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Royal London eyes oil explorers

Reuters UK

Thu Oct 8, 2009 1:26pm BST

By Alex Lawler

LONDON (Reuters) – Oil exploration and production firms offer better gearing than majors BP and Royal Dutch Shell to an oil price unlikely to head lower, a Royal London Asset Management money manager said.

Ivor Pether, a senior fund manager who helps manage 6.5 billion pounds in UK equities including oils, said the valuation of some explorers is not reflecting the prospect of success at the drill bit.

“The oil majors offer long-term value and have income attractions, but are not capturing the benefit of higher oil prices because of poor refining margins and low gas prices,” he said.

“Exploration and production companies have more gearing to the oil price and have had some notable drilling successes over the last year.”

Tullow Oil (TLW.L), in which Royal London owns stock and which has made a string of oil finds, has gained 82 percent since the end of 2008. Shell (RDSa.L) has fallen 2 percent and BP (BP.L) has climbed 2.5 percent.

Besides Tullow, Royal London has a positive view on other UK explorers. It holds oil stocks in a range of its UK equity funds.

“Premier (PMO.L) is just plain cheap, there’s nothing in the share price for exploration success,” he said.

“We also hold Dana (DNX.L) and Cairn (CNE.L). Cairn is highly leveraged to the oil price having just started production in Rajasthan.”

The shares of BP and Shell, in contrast, are more under the influence of wider developments.

“The performance of both stocks is more driven by what’s happening in the rest of the market. There are more question marks over Shell’s outlook than BP’s. BP is on a path of operational recovery having come through some turbulent times, while we are waiting to see how aggressive Shell’s new CEO will be on restructuring the company.”

Oil has risen to above $70 a barrel from below $33, a more than four-year low, in December. Pether expected crude to remain firm.

“I don’t see much that’s going to drive it down at the moment. It stems from an assumption of improving demand and economic recovery.”

“China has been key to that, and Saudi Arabia likes an oil price of over $70 and seems to be comfortable with a $70-$80 range.”

(Editing by William Hardy)

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