Two energy companies on our list, Heritage Oil and Addax Petroleum, were able to avoid the correction that hit energy stocks this past year and managed to deliver big gains at a time their peers' stocks were dropping. Small-cap Heritage returned more than 132% while Addax, a mid-cap Swiss company listed on the TSX, gained more than 37%.
What's the secret to their success? Part of the answer lies in the one thing these companies have in common: new operations in northern Iraq.
Both Heritage and Addax have secured contracts signed with Iraq's Kurdistan Regional Government, which manages the northern area of the country. Iraq, of course, is considered a “high growth” area by the energy industry, and the under-explored Kurdistan region is said to contain 48 billion barrels of oil. Both Addax and Heritage have gotten a jump on companies hoping to operate in Iraq, even though the Iraqi oil law, which defines how oil resources will be produced and how revenues will be shared, has yet to be signed.
Addax has already drilled wells that are producing, and the company estimates it's sitting on 1.2 billion to 2.7 billion barrels. “This is a highly interesting prospect,” says CEO Jean Claude Gandur over the phone from Geneva. But what about the risks associated with operating in a war-torn country? “There is always a risk,” says Gandur. “But Kurdistan is not like other areas of Iraq; the people are friendly and welcoming. There are no bombings, no kidnappings. You can walk the streets. We have high security, probably more than is necessary.”
The big risk, in fact, may be political. Lawmakers in Iraq have been squabbling over the oil law for almost a year now. The Kurds, of course, would like regional control over new oil resources. That has put them at odds with Iraq's other ethnic groups, who would like to see the industry run from Baghdad and the creation of a national oil company to oversee any newly discovered fields. Iraqi oil minister Hussain al-Shahristani recently warned that all contracts should be signed through the ministry; those that aren't would be considered illegal. The comments were deemed to be directed at the Kurds, but Gandur is confident the contracts he has signed will be respected. “The contracts are in the spirit of the oil law. I feel comfortable,” he says.
Heritage Oil seems to have taken a two-pronged approach. In addition to its contract in northern Iraq, an Independent Equity Research report on the company points out that it is also targeting areas of Iraq outside of Kurdistan. According to the analysts, an important factor in Heritage's success is the considerable political and government contacts chairman and CEO Micael Gulbenkian has. His family's relationship with members of both governments, which go back to before the first oil wells were drilled in Iraq in the 1920s, should serve the company well in post-Saddam Iraq.