Five Forces to Affect Wagers on the Re-opening of the West Sea Oil Exploration Projects

 

Speculating, more than anything else, is capitalizing on politically caused distortions in the market—Doug Casey 

Five Forces to Affect Wagers on the Re-opening of the West Sea Oil Exploration Projects 

 

From the Inquirer(October 16): President Rodrigo Duterte’s go-signal to resume oil and gas exploration in West Philippine Sea has perked up investor appetite on mining/oil stocks with stake in service contracts disrupted by the territorial dispute between the Philippines and China in the last six years. The biggest beneficiaries of the renewed oil exploration play were PXP Energy Corp. (PXP) and Atok Big Wedge, whose shares surged by nearly 50 percent on Friday. Apex Mining gained 34.84 percent and was the day’s most actively traded company. Shares of PXP’s parent firm, Philex Mining, also rose by 20.76 percent. As other mining/oil stocks also mostly gained, the mining/oil counter advanced by 10.79 percent…Energy Secretary Alfonso Cusi has given the “resume to work” notice to contractors doing petroleum exploration in the service contracts (SC) 59, 72 and 75. Atok Big Wedge’s subsidiary Tidemark Holdings Ltd. has a 20 percent in UK-based Forum Energy Ltd., which in turn has 70 percent economic interest in SC72, which is situated offshore west of Palawan Island and is host to the Sampaguita offshore gas discovery. Drilling in the area had been placed on hold by the Philippine government in 2014, under the term of then President Benigno Aquino, pending the resolution of territorial sovereign disputes. PXP, for its part, holds a 79.13 percent in Forum Energy. Apex Mining’s subsidiary, Monte Oro Resources & Energy, has 30 percent participating interest in SC72. 

 

Returns (weekly, year-to-date): PXP (+45.39%, -10.65%), APX (+31.45%, +111.11%), PX (+21.28%, 101.41%), FPI (+27.43%,+9.9%), AB (+49.87%, +5.3%), APO (+9.09%,-13.04%), OPM (+13.1%, -13.64%), OV (+13.75%, -17.27%), PERC (+12.9%, -14.63%) and ACEX (+11.57%,-7.8%). [as of October 16] 

 

Nota Bene: Past performance does not guarantee future results. 

 

Five forces are likely to affect speculations on the West Philippine Sea oil and gas projects. 

 

Here they are. 

 

1.Politics. 

 

Politics determine the existence and the operating parameters of domestic local oil and gas exploration projects. Yet, what the government gives or permits, it can take away again.  

 

In an attempt to downplay the immediate euphoria… 

 

From the CNN (October 16): Insisting that the lifting of the suspension of oil exploration activities in the West Philippine Sea was a unilateral move, Energy Secretary Alfonso Cusi now expects China to ask for an explanation. “I’m sure that they will not just take it without raising a word. I’m sure they are going to write us and we will address that as it comes – na bakit natin nilift (on why did we lift it), and we will be answering that,” Cusi said in an online media briefing on Friday. 

 

However, later… 

 

From the ABS-CBN (October 16): China hopes it can work together with the Philippines in jointly developing energy projects in the South China Sea, foreign ministry spokesman Zhao Lijian told a daily briefing on Friday. Philippines President Rodrigo Duterte has lifted a moratorium on petroleum exploration in the South China Sea, paving the way for three projects to resume, including a possible joint venture with China. 

 

For instance, the real estate boom, we’ve been told, would find its elixir in POGOs. What happened to them? 

 

2.Prices of oil and gas determine the viability of these projects.  

 

Falling prices of oil and gas will diminish margins, thereby reducing the incentives for these firms to pursue engagements in the project/s. On the other hand, rising oil prices, ergo, increasing margins, encourage investment commitments. 

 

Ever since its zenith two years ago, international oil prices have been southbound. However, the pandemic accelerated its cascade; oil prices crashed from March to April, but, in response to the collective actions of global central banks, subsequently rebounded. 

 

Nevertheless, global oil rig counts, which resonated oil prices, plummeted to multi-year lows and continues to fathom at the same levels as of September. That is, while oil drilling activities collapsed along with oil prices, the latter’s bounce has barely induced operators to increase exploration. 

 

Needless to say, a decreed re-opening of oil and gas exploration projects won’t necessarily translate to its reactivation (unless these are state-owned projects). 

 

3.Price trends of the underlying issues, before the news announcements, matter.  

 

 

Sure, the news spurred price spikes on shares of many project related issues, such as AB, FPI, OPM, OV, APO, and ACEX. But even before the announcements, inertia has governed the undercurrent of their respective trends. Friday’s speculative orgy, a possible sign of climaxing euphoria, will exhaust itself. 

 

On the other hand, the news only accelerated, confirmed, and reinforced the uptrends for several issues such as APX and PX, as well as PERC. Though these issues have reached overbought conditions and may see substantial retracements, the underlying trends have been more resilient and likely sustainable over a longer time frame. 

 

The outperformance of gold prices relative to oil underpins the strength of the price trends of gold miners (with oil exploration exposures). 

 

4.Volatile properties of exploration shall influence share prices too. 

 

Oil and gas projects, like its mining contemporaries, shares a similar lifecycle: drilling, speculation, discovery, development, and production phases. 

 

And the exploratory phase tends to be most volatile in the context of price movements. 

 

5.Market liquidity and breadth. 

 

The current easy money regime has been enabling and facilitating wagers supported by several themes, including mining and oil issues. Market breadth has shown signs of improvement. 

 

Have cash-rich banks been using such surpluses to pump up select sectors in the PSE? 

 

While it may be true that liquidity in the PSE, expressed in peso trading volume, remains wanting, mines have led the marginal improvement in market breadth. 

 

Of course, there are other stories besides the mining sector, namely infrastructure (cement, project managers, and builders), alternative energy, and eCommerce (telcos, logistics, transports and real estate), as well as listed firms of a political favorite. 

 

As a side note, raging prices of alternative energy appear to be a gung-ho bet on the triumph of the “blue wave” in the nearing US elections. 

 

Again, politics, prices of oil, underlying price trends, the oil and gas lifecycle, as well as market liquidity and breadth, will likely influence the speculative appetite of the oil sector. 

 

Disclosure: The author has minor exposures to some of the aforementioned issues.