Investment Matters

Riding the capex recovery

The turn in the capex (i.e. capital expenditure) cycle in the energy and resources sector is coming through.  We see it in our own research, through conversations with companies, and other sources (e.g. see below from WorleyParsons).

Focussing on the energy sector:

What happened?

The oil price reached sustained highs of over US$100 (per barrel) from early 2011 through to mid-2014.  It fell from there and by January 2016 reached a low below US$30.  Currently, it is $56.

Energy companies responded to the price fall by:

1/ materially cutting exploration activity (i.e. drilling of new wells to try to identify new reserves);

2/ delaying new developments; and

3/ even minimising non-essential maintenance (e.g. inspections of oil rigs).

Some interesting charts

WorleyParsons is a global company (~57,000 employees post the merger with Jacobs Energy, Chemicals and Resources division) that provides engineering, project management and consulting services to the energy, minerals, metals, chemicals and infrastructure sectors.

The following charts have been extracted from WorleyParsons’ recent capital raising presentation (22-Oct-18):


(But is not just in the energy sector, as the following charts show.)




What are the charts saying?

We are seeing a turn in the capex cycle in the energy (oil and gas) sector. (It is also being seen in the resources, i.e. minerals and metals sector.)

This means owners of oil and gas (and mining) projects are starting to increase their spending – on everything from drilling to replenish their depleting reserves, expansion of existing operations, construction of new mines / oil production facilities, and maintenance of existing facilities (in many cases only 'bare-bones' maintenance was done during the period of cash-flow optimisation, coinciding with the bottom of the investment cycle).

Other pertinent data points

We note three recent specific data points in regard to the turn we are seeing:

1/ Global drilling and well services activity is increasing.  Renowned energy research house Rystad is expecting 4% CAGR in the number of wells to be drilled and completed from 2018 to 2021 (source: Rystad Energy WellCube, Well Analytics, Nov-18). (CAGR = compound annual growth rate.)

2/ About 2 weeks ago BHP released a presentation discussing the capital discipline it has now achieved (in essence, a mea culpa for a number of disastrous major investments over recent years, notably US onshore energy assets and undertaking a AU$6 billion share buyback in Apr-11 at a price of $40.84 per share).  BHP’s CFO stated that the company was a value investor, and cautioned the minerals industry risks investing too little in future projects amid a sharp focus on shareholder returns.

3/ In the Sep-18 quarter Woodside Petroleum commenced the concept definition phase for the long-delayed Browse development (offshore WA gas).  This week it also announced FEED (front end engineering design) commencement for the subsea component of its off-shore joint venture development in Senegal.


We do not know the exact timeframe, or more significantly the aggressiveness / extent of the turnaround.  It may be quicker that we are anticipating (as occurred for Emeco).  Or the current global geopolitical and trade issues may slow the recovery down.   

But there is a clear need to invest in replacing depleting reserves, and to step-up maintenance after a period of cost and cash flow focus.

By acquiring investments on favourable prices, we are able to ride out a slower-than-expected recovery in the capex cycle for the energy sector, should that eventuate.

Your exposures

Your equity portfolio contains a number of investments that are leveraged to the turn in the capex cycle:

  • WorleyParsons
  • Northern Silica (frac sand used in wells in Canada)
  • MMA Offshore (provider of vessels, i.e. ships, that service offshore oil and gas)
  • Less so, Cardno: environmental and engineering services to energy (and resources) projects


The capex cycle is turning in the energy sector.  A number of investments in your equity portfolio will benefit from resultant increasing activity.

-          Fleur Graves