Middle East Conflict Could Prop Up Oil Markets

A widening of the conflict in the Middle East between Israel and Gaza could lead oil prices to soar to more than US$150 a barrel and a cause shock to energy markets not seen since the 1970s, the World Bank said this week.

And recent consolidations show the oil industry is still betting on fossil fuels despite the electric vehicle (EV) trend, a possible boon for oil-related stocks like TAG Oil Ltd., Jericho Energy Ventures Inc., and Gran Tierra Energy Inc.

The Middle East conflict's effects on global commodities have been limited so far. The World Bank said overall, oil prices had risen 6% since the start of the fighting. But "the outlook for commodity prices would darken quickly if the conflict were to escalate," the organization said.

"The latest conflict in the Middle East comes on the heels of the biggest shock to commodity markets since the 1970s — Russia's war with Ukraine," said Indermit Gill, the World Bank's chief economist. "That had disruptive effects on the global economy that persist to this day. Policymakers will need to be vigilant. If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades — not just from the war in Ukraine but also from the Middle East."

Oil prices may not have spiked yet, but there should be time to cash in if they do. The International Energy Agency recently predicted that despite the rush to clean energy, the demand for fossil fuels would not reach its high point before 2030.

"The share of coal, oil, and natural gas in global energy supply — stuck for decades around 80% — starts to edge downwards and reaches 73% . . .  by 2030," the agency wrote.

Big Oil is voting with its wallets, doubling down on fossil fuels. Chevron Corp. (CVX:NYSE) last week said it would buy Hess Corp. (HES:NYSE) in an all-stock deal worth US$53 billion, and earlier this month, Exxon Mobil Corp. (XOM:NYSE) announced a deal to buy Pioneer Natural Resources Co. (PXD:NYSE) for US$60 billion.

"These are two great American companies coming together to be even stronger at a time when investment in American energy is important from the standpoint of jobs and from the standpoint of energy security," Chevron Chief Executive Officer Mike Wirth told The Wall Street Journal.

The industry's consolidations may just be starting. Exxon, America's largest oil company, could be looking for more opportunities.

"It's important to say that we're always looking," Exxon Chief Financial Officer Kathy Mikells told the Financial Times.

The Catalyst: A Drop in World Oil Supply?

According to the World Bank, the size of the jolt to oil prices would depend on the level of disruption from the conflict in the Middle East.

A small disruption to the global oil supply of 500,000 to 2 million barrels a day would initially increase oil prices to a range of US$93 to US$102, the organization said. The price of crude was about US$81 a barrel on Wednesday afternoon.

The global oil supply would drop by 3 million to 5 million barrels per day under a large disruption scenario, driving prices as high as US$121 a barrel. A large disruption would be comparable to the Arab oil embargo of 1973 and would shrink supply by 6 million to 8 million barrels per day and drive prices up by as much as 75% to US$157 a barrel, according to the World Bank.

"The fact that the conflict has so far had only modest impacts on commodity prices may reflect the global economy's improved ability to absorb oil price shocks," the World Bank wrote. "Since the energy crisis of the 1970s, the report says, countries across the world have bolstered their defenses against such shocks."

Countries have set up strategic petroleum reserves and developed futures markets to mitigate the impact of shortages on oil prices.

"Policymakers nevertheless need to remain alert," the World Bank noted.

However, a declining pool of shale inventory and a limited number of targets in the Permian Basin are leading supermajor companies to look at making deals and consolidating.

"The FOMO (fear-of-missing-out) component of it is only going to accelerate," Dan Pickering, chief investment officer at Pickering Energy Partners, told The Wall Street Journal. "See one or two more deals, and there could be a scarcity premium that starts to emerge."

The Arab oil embargo in 1973 sent crude costs up fourfold, leading to an era of high inflation and rising unemployment in the country.

TAG Oil Ltd.

In the oil sector, one play has "great economics," according to one analyst: TAG Oil Ltd. (TAO:TSX.V; TAOIF:OTCQX), which just announced it had started drilling the horizontal portion of its first horizontal well in the Badr Oil Field in the Western Desert of Egypt.

The company successfully drilled the vertical pilot hole to a depth of 3,290 meters and performed open-hole logging, formation imaging, and pressure measurement, followed by cement plugback of the lower vertical pilot hole. It then proceeded into whip-stock drilling of build and lateral horizontal sections in the Abu Roash F (ARF) formation.

The shaft will target oil in the ARF reservoir. The lateral section of the horizontal well is expected to take three weeks and will extend more than 1,000 meters, the company said.

"The Company expects the well will be completed by calendar Q4/23," Research Capital Corp. analyst Bill Newman wrote in August. "Based upon an independent resource report, a successful well is expected to initially produce in the 1,000 to 1,500 bbl/d (barrels a day) range."

The company has "great economics at the current oil price," Chen said. "I am hoping they knock it out of the park with 3,000 (bbl/d)." 

Management and insiders own 27.14% of the company. Askar Alshinbayev owns 18.78% with 29.99 million shares, Abdel Fattah Z Badwi owns 3.36% with 5.38 million shares, Shawn Reynolds owns 1.49% with 2.38 million shares, Suneel Gupta owns 0.99% with 1.59 million shares, Toby Robert Pierce owns 0.95% with 1.51 million shares, Barry MacNeil owns 0.85% with 1.36 million shares, and Gavin Hugh Lothian Wilson owns 0.72% with 1.15 million shares.

Institutions own 10.93% of the company. YF Finance, Ltd. owns 8.14% with 13.01 million shares, Purpose Investments Inc. owns 2.15% with 3.44 million shares, and Novum Asset Management AG owns 0.64% with 1.02 million shares.

There are 184,231,793 shares outstanding and the company has a market cap of CA$96.59 million. It trades in a 52-week range of CA$0.40 and CA$0.79.

Jericho Energy Ventures Inc.

Another company that could benefit from the higher oil prices is Jericho Energy Ventures Inc. (JEV:TSX.V; JROOF:OTC; JLM:FSE), which is in the process of pivoting toward green energy sources like hydrogen but still has important oil and gas holdings.

The company recently missed an analyst's estimates for revenue from its oil and gas joint ventures in the second quarter, but that could change if oil prices jump.

"While missing our estimates, the production numbers were objectively solid with crude oil production up 6% YoY," analyst Nicholas Cortellucci of Atrium Research wrote. Cortellucci has a Buy rating on the stock with a price target of CA$0.50 per share.

Jericho's Oklahoma O&G joint venture reported revenue of CA$2 million for the quarter, a 39% decline YoY due to lower commodity prices.

Cortellucci noted that the company planned to start drilling more this quarter.

Jericho's hydrogen investments "have been performing exceptionally well," Cortellucci wrote.

The company recently announced its first sale of a hydrogen Dynamic Combustion Chamber™, or DCC, boiler system to a prominent anonymous university.

The company is also collaborating with a leading global alcoholic beverage company to study using the boilers at production facilities in four countries and is partnering with two other companies to manufacture, implement, and service a new DCC™ boiler-based hydrogen steam plant called the HSP3000 that will come pre-assembled in container-sized units and eliminate the CO2 equivalent of about 5,000 cars. 

Around 35% of Jericho's shares are held by management, insiders, and insider institutional investors, the company said. They include CEO Brian Williamson, who owns 1.25% or about 3.1 million shares; founder Allen William Wilson, who owns 0.79% or about 1.97 million shares; and board member Nicholas Baxter, who owns 0.46%, or about 1.14 million shares, according to Reuters.

Around 10% of shares are held by non-insider institutions, and 65% are in retail, the company said. 

JEV's market cap is CA$60.79 million, and it trades in a 52-week range of CA$0.44 and CA$0.21. It has 248.14 million shares outstanding, 178.38 million of them floating.

Gran Tierra Energy Inc.

Another "good value" oil company stock is Gran Tierra Energy Inc. (GTE:TSX; GTE:NYSE.MKT), according to Research Capital Corp. analyst Bill Newman. In a November 1 research note, Newman maintained his Buy rating with a CA$21.50 per share target price on the producer and explorer focused on Colombia and Ecuador.

"Excluding exploration success, we expect production to increase to an average of 36,000 bbl/d (barrels per day) in 2024," Newman wrote. "We believe GTE represents good value, trading at a large discount to our estimated proven reserve after-tax NAV of (CA)$29.44/(share)."

Just this week, the company announced that it hit its highest production rate since 2019, bringing in CA$7 million and CA$36 million of free cash flow.

The company said its 1.6 million gross acres of projects are 100% oil and 99% in production.

Its projects include Acordionero in northern Colombia, which has produced about 37 million barrels of oil and generated about US$1.8 billion in oil and gas sales and about US$740 million of free cash flow, and South Putumayo in southern Colombia.

Last April, GTE announced it would extend a 20-year contract for the Suoriente Block, which was set to expire next year. 

"GTE has committed to spend US$123 million over a three-year period, which will be invested in infrastructure, EOR programs, and appraisal drilling," Newman wrote.

The company is also drilling at Costayaco Field and exploring in Ecuador.

According to Reuters, about 31% of the company is owned by institutions and about 3% by strategic entities. The rest is retail.

Top shareholders include GMT Capital Corp. with 7.48%, RBC Wealth Management International with 3.01%, Redwheel with 2.32%, Renaissance Technologies LLC with 2.12%, and AQR Capital Management LLC with 1.9%.

Its market cap is about US$217 million, and it has 33.29 million shares outstanding. It trades in a 52-week range of US$14.10 and US$4.62.

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Important Disclosures:

1. Jericho Energy Ventures Inc. and TAG Oil Ltd. are billboard sponsors of Streetwise Reports and pay SWR a monthly sponsorship fee between US$4,000 and US$5,000.
2. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Jericho Enery Ventures Inc.
3. Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee.
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