Thursday 12 July 2012

Rockhopper and the fate of Small Caps

AIM listed Rockhopper has sold 60% of its largest find to Premier Oil, the FTSE 100 giant. The find is in the Falkands and is the cause of much of the current hostility of the Argentinian Government against the UK. 700 million barrels of oil and counting is a lot of resources to have.

Whilst one could have made a lot of money buying Rockhopper from it 2009 low of 14p to its current 270p (over 300 briefly on the news today), you would have to have timed it impeccably and it has, pardon the pun, been a rocky ride.

I doubt investors who buy into these shares really expect many of the companies to do a Tullow Oil or a Cairn Energy and turn into FTSE 100 behemoths from penny shares themselves. But what looks frustrating is that the exceptionally weak small cap equity markets are serving up some great treats for the likes of Premier Oil at the moment.

Depressed prices due to a lack of access to capital for development means the small cap explorers are as hamstrung now as they were in 2008/9. To move projects on it is either eye-watering dilution for current holders (including management), a partial sale of assets at firesale prices or treading water, waiting for markets to revive and hoping current funds can eek out the time. Even int he latter case the funding is often from a death-spiral equity finance arrangement that is again very dilutive with shares offered for cash on poor terms.

Unsurprisingly then the share prices are being hammered and the companies valued at far below par value. This is good for predators though like Premier who have the cash flow to snap up explorers at cheap valuations.

Whether it makes sense to back the AIM explorers now is less clear. If they are not ever going to provide the returns needed, perhaps the better strategy is to buy the likes of Premier Oil currently. Alternatively if the markets do recover, there are going to be some sharp spikes on AIM Oil and Gas companies.


Tim Worstall said...

Getty....drill for oil on Wall Street when that is cheaper than drilling in the field. And vice versa.

And the logic of the current situation is to float a shell, swallow the minors and by agglomeration create something large enough to be able to finance the projects.

Financing one 700 million barrel project, difficult. Financing 10 of them in the same company, much easier.

andrew said...

I Cannot fault TW's logic but it is not a case of oil or oil shares - you can always choose to buy gold/ art/ serviced offices...

I have been going into advanced manufacturers - not so much drilling for oil as creative brains.
As always mixed success and ymmv
(Peugeot -40%, 3D Systems Corporation +120%and not with the intent of trading) .

Budgie said...

So what about Xcite? Oil in place; extraction equipment in place; extended well test happening; finance in place? Or Max? Oil in place and producing revenue but latest drill dry?

Lending to oil minnows, including buying shares, is always high risk. It is as you say even harder now. But for some with obvious assets it should not be that difficult.

The killer problem is the euro. The UK and the rest of the world would all be better off if the euro simply broke up. And certainly small oil businesses would benefit.

Steven_L said...

I'm staying a couple of doors down from an Xcite office in Aberdeen.

The other day they left their garage door open with a plastic tub half full of oil there for the taking (not that I did of course).

Is that an omen?

Anonymous said...

I saw the other day that oil extraction in Saudi costs half of what it does in the next cheapest country and a quarter of the price of Venezuela. Given that Saudi produces 60% of the worlds oil, it is a hard act to follow.

Of course the fat slapper that runs Argentina hasn't realised that by co-operating with the Brits they would get a large share of any profits to be made from Falklands oil as they obvious thing to do is land it in Argentina and ship it on from there.

CityUnslicker said...

Xcite - advised by Rothschilds who just sold Encore and Rockhopper!