Shares of Ophir Energy (LSE: OPHR) have jumped 15% in early trading after the company announced it has partnered with global energy giants Golar Energy and Schlumberger to develop the large Fortuna liquefied natural gas (LNG) field off the coast of Equatorial Guinea.

It’s good to have friends in high places

Shares have rocketed on this news for several reasons. For one, partnering with the likes of Golar and Schlumberger brings considerable advantages. Schlumberger, one of the world’s largest oil field services providers, brings decades of experience in developing oil and gas assets. Golar brings to the table the knowledge and ability necessary to liquefy, store and transport the LNG.

Furthermore, partnering with these two substantially lessens the financial risks to Ophir and its shareholders. The company estimates that from the final investment decision in H1 2017 to first gas in 2020 the project will require $2bn, of which $1.2bn will be debt financed. The agreement also stipulates that Ophir’s committed expenditure to first gas won’t exceed $150m. This means Ophir, which had over $200m of net cash on its balance sheet at the end of June, will most likely avoid tapping shareholders for additional funding.

In exchange for diversifying its downside Ophir did have to sacrifice some of the upside potential of Fortuna in the form of taking only a 33% stake in the joint venture. However, if this is necessary to reach first gas without dangerously over-leveraging the balance sheet then I would view it as a positive for current shareholders.

Show me the money

Of course, it’s also necessary to touch on the economics of the Fortuna project and LNG in general. In the short term the same factors that have dragged down oil prices have also led to LNG prices falling dramatically. European Union spot LNG prices are down from around $11/mmbtu pre-2014 to $4.29/mmbtu currently.

The good news is that falling oil and gas prices have also significantly decreased the cost of construction and servicing of new developments. Ophir now believes that offtake agreements at $6/mmbtu will net the joint venture some $560m in cash flow per annum. This would mean a little under $200m per year would find its way to Ophir before debt servicing.

Ophir’s conservative approach to funding leads me to believe that the company will attempt to sign enough offtake agreements to break even and cover debt financing. Whatever production is left over can be sold at spot prices, allowing Ophir to benefit from any upwards movement in LNG prices.

Indeed, in my opinion LNG prices are likely to move upward in the coming decades. This is primarily due to increasing global consumption of cleaner burning fossil fuels such as natural gas.

Today’s update represents a major step forward for Ophir. Bringing on board top notch partners, limiting the downside risks of Fortuna and clarifying the financial outlook of the project should all be cheered by investors. It’s still a long way to go before first gas but investors looking for a conservative approach to benefitting from the long-term potential of LNG would do well to take a closer look at Ophir.

The post Ophir Energy plc shares jump 15% on positive funding update appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The fossil fuel giant has seen its share price explode 30% in the past two months, moving in lockstep with the Brent benchmark’s surge back above the $40 per barrel milestone.

But with data surrounding the oil sector still worsening, I see little reason for crude’s recent march higher, leaving Shell’s share price in danger of a massive reversal.

Supplies surging

Stockpile data from the US disappointed yet again this week, a 9.4m barrel build in the latest period exceeding forecasts and taking total levels to a fresh record of 532.5m barrels.

The world is still desperately awaiting a co-ordinated production cut from OPEC, Russia and the US. But the pumpers can’t even agree to an output freeze, let alone a much-needed reduction to ease the pressure on bloated inventories.

And with China’s economy locked in a hair-raising tailspin, there’s clearly little prospect of this excess material evaporating any time soon.

Fragile forecasts

The City expects this backcloth to keep earnings under pressure at Shell, not surprisingly. A 34% decline is currently pencilled-in for 2016, leaving the company trading on an extremely-high P/E rating of 22.8 times.

Still, the number crunchers expect the oil leviathan to rebound with a 79% bottom-line bounce next year, driving the earnings multiple to just 12.8 times.

While this is a very decent value on paper, I believe stock pickers should resist the temptation of piling into the business. Until supply/demand indicators start to pick up, I believe predictions of a near-term bounceback at Shell are built on sand foundations.

Long-term worries

Indeed, I reckon there’s a real danger that Shell will end up becoming a mere shadow of its former self, and fail to deliver the stonking returns of previous times.

Firstly the company continues to hive off assets at a hair-raising rate. Shell announced in March it was raising its 2016 divestment target to $30bn in a desperate bid to mend its battered balance sheet, up $10bn from its previous goal made a few months earlier.

On top of this, Shell is still rapidly scaling back its capex budgets, a strategy that has seen major projects from drilling in Alaska to development of the Carmon Creek oil sands asset in Canada fall by the wayside.

Many will point to Shell’s acquisition of BG Group as a potential growth driver moving forwards. But the chronic oversupply washing over the liquified natural gas (or LNG) market is expected to remain well into the next decade at least, casting doubts over the economic viability of the tie-up. Indeed, Woodside Petroleum put plans to develop its Browse LNG project in Australia on ice just this week.

And with global lawmakers increasingly shunning fossil fuels in favour of clean energy like solar and wind, Shell is in severe peril of being left out in the cold.

The post Is It Finally Time To Give Up On Royal Dutch Shell Plc? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.