There are many factors counting in favour of junior oil and gas exploration companies like Bengal Energy (TSX:BNG), none more so than the great energy transformation.
The Australian government’s continued support of oil and gas exploration did not win them any prizes at COP26 in Scotland this year. Nevertheless, this controversial decision might just prove to be a prudent one. In its haste to shed all forms of fossil fuels, the developed world suddenly finds itself stranded without adequate supplies of oil, gas, and coal to pull them through the cold northern hemisphere winter, which plays right into the hands of budding exploration companies like Bengal Energy (TSX:BNG).
The Australian government recently gave the go-ahead for several oil and gas companies to spend vast amounts of money on exploration activities, despite international calls for a net zero energy transition and downscaling fossil fuel exploration. Let’s be honest, Australia (never a green revolution proponent) has made a fair amount of questionable geopolitical moves over the past few years. In this instance, their decision was far-sighted.
As fossil fuel projects around the world are mothballed, and amid a sudden dearth of oil, coal, and gas, those producers in Australia that have been put under the pump from all angles, may become the world’s saviours. Russia’s reluctance to provide her western neighbours with gas, China’s growing hunger for LNG, and the developing world’s need to kickstart their economies with some sort of baseload energy, makes the Australian oil and gas landscape an interesting one from an investors’ perspective.
Online oil and gas projects build up steam
Although offshore exploration still forms the backbone of Australia’s oil and gas sector, onshore projects are building up steam as demand for gas continues increasing. The Cooper Basin is the most prolific onshore oil and gas field in Australia. Exploration and development outfits like Austin Exploration Limited, Cooper Energy, Beach Petroleum Limited, Senex Energy, Bridgeport Energy, Strike Energy, Bengal Energy and Magellan, are all hedging their bets in the heart of South Australia.
The largest producer in the Cooper Basin is Santos QNT Pty Ltd with its main production facility at Moomba in South Australia at the head of the Moomba Adelaide Pipeline System. Santos recently signed a farm-in agreement with Bengal Energy.
In a world where oil and gas projects continue facing headwinds, Bengal is one of the most robust outfits. The company has been active in the oil and gas space for more than 15 years. They have a debt free balance sheet and C$4-million in working capital. Its strong mix of JV, 100%-owned cash generative and high growth exploration assets make it the ideal junior exploration outfit in an uncertain and hostile market.
Bengal recently released great results for Q2 2022. During this quarter, crude oil revenue was $1.9 million, which is 50% higher than the $1.3 million recorded in Q2 fiscal 2021 as decreased production was offset by increased commodity prices. Benchmark Brent prices during the current quarter averaged US $76.48 per barrel of crude oil (“bbl”) compared to US $46.18 per bbl for the same quarter in fiscal 2020.
At the same time Bengal generated $0.6 million of cash from operating activities during Q2 fiscal 2022 compared to ($0.2) million of cash used in operations in Q2 fiscal 2021. Funds from operations were $0.4 million during fiscal Q2 2021 compared to funds used of ($0.1) million in Q2 fiscal 2021.
Oil and gas will remain part of the energy mix
Bengal Energy is sitting pretty even if Europe decides to cut all ties with fossil fuels. Oil and gas will remain an integral part of the energy mix well into the future. Investing in new exploration projects, and junior companies like Bengal, will pay off in the medium and long term.
The International Energy Agency’s Sustainable Development Scenario (SDS) and the Shell Sky Scenario—both aggressive decarbonisation forecasts—show an ongoing, long-term role for oil and gas, even while demand levels are reduced from where they stand today.
In a report titled the role of oil and gas companies in the energy transition, the authors Robert J. Johnston, Reed Blakemore and Randolph Bell states that in the USA, India, and China—the three largest greenhouse gas emitters—natural gas in particular has the potential to remain an integral component of the low carbon energy transition for decades to come, depending on the policy mechanisms and technologies in place.
Despite the push towards renewable energy and the progress of the low carbon transition, oil and gas demand is projected to increase at least until 2035, and even beyond.
Oil and gas expected to remain bullish
The tight supply of oil and gas has resulted in surging prices on international markets, and that is expected to continue. Several Wall Street banks have raised their projections for oil prices significantly in the short and medium term, despite a pushback by the anti-fossil fuel group.
Oil prices recently reached multi-year highs, with WTI Crude at its highest since 2014 and Brent Crude at the highest levels since October 2018. Even at these levels, major investment banks believe there is more headroom to rise further.
Goldman Sachs is expecting Brent Crude to hit USD90 per barrel at the end of 2021. The key driver of Goldman’s higher forecast is global oil demand recovery amid still a weaker supply response from non-OPEC and oil producers.
The bank’s forecast for the next several years is USD85 a barrel. RBC Capital Markets is also bullish on oil prices in the medium term.
“We maintain the view that we have held all year – that the oil market remains in the early days of a multi-year, structurally strong cycle,” RBC analyst Michael Tran said in a note in mid-October carried by Reuters.
Last week, Morgan Stanley raised its long-term oil price outlook up by USD10 per barrel to USD70. BNP Paribas expects oil prices at nearly USD80 a barrel in 2023, Bloomberg notes.
Gas is the other big bet
Besides oil though, Australia’s other big bet is on LNG. Australia surpassed Qatar as the largest LNG exporter in the world in 2019, exporting 77.5 million tonnes. Australia granted 13 exploration titles in 2019 alone – the highest number issued in the last decade.
Besides the increased demand for gas in Europe because of countries like the UK, Germany and Norway downscaling on gas production, and Russia not delivering what they said they should, China has also come into play. In its efforts to wean itself from other fossil fuels, China has prioritised the use of natural gas as city gas to replace coal heating, a large source of emissions and pollution.
However, China (nor India for that matter) does not have abundant low-cost natural gas resources which will enable them to switch away from coal. China, producing only 19.4 bcf/d in 2018, has increased its natural gas imports by 30% since 2010, becoming a major destination for Qatar, Australia, the United States, and, most recently, Russia.
Why invest in oil and gas in Australia
According to consultancy firm Rystad Energy, Australia is anticipated to see a 22% spike in spending towards oil and gas exploration in the coming year. The company says that Australian exploration investment is forecast to increase from USD1.62-billion in 2020 to USD 2.01-billion in 2022, and thereafter increase to $6 billion a year by 2026 if projects proceed as currently planned.
That Australia is betting on oil and gas bodes well for companies like Bengal Energy with a production and cash flow stream that has room to grow. Moreover, Australia offers a stable jurisdiction and a well-established regulatory framework with British common-law, without the security and geopolitical risks normally associated with international oil and gas development. Bengal’s management team has extensive experience in Australia, and with the oil price holding firm for now and looking good for next year, the stage is set for Bengal to really shoot the lights out in the Cooper Basin.
