May 2016, Vol. 243, No. 5
Features
Election Results Could Be Good News for Oil Majors
Iran’s Feb. 26 parliamentary and Assembly of Experts elections saw strong gains for pragmatic forces, heralding a new openness in Iran and a much better window of opportunity for foreign businesses and the development of the country’s further oil and gas potential.
While no one won a solid majority in Parliament, and the conservatives led with around 36% of seats, the pragmatists/reformists centered around Iranian President Hassan Rouhani made a strong showing with 32%,, shoring up their power. In the Assembly of Experts – the religious body of 88 clerics who elect Iran’s supreme leader – -the pragmatists won a slight majority with 52 seats compared to the conservatives’ 36 seats.
In the whole scheme of things, the parliamentary results are the most important because the conservatives will have to join forces to a greater extent with the pragmatists and reformists on some issues. And radical forces that have fought the opening up of Iran to the international community have been sorely diminished.
So for the next couple of years – at least until Iranian presidential elections – this is good news for anyone who was entertaining the idea of doing business in the new, post-sanctions Iran.What it means is that the likelihood of stronger ties with the West has just grown exponentially – and that includes increased economic and commercial cooperation. It also heralds a certain degree of investment security – again, at least for two years – which will be a key factor for foreign investors.
There is a great deal of interest in the Iranian oil patch among foreign companies because of the opportunities for low-capital development. Iran’s production costs hover around $12 per barrel, well under the production costs of shale oil in the U.S. It’s an attractive cost environment to accept a bit of investment-climate risk as it is – but with the parliamentary election results things should move a lot faster.
Specifically, we’re looking at 18 exploration blocks, and dozens of oil and gas projects tentatively up for grabs in Iran. Things were helped along late last year with a new Iranian Petroleum Contract which should get a boost from the pragmatists’ parliamentary victory because the details of this contract are still to be fine-tuned. Even before sanctions were lifted, the overriding sentiment was that the new terms would be much more attractive to foreign investors, particularly with regard to the establishment of joint ventures with the state run oil company. We already know Rouhani wants this, and now he is more likely to get it. Previously, foreign companies couldn’t own any shares, and couldn’t form JVs.
The elections come at an interesting time, and the timing is fortuitous for foreign oil and gas companies seeking to get in on these plays. In fact, they come only a few months before all those E&P blocks and projects are set to be auctioned off in May. After May, and for any of those supermajors who bite at the auction, it will be important to gauge where Iran is going by watching how the Revolutionary Guard, the most influential economic force in Iran, deals with Rouhani and his circle.
Will they yield and join forces, or will they fight the opening up of Iran’s oil and gas largesse? What they do on the foreign policy front will indicate what they’re going for at home, so keep a close eye on Iran’s attitude when it comes to geopolitics and conflict in the Middle East because it’s being led by the Guards.
Meanwhile, a posting on March 30 by 24/7 Wall Street suggests that Schluimberger and Halliburton may benefit big from Iran’s return to the oil market.
At 24/7 Wall St. we leave the political discussion to others and focus on how blockbuster deals like this can affect companies in which investors hold shares. Needless to say, after years offline, the Iranians will be looking to the West for help in restarting their oil industry.
In a new research report from UBS, its highly regarded oil services analyst, Angie Sedita, makes the case that while Iran has far better overall infrastructure and wants to retake its position as the number two Middle East oil producer behind Saudi Arabia, it has issues from its years out of the game. She points out that with limited oil services technology, and capital that is only slowly creeping back in, it will be a challenge for Iran to ramp up production quickly.
There are some big positives for Iran in addition to the overall better infrastructure. The populace is well educated and the risk of having to deal with ISIS is far less of a concern as compared to the situation in Iraq. Corruption at government levels is far lower, and the contract structure for vendors is expected to be “risk adjusted” with a fee multiple for higher risk fields as well as for beating production goals.
So who will benefit? The UBS team thinks two industry leaders will be the main players in what could prove to be a volatile, but growth-oriented landscape. It’s important to note that U.S. oil and oil services companies are still prohibited from entering Iran. Only European and Asian companies currently can go there.
Halliburton
This stock is still down over 30% since last May and could be offering investors a very tempting entry price point. Halliburton Co. seems to be in the final stretch of getting the merger with Baker Hughes completed, and the trick is to find the right buyers for the businesses that are required for the divestitures required by the U.S. Department of Justice and European Union regulators.
The oil field giant announced last year a $1 billion investment to develop huge potential oil fields in Ecuador, and has entered into a long-term deal with Petroamazonas, an Ecuador-based company involved in the exploration and development of the country’s oil reserves.
The UBS team thinks the company will be very interested in entering the region when the Iranian sanctions are lifted. In fact, the analysts point out that company executives have expressed an interesting in entering the region, and the industry giant has the capacity and wherewith all to make an immediate impact.
Schlumberger
This is hardly a company that many investors would view as a value stock, but given the debacle in the energy sector over the past year, the decline in share prices has pushed it almost to value levels. Schlumberger Ltd.remains the largest oilfield services company in the world for now, with far-reaching operations all around the globe.
The company could be poised for years of solid growth despite the huge turndown in oil pricing. Wall Street analysts think the company will continue to drive margins on execution, technologies and efficiencies. Russia, Saudi Arabia, Iraq and China are expected by some to be the strongest markets, if geopolitical concerns remain somewhat in check.
The company announced last August it would buy oil field services giant Cameron International in a deal expected to cost about $12.7 billion. Wall Street analysts note what they term the company’s “drive to disrupt the status quo,” which includes transformation initiatives like the gigantic purchase of Cameron. The UBS report notes the company was operating in the region before with exceptionally high margins. It also notes that some reports indicated the company may be looking to buy back its former Iranian unit. Schlumberger sold Well Services of Iran to Nima Energy, a Hong Kong-based holding company, when it left Iran, and the sales-agreement reportedly included a provision that could give the oil services giant “first right to buy back the company when sanctions were lifted,” per Dow Jones news.
The bottom line is that despite some reservations, at least for now, Iran is resuming the process of getting back into the oil export game. It should come as little surprise that the sector leaders would be the ones that may benefit. They have the infrastructure, manpower, logistics capabilities, balance sheets and, most importantly, the expertise to take on the job.
By James Burgess, OilPrice.com
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