I recently gave a big thumbs-up to Royal Dutch Shell as a candidate for novices investors, partly because most of its business comes from downstream activities — refining, processing, marketing, etc. Less than 10% of Shell’s turnover comes from upstream exploration and production. That profile carries very low risk, and avoiding risk should be a key part of a new investor’s strategy.
Conversely, it was my nose that I turned up at Gulf Keystone Petroleum, because it is wholly an explorer and producer, and focused in just one small region.
Where to look
But if you really want some exposure to upstream risk, you should consider BG Group (LSE: BG) (NASDAQOTH: BRGYY.US), offspring of the demerger that also brought us Centrica.
For one thing, some of the risk is mitigated by BG’s shipping and marketing operations, a part of the business sometimes known as midstream, including being the largest supplier of liquified natural gas in the USA.
BG is also widely diversified geographically, with operations in 25 countries in all six of the available continents, and that seriously reduces the risks as well– if exploration operations in one country were to go bad, it would only affect a small portion of BG’s reserves and production.
Low upstream risk
We do actually have experience of how local risk affects BG. Its share price has been flat over the past two years, moving by just a few pennies from the 1,150p to 1,160p levels it was at in early October 2011, to 1,158p at the time of writing. Dividends have been low at around 1.5%, so there’s been little compensation there.
That’s partly because of BG’s exposure to Egypt, where political unrest has severely hampered its West Delta Deep Marine project, and delays to a project at the company’s Knarr field in Norway aren’t helping, either. The problems in those two countries should reduce 2014 production by about 30,000 barrels of oil equivalent per day (boepd), and a weakening of natural gas prices should see lowered activity in the US and reduce production by a further 17,000 boepd.
Imagine if that happened to an exploration and production company solely focused in Egypt, Norway or the USA. We’d be seeing varying shades of toast, with the mooted Egyptian explorer looking a bit like burnt crusts.
How bad was it?
But from BG, during one of its worst recent spells, we’d have no share price rise and just a 3% total return in dividends over two years — and that’s a long way from the kind of disaster than can scar a novice investor for life.
Looking back a bit further, over the past five years BG has produced a share price rise of 50%, which is only a little behind the FTSE though with a lower dividend yield. But during a bad recession and suffering those local problems of its own, I’d call it a pretty resilient performance.
The real long term? Well, BG shares have risen fourfold over the past 10 years, and 12-fold over 20 years, trouncing the FTSE.
Production should be back strong in 2015, with BG offering guidance of around 800,000 boepd. Even as Egypt and Norway should be recovering, new production will be coming online in Australia and Brazil.
All in all, I reckon that provides about the lowest risk there is in the upstream oil business, and it’s exactly where a novice wanting to invest in the industry should be looking.