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Energy Insights: Energy News: These oil companies will benefit post-Iran deal

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These oil companies will benefit post-Iran deal



Earlier this week Iran and western negotiators agreed an historic deal whereby Iran will be allowed to resume oil exports in return for limiting its nuclear programme. Oil prices plunged in response - the loss for July hit 11% at one stage. Expectation that Iran will struggle to ramp up production quickly caused a brief round of buying before a further collapse toward support levels at $56-$57 a barrel for Brent crude. Now what?

Well, concerns that a flood of new oil onto the market will crush prices looks wide of the mark, for the moment at least. Iran's oil minister said after the agreement with the six P5+1 nations - China, France, Russia, the UK, US, plus Germany - that it will take up to six months to lift sanctions. Oil exports will rise by 500,000 barrels per day (kbpd), said Bijan Namdar Zanganeh, then by another 500,000 barrels six months later.

Iran is currently the world's sixth largest producer of oil and holds the world's fourth largest reserves of oil. Production peaked at just over six million barrels of oil per day (mbpd) in 1974, but has fallen to about 2.8 mbpd. Exports halved to about 1.1 mbpd.

"The arrivals lounge at Tehran airport will be full of Texans, Dutchmen, Chinese and the French to name but a few and inward investment should flourish," says industry expert Malcolm Graham-Wood. "But this will take time and I don't expect any return to 2-4m b/d anytime soon but it may just happen in time for the oil price rise one can expect further down the line."

Indeed, the team at broker Citigroup expect Congressional approval for the agreement and pencil in limited sanctions relief by the end of 2015. That should open the way to incremental production of 300kbpd in early 2016 and 500 kbpd late next year.

Source: TradingView

So, Iran is unlikely to single-handedly clobber oil prices. But Mark Henderson, oil analyst at Westhouse Securities, doesn't think concerns about an overheated Chinese stock market or the Greek crisis will have a significant impact on the near-term global supply/demand picture either. "Stay focused on fundamental data, which is beginning to look more supportive for oil prices, we would suggest," says Henderson.

"It is also worth noting that the UK exploration and production sector is now trading at an all-time low relative to the market, despite oil prices being almost 3x higher than they were at the time of the previous relative lows in 2001/02," he adds. "Our favoured stocks to play a better outlook for oil prices than is currently discounted would be Tullow Oil (TLW, Buy, TP590p) at the larger end and Lekoil (LEK, Buy, TP73p) at the smaller end."

And overseas companies should actually benefit from Iran sooner or later.

"The Western energy industry will likely be able to re-enter the country and aid in further production capacity expansion, impacting the global oil services market," says Citi. That will be a relief to the western oil companies who, having pumped billions into boosting production in Iran during the late 1990s and early 2000s, let the Chinese in when international sanctions were announced in 2007.

It turns out not all Chinese firms were up to scratch, and Iran actually cancelled contracts with CNPC at both the South Pars project and the South Azadegan field. "As a result, many projects remain partially developed and thus investment could ramp faster than what the industry witnessed in Iraq," Citi adds.

"We believe Schlumberger (SLB) has the most to gain from re-entrance to Iran, given its legacy relationships and status in the country pre-sanctions. Halliburton (HAL) and Weatherford (WFT) are also well-positioned to reenter, with Halliburton the preferred name given its better position to gain from a North American shale recovery. Iran is lower on the cost curve than deepwater, which puts equipment providers National Oilwell Varco (NOV), FMC Technologies (FTI) and Cameron International (CAM) at the greatest risk following the nuclear deal."

Among the UK-listed companies is Petrofac (PFC), a leading engineering, procurement and construction (EPC) contractor in the region. It's well positioned for potential upstream investment and projects in Iran, says Citi, although offshore and the Integrated Energy Services (IES) division are risks.

There could also be engineering opportunities for Wood Group (WG.) longer term, although the region is not the firm's real focus. "Delays to recovery in deepwater, and slower than anticipated US rig count recovery material downside risks."

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