Investment Matters

Energy sector sparking to life

Your equity portfolio has an exposure to the energy - oil and gas - sector through investments in MMA Offshore and Origin Energy (LNG operations).  There is also an indirect exposure through Cardno, with its engineering services capabilities.

These investments are somewhat influenced by the price of oil.  MMA Offshore perhaps the most – the oil price, and more importantly the outlook for the oil price, is a major demand driver for the offshore vessels it operates.

There is also a degree of correlation between the oil price and the LNG export price, and thus the revenue Origin receives from its 37.5% ownership of the APLNG project.

And in a similar manner to MMA Offshore – demand for some of Cardno’s engineering services (from pipeline design to infrastructure engineering environmental testing for energy-related projects) is influenced by a positive outlook in the energy sector.

Historical oil price, and price outlook

The following graph depicts the historical oil price, and the outlook – around US$60 per barrel.

There has been pressure on the oil price over the past ~ 5 years.  This has impacted on investment in the sector globally – including on exploration (finding new reserves), expansion projects and even maintenance spending.

We believe it is unlikely that the oil price will return to US$80+ levels, as US shale production acts as a moderating factor in the short and medium term.  In the longer term (10 years, probably 15-20 years+) solar energy and the like may act to moderate price.  However, declining oil and gas reserves are likely to be a balancing factor to some degree in relation to this.

From an investment perspective, we are especially mindful of what the outlook for the price is over the next 3 to 5 years.


Short term machinations

The oil price can be quite volatile in the short term.  And the press likes to discuss such movements.  Even as I write this article the top headline in The Australian’s online business section is “Oil prices surge on Middle East tensions” (12-Apr-18).   From an investment perspective, we look through this short-term volatility.

MMA Offshore presentation

MMA Offshore released a corporate presentation this week.  Its sentiment is consistent with a number of other sources of information we have across the energy sector, which, in summary, is increased confidence in a sustainable oil price outlook (around the US$60 / barrel mark), and early signs of increasing activity and investment in the sector.

MMA Offshore advised that the macro environment remains challenging, but sentiment is positive for a recovery in the oil and gas industry.  Some specific points are summarised below:

Oil price:

  • Oil price has strengthened in recent months
  • Global inventory levels continue to decline
  • Global oil demand remains strong
  • But US oil shale production is offsetting factor

Investment outlook in the sector:

  • In the last 3 years, only 1 in 3 barrels produced offshore have been replaced with new reserves
  • The majority of oil companies are cash flow positive at current oil prices (giving them the ability to invest)
  • New offshore project commitments increased in 2017, and are expected to increase materially in 2018
  • Maintenance, inspection and repair work has been deferred in recent years, which is expected to reverse

Signs of recovery MMA Offshore are seeing:

  • Global OSV (offshore supply vessel) utilisation and asset values have stabilised
  • Activity, e.g. in the North Sea, is increasing – such as rig contracting and seismic activity testing


It is early days, but your Investment Team is consistently hearing about tentative signs of a recovery in the energy sector i.e. increased investment and exploration, and more confidence in the medium-term outlook for the oil price.   This bodes well for companies which you are invested in, including MMA Offshore, Origin and Cardno.  But it does come with a word of caution – the recovery may not be a quick and aggressive as some would like.  Even so, we are confident that these investments will be sound ones over our three-year investment horizon.