Major Oil Discoveries Spur Energy Outlook Debate

NEW YORK (A DOW JONES INVESTMENT BANKER COLUMN), Sept. 22, 2009

Massive new oil discoveries have enthused investors and analysts alike, but with oil's near-term supply at multi-decade highs and its price climbing above $70 a barrel, energy faces mixed signals.

The finds have oil enthusiasts debating the theory of peak oil. But no matter the future, several companies stand to benefit.

Anadarko Petroleum Corp.'s (APC) discovery off the coast of West Africa last week marks the third major find this month, following BP PLC's (BP.LN) discovery in the Gulf of Mexico and Petroleo Brasileiro SA's (PBR) off the coast of Brazil.

The discoveries will take years to cultivate and develop but are a welcome sign to those who feared a supply shortage could ensue if the global economy recovers faster than anticipated.

According to analysts, Anadarko's discovery could yield 200 million barrels on an 8 million-acre grid off West Africa. Anadarko has a 40% interest in the area, while Spain's Repsol-YPF SA (REP), and Australia's Woodside Petroleum Ltd. (WPL.AU) each have 25% and Tullow Oil PLC (TLW.LN) a 10% interest. To further spread the cost, a new partner might be commissioned before additional offshore wells are drilled.

BP's Gulf of Mexico find could yield up to 4 million barrels of recoverable oil. The largest producer of oil and gas in the region said the deep waters of the Gulf could hold up to 50 billion barrels of oil, up from its previous estimate of 30 billion. BP owns a 62% interest in the plot, while Petroleo Brasileiro, or Petrobras, holds 20% and ConocoPhillips (COP) 18%.

The Brazil oil discovery is 63% owned by Petrobras and 37% held by Repsol. While the projected number of recoverable barrels is still unknown, the well had shown indications of oil in August. Petrobras CEO Jose Sergio Gabrielli believes the company can increase its oil reserves to 35 billion barrels in the next two or three years from 14 billion currently. Petrobras is seeking to increase output to 3.66 million barrels a day by 2013, up from 2.4 million barrels a day last year.

The finds highlight how oil companies are pushing into higher-risk territories, and deeper offshore. Anadarko's Sierra Leone well was found after drilling more than a mile below the surface of the ocean.

Because Petrobras contracts 80% of the world's offshore rigs, the company has a stranglehold on the market and will benefit from both its own finds and those of companies searching deeper offshore. The recent finds will also increase demand for these types of rigs. Yet the availability of existing rigs is limited, as is the shipyard capacity to build new drilling units, according to Petrobras' latest regulatory filing.

The finds represent a huge turnaround in sentiment regarding oil supply. Onshore oil fields have been reporting declining production numbers for years now. U.S. commercial crude inventories hit a 19-year high in April but have since retracted to 332.8 million barrels currently, according to the Energy Information Administration.

A look at the beneficiaries of each find suggests Petrobras and Repsol will stand to be the major winners. The news will be especially beneficial for Repsol, which has seen its return on assets dwindle to 3.6% over the last 12 months, down from 8.5% just one year ago. Repsol recently has been holding discussions to sell its stake in YPF S.A. (YPFD.BA) to raise cash and pay down debt. Net debt to earnings before interest, taxes, depreciation and amortization stands at 2.9x, according to CapitalIQ data.

Petrobras has fared better, posting a return on assets of 9.4% for the last 12 months and Ebitda margins of 28.6% over the same period.

Times have certainly changed for exploration and production companies as the industry's production cuts and rig shutdowns are beginning to affect the price and supply of oil. Crude oil is up 62% since the beginning of the year.

While the current price of oil makes the finds even more attractive to those with drilling rights, it has yet to be seen how quickly the demand for energy will return.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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