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Not so long ago, telling portfolio managers about the potential size of a new oilfield was an easy sell. That era ended when investors decided they would not pay up for high-cost exploration given climate change and the approach of Peak Oil.
But the mood has changed, again. Drilling is back in fashion, and suddenly shareholders want to talk exploration and production once more, according to executives and analysts.
Portfolio managers are not looking so much in the US shale oil patch, though. Years of shareholder demands for less drilling and more cash flow for buybacks has forced consolidation there. Last year, M&A deals — of both companies and assets — more than doubled from 2022 to $234bn, according to the US Energy Information Administration.
Deals included ExxonMobil’s $64.5bn acquisition of Pioneer Resources, Diamondback’s $26bn swoop for Endeavor Energy and Occidental’s $12bn acquisition of privately held CrownRock. In the Permian Basin, the most productive shale oil region, five companies now own half of the resources, according to Citi.
Instead, investors with a taste for frontier exploration have taken a shine to recent oil discoveries in Namibia’s offshore Orange Basin. Portugal’s Galp last month announced some promising results after only two wells. Nevertheless, its shares have jumped 24 per cent since April 18, pricing in prolific oil production unlikely to begin until early next decade. On an enterprise value of 5.7 times its forward ebitda, Galp trades at nearly double the 2.9 times average of seven large international exploration and production groups, using data from Jefferies.
This premium may not reflect speculative excess but instead a hunger for new oil exploration ideas. There has been a sea change in the interest from investors recently, one E&P chief executive told the Financial Times. Moreover, they have begun to ask about the sustainability — and not in the climate change sense — of his company’s oil production.
Investors have noted that US shale production is less about exploration and more about a manufacturing process of wells drilled in proximity. Production of oil is outrunning new finds. Reserve lives since 2016 for these E&Ps have dropped more than a third to 13.5 years of production.
Galp’s announced discovery in Namibia may be a moment for the oil sector. Investors last week shot down a climate change resolution asking for tighter targets at Shell. Investors may even become more receptive to visits from smaller E&Ps.