Uganda’s recent profit sharing move to attract international oil stock investment is just the latest example — the continent has changed the way it produces energy.
And it sure will produce.
By 2015, Africa will account for roughly 13% of the world’s total oil output. Yet that could be a drop in the bucket when looking at its total potential. In its latest survey of Africa’s energy sector, consultant PriceWaterhouseCoopers shows that Africa holds nearly 132 billion barrels of oil and nearly 513 trillion cubic feet (Tcf) of natural gas. That’s roughly 8% and 7% of the world’s supplies of the two energy sources, respectively.
But the continent isn’t without risks….
Places like the Congo are still pretty dangerous when it comes to political violence. Theft of oil — called “Bunkering” — is also a huge concern for many oil stocks operating in Africa. Royal Dutch Shell (RDS.A) estimates it loses about 60,000 barrels per day from its operations in Nigeria. The number of incidents involving the theft of oil tankers via pirates has also grown in recent years.
However, the longer-term picture is still positive for oil stocks operating in Africa.
While many of the larger integrated oil stocks — like Total (TOT) and Chevron (CVX) — have exposure to African energy, there are a few direct ways to participate in its future growth. And they don’t involve buying into some penny stock scam.
One of the best could be United Kingdom-based Tullow Oil (TUWOY). It’s less popular than other oil stocks, but the company has had huge success in exploiting both Ghana and Uganda acreage. TUWOY stock actually operates the largest field in Ghana. More recently, Tullow Oil has begun picking up fields in Equatorial Guinea, Gabon, and the Congo.
However, the real story for TUWOY stock could be it exposure in Kenya. It’s one of the first oil stocks to tap the prolific Somalian Plate shale field. Tullow’s latest drilling program in the region has allowed it to double its Kenyan resource estimates to more than 600 million barrels. That will help Kenya become a net oil exporter by 2016.
TUWOY stock isn’t necessarily cheap — currently trading at a P/E of 33. But, that premium is justified as the firm is Africa’s top oil & gas explorer. Competitors like Kosmos Energy (KOS) and CAMAC Energy (CAK) aren’t even profitable yet.
Another potential play could be beaten-down Cobalt Energy (CIE). While CIE stock does hold interests in offshore wells in the Gulf of Mexico, Cobalt’s growth prospects lie in offshore Africa — namely, Angola and Gabon.
Recently, CIE stock found huge volumes of natural gas from several of its offshore finds in Angola. However, due to political issues within the nation (related to royalty rates), the vastness of the find is going under-appreciated by the market. Especially when Angola is looking to change its current rules to begin exporting LNG. ConocoPhillips (COP) is already looking at building new LNG facilities in the nation.
CIE stock isn’t profitable yet, but the recent finds in Angola are consider world class and could propel the stock higher as government changes its tune and begins exporting the natural gas.
For investors, shares of TUWOY stock and CIE stock are the best oil stocks out there to play the rise of African oil production.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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