by Aaron Levitt | February 3, 2014 9:28 am
Higher global oil prices can be explained in one word: Iran.
OK, it’s not quite that simple, but Iran has been one of the major risk “premiums” tacked onto crude oil prices over the last few years.
The nation’s nuclear program sparked widespread panic in the oil markets as both the U.S. and European Union placed heavy economic sanctions on Iran. Those sanctions sent prices for Brent skyrocketing as many countries were forced to look elsewhere for their crude oil needs.
However, with regimen change and Tehran finally playing ball with the U.N. weapons inspectors, Iran could be on the cusp of real change — especially in its oil fields. For investors, the Iranian risk premium on oil could just turn into reward.
It’s amazing what a new leadership base — along with crippling sanctions — can do for a nation.
Newly elected Iranian leader Hassan Rouhani seems to be making the right moves to win over the rest of the world. Last week, the nation halted some of its questionable nuclear operations under a preliminary deal with the U.N. Security Council. That deal — which expands on an agreement originally made back in November — allowed for the United States and European Union to both suspended some trade sanctions and other restrictions against the OPEC oil producer.
Overall, that’s a very big deal for the economy of Iran, whose GDP shriveled by 5% in 2013 under the weight of tough sanctions on oil exports and trade.
It’s also a big deal if you’re an oil company.
See, the problem in Iran — as with several oil-rich nations — has been a sheer lack of investment. Data from the Energy Information Administration (EIA) shows that oil output in the Middle Eastern nation peaked at around 6 million barrels per day back in the 1970s.
However, ever since the 1979 Iranian Islamic Revolution, the nation’s output has continued to dwindle at a rapid pace. Since then, Iran’s mature onshore and offshore oil fields have declined annually by a rate 8% and 10%, respectively. Essentially, the nation is in need of various enhanced oil recovery techniques — like CO2 injection and horizontal drilling — to keep them pumping out crude for the next few decades.
And with the sanctions gone and new leadership in place, Tehran has finally realized that they need the help of the developed world in order to get that production up to snuff. Already, Iran has begun to craft new, “sexy” contracts to lure international oil companies to help develop and reimagine their declining fields once the trade embargo against the country is fully lifted.
And with the world’s fourth-largest oil reserves, officials in Tehran estimate that these new contracts will attract nearly $200 billion worth of foreign direct investments into Iran’s oil sector.
With the Oil & Gas Journal estimating that Iran has nearly 154 billion barrels of proven oil reserves — or 9% of the world’s total reserves — the opportunity could be too great for E&P companies to ignore. However, not everyone will be a winner. American energy firms like Exxon (XOM) and Halliburton (HAL) are still banned from doing business in Iran. That means a dose of international energy muscle is in order.
The first stop could be French giant Total (TOT).
The integrated oil giant already has history of doing business in the nation. Just before the sanctions hit, TOT was already heavily investing in Iran’s South Pars gas field. The major energy firm was beginning to redevelop the mature filed for enhanced oil recovery work and was setting new terminals to increase the South Pars’ export capacity. The South Pars’ is estimated to contain roughly 325 trillion cubic feet (Tcf) of natural gas.
Already, Total’s CEO Christophe de Margerie has hinted that the energy company has been receiving potential contract bids from Tehran to renter the nation and finish work in the field.
For TOT shareholders, the potential is great, despite the risks. Tapping such reserves should ultimately provide the integrated major with a boost to cash flows. In the meantime, TOT stock pays a hefty 5.5% dividend and only trades for a forward P/E of less than 9.
While TOT has the most to win from Iranian oil, Italian oil major ENI (E) and oils service giant Schlumberger (SLB) could also be big winners.
ENI has a strong presence in the Middle East — with operations in places like Lebanon and North Africa. More importantly, it has continued to operate those assets through various points of strife in the region. Given its focus on the Middle East, ENI could be one of the first integrated oil firms to bid on any new contracts coming out of Iran. And like TOT, E pays a juicy dividend with a 4.9% yield.
Meanwhile, SLB — which is technically a Dutch firm — is already the go-to service provider in the Middle East and continues to be tapped by state-owned energy firms for enhanced oil recovery work. Last quarter, international operations saw a huge bump, with Middle Eastern revenues rising by 5%. When Iran finally begins tapping its oil, SLB should be one of the first firms it calls to do the job.
The bottom line: While it’s a risky play, Iranian oil could be coming to an energy company near you. The trio of TOT, E, and SLB are the safest ways to play that potential.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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