Wednesday 29 September 2010

Guest Post: UK Small Oil Cap Shares

Well, fresh from having bought yet another small oil share this morning (AEY), I have below a post by an excellent young analyst, Chris Hopper. Chris started out a couple of years ago with an interest in the markets and has built some very impressive winning positions. Moreover, his commitment to doing real research has helped him pick many huge winners.

There is a huge amount of private investor money going into small cap oils at the moment. So Chris has come up with a defensive strategy for what is still a top sector beset by strange valuations and poor liquidity:

"2010 has again bought us some true winners across the London AIM Market, A market where small companies strive for profitability or to discover the next big resource/invention, however the London AIM market suffers from a disease that is leading to a serious miss-valuation on stock prices,

It is not uncommon to see 100 or 200% daily rises in Aim listed stock prices for them then to gradually give up the gains over the next few days; the fueling for these sky high gains can usually be traced back to Investor bulletin boards.

AIM stocks go in and out of fashion like there's no tomorrow and you only have to browse sites such as or advfn to see what I'm talking about.

However over the past 18 months it seems to be the Oil Exploration and production companies that have been where the "Hot Money" has been flowing towards on London's AIM.

A few certain stock have truly found what every small Oil E&P company dreams of A world class discovery and this is usually reflected in their stock price.

Late 2009 saw Kurdistan based Gulfkeystone Petroleum strike black gold in its shaikan block that analysts are now predicting could hold over 20 billion barrels of oil and has been labled as one of the biggest discoveries in the past 40 years its stock price rose from 5p to over £1.20 in just a few months, 2010 saw further large discoveries in the Falklands and in the North Sea, Rockhopper exploration found what could hold upto 450million barrels of recoverable oil and it too saw its stock jump over 1000% over a short space of time but is it these sort of discoveries that has led to investors becoming over ambitious on the prospects of finding oil, perhaps in similar regions where other discoverys have been made Sterling Energy is a good example who have so far failed to find oil in Kurdistan but remain to be valued at £300m , finding commerical oil is no easy task and in many cases can be the make or break of many of these companies, however the constant "ramping" and hype surrounding these stocks usually keeps the share price inflated until a faeces/fan intersect moment and in black and white investors are told their company has been unsuccessfull.

The recent bubble has been surrounding the Falkland oil stocks that all seem to of prospered on the back of Rockhopper's multi-million barrel find, its almost as if to say we're going to value happy shopper at half the marketcap of tescos simply because their next door and they sell the same things. Stocks such as Desire Petroleum (DES £500m marktcap) and Falklands Oil & Gas (FOGL £250m mrkt cap) are two examples of stocks that have failed to find oil but yet seem to be valued extreamly high, say in comparision to another AIM oiley Chariot Oil who havent started drilling for oil yet but hold the same if not more chance of striking it rich who are valued at £175m or Xcite energy who have already made a large discovery and are soon to provide its economic worth ( £140m mrketcap) and consider the remotness and the development costs needed should DES or FOGL make a discovery they seem a bubble waiting to burst but are being propped up by hot money.

Over to Canada and the situation is different Oil E&P stocks listed on their TSX are looked upon in a whole different light as the reality of development costs and the small chances of actually finding a commercial discovery is reflected in stock prices in toronto stocks such as African Oil and Vast exploration who despite having a good chance of making a commerical discovery in the billions or barrel range are valued at under £100m - these look like far better safer places for investment."
CU - I would add that my single largest "investments" are in GKP mentioned above and IAE an dual AIM/TSX listed explorere/developer of North Sea oil. CU managed to lose a small packet trying to trade DES.


Steven_L said...

My mate keeps trading these small cap oil and miners and has been doing well.

He hangs about the LSE forums and keeps an eye on broker recommends. He's had decent wins on GKP and that Churchill Mining CU was tipping me.

I still haven't touched any of them, because I really don't understand them. I read their reports, look at their market cap and it doesn't add up.

This post is making me think about developing some kind of shorting strategy on them - maybe they are a bubble.

CityUnslicker said...

SL - they are a bubble for sure, but the key is some have real value and others litte. CHL has a huge mining reserve it just needed a partner to develop - all the ingredients for a good punt. DES has exploration licences which may or may not strike oil- the valuations are crazy.

The Key is to ignore the white noise.

Al said...

I can see the whole BB thing, in fact I lost a small packet on Newport Networks due to overly ambitious BB's.

Certain sections of the media also appear to be overly critical of some oilers who have actually struck and overly praising of others that haven't. Something that adds to the confusion, especially when that particular media source has a good reputation

Savonarola said...

I like look of AEY. Real company, experienced team, reserves, no debt, positive cash flow in Argentina. Share price uncorrupted by speculators and lemmings. Building a position.

Steven_L said...

Well I'm getting better at timing the large-caps/blue chips now.

So I'm reckoning that I can produce the same high risk/reward as small caps by just using leverage?