junior oilers 31 may

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    Junior oilers 31 May

    Oil and gas prices closed up this week , a time of the year when they are normally heading down. Closing prices with previous week’s price in brackets were as follows. Nymex crude $29.56 ($28.93), Dated Brent $26.90 ($26.52) and Nymex Henry Hub natural gas $ 6.25 ($6.00).

    Gas prices in the United States are particularly strong which is good for AMU, FAR and particularly PSA who announced Thursday that all three wells at West Cameron returned to full production earlier in the week after recompletions and were flowing at a rate of 25 mmcf per day.

    At the International Association of Drilling Contractors (IADC) annual land drillers conference in Houston, this week, Marshall Adkins, the managing director for the energy equity group at Raymond James and Associates, saw a dynamic natural gas market ahead.

    Short term, Mr. Adkins envisions a potential train wreck in the natural gas market as production falls, drilling is unable to stem the decline, and the resulting shortfall in supplies can only be offset this summer through driving 700 bcf of demand out of the market via price rationalization.

    That destruction must come from the industrial sector, he opined, which has already cut natural gas demand by 10 bcf/d since January 2000. He predicted natural gas prices could exceed $6 per mmcf this summer and that June would provide the first signals of where the market was headed.”

    Of the 44 oil and gas stocks on my expanded watch list 10 rose this week, 23 fell and 11 remained neutral. The bias is definitely to the downside after a good week the week before when it looked as though some interest was returning to the speccie oil sector. That interest proved shortlived.

    It is worth noting however that we are now in that time of the year when investors are looking to offload losing stocks for tax purposes. So some stocks like FAR, NWE, CVN, VPE and others which are down for the year, can be expected to remain weak under tax loss selling pressure. There are accordingly some good straw hats out there for the taking.

    In the winner’s circle were the stock of the month, Amity Oil, up 12 cents for the week to reach a new high for the year of $1.13 and Australian Worldwide Exploration up 3 cents to 85 cents. Unfortunately these were the only two stocks to show notable gains. Arc Energy lost a cent over the week but remained strong and at higher levels than seen recently.

    Arc seems to have broken into an up trend. VOY and Icon Energy may be in the same situation as both have come off recent lows the latter on reasonable volume. ICN announced during the week that it was closer to arranging the capital necessary to restart operations at Bayou Choctaw. This will be a significant step forward for ICN (and FAR and HZN) if it ever comes to pass.


    There is no doubt Amity Oil is the current momentum stock. It has hit a 52 week high on the back of continued drilling in Turkey (Adatepe 1) and the prospect of further success with Yesiltepe 1 which is on the starting blocks.

    I have never liked AYO’s fundamentals, it operates in a politically, economically and geologically unstable environment, it is a gas producer competing with other gas producers for customers and there have been internal problems within management. I always thought that this was a bit of a “gunner” company as far as predictions of production and sales were concerned. It was net operating and investing cash flow negative to the tune of $2.5 million dollars in the March quarter.

    But there is no doubt that this is a company that attracts momentum. It has been over a dollar four times in the last couple of years, though has never been able to stay there for long with the pattern being one of significant reversals after spiking to dollar plus highs.

    Why I get angry at myself about this one is that I have allowed a negative view of its fundamentals to over ride what should have been an assessment back in March that this one was going up because it was about to resume drilling; because it was a popular stock with lots of supporters and because it was a stock that was exceedingly well promoted. Just look at the number of press releases AYO has put out in the last couple of months.

    In other words we should invest in these speculative oil stocks, not on the basis of whether we like them or not but because, for what ever spurious reason, we think they are likely to go up. Anyway lesson learned. Congratulations to all those who have made money on AYO. Personally I think the smart money has already left the stock but I guess there will be some punters who will stay in for the ride on Yesiltepe. If that comes in AYO could hit $3 .00 or more and I would have more egg on my face. If it doesn’t, I would expect the stock to retrace to 80 or 90 cents.

    Amity is now capitalised at $222.6 million (158 million shares plus 38 million in the money options). Compare that to ROC for example capitalised at $124 million and ask yourself does AYO really deserve to be valued twice as highly as ROC. The answer is no of course it doesn’t but that doesn’t necessarily mean anything when a stock like AYO is on the roll that it is. Just keep a tight stop loss.

    The Losers

    Although the bias this week was towards weakening share prices, apart from ECU which got hammered down from 5.3 cents to 4.7 cents on Friday there we no stocks which I thought had entered a new down trend.

    WON and EGO are in trouble and have been so for a while. WON because the new management is foreshadowing a 1 for 10 reconstruction and a capital raising so why anyone is buying into this stock at the moment is beyond me. EGO has not recovered from the failure of Eclipse 1 but still surfaced this week confidently predicting that all was not lost and that it will announce a revised drilling program shortly. How it is going to finance that is anybody’s guess.

    Kalrez was down a bit for the week with a whopping 23 million shares changing hands on Thursday and Friday on a falling share price. This is another one that is due for a reconstruction as it probably has more scrip on issue (1.4 billion) than any other oiler. I wouldn’t advise anyone to enter KRZ until it is a lot further down the road to recovery and the share reconstruction is out of the way.

    Bounty Oil and Gas, a stock I hold, was off a cent this week down from 9.8 cents to 8.8 cents. But as I predicted last week, after the good run it had a fortnight ago, a quieter week was on the cards. With Leafcutter to be drilled in the Perth Basin this month (June) I am hoping for some interest to return to BUY this week.

    The Cooper Basin stocks BPT, COE and STU are still to reflect the fact that an extensive drilling program is about to get under way shortly. COE and BPT look like bargains to me with considerable upside potential in the medium term particularly BPT which is funding its drilling program out of its substantial revenue flows. COE has foreshadowed that it may need more cash before the year is out.

    Hardman Resources was off 5 cents this week down to 54 cents at Friday’s close from 59 cents the week before

    Hardman seems to have been adevesrely affected by a statement from ROC Chairman John Doran during the week that Chinguetti was yet to be proved up as a commercial discovery. Here is what Doran had to say:

    “On balance, the Chinguetti Field is also expected to proceed to development but in this case the key event will be a development well which the Joint Venture is considering drilling during August and September 2003. If that well is drilled and the results are encouraging, it will be retained as a future producer and the field will probably be developed. However, until the results of that well are known it is premature to consider Chinguetti as a definite commercial development - despite anything you may have read to the contrary in recent press coverage.”

    Hardman was also queried by the ASX about some statement it made about the availability of project financing.

    So with these negatives in the market Hardman took a bit of a hit. Late in the week came the announcement that Premier Oil had bought the interests of Fusion Oil in Chinguetti and Banda but at the time of writing this I have not seen any comments as to whether the markets sees Premier’s confidence as a positive or Fusion’s decision to take an ORRI as a negative. Here is an excerpt from the press report:

    “Premier has reached agreement with Fusion Oil & Gas to purchase a number of West African interests including the Chinguetti and Banda oil discoveries offshore Mauritania.
    In Mauritania, Premier will acquire Fusion's 6% interest in PSC B (containing the Chinguetti discovery) and 3% interest in PSC A (containing the Banda discovery) for a cash consideration of $10 million and an overriding royalty.

    The Chinguetti discovery is expected to receive development consent in the next 12 months and production of the estimated 120 mmbbls of oil reserves (Premier share 7.2 mmbbls) is to commence in 2005/6. A multi-well drilling program covering both PSC A and PSC B is expected to begin by late 2003. There are many other attractive exploration prospects to be pursued in both PSC's.”

    I took advantage of the weakness in HDR to enter the stock at 54 cents in the belief that we are on the verge of some important announcements re the upcoming drilling program that should re-ignite HDR’s share price.

    China Beibu Field

    I think it is worth repeating here the comments ROC Chairman John Doran made this week about the Beibu Field offshore China. He said:

    “The details of ROC's activities in China are probably the hardest to quantify. Not because they have any less potential but because, unlike Cliff Head and Chinguetti, we're not dealing with a single field but with five fields which have already been discovered in the Block, plus several attractive new prospects which are emerging from the interpretation of the 2002 3D seismic which is now nearing completion.

    Also, the known oil accumulations and new exploration targets are at various stratigraphic levels. Therefore, any hesitancy we may appear to have about Block 22/12 simply reflects the fact that we're yet to decide which of this array of opportunities will be the first candidate for a potential development.

    The one to three well drilling programme which is scheduled for late this year will be the key to any potential development. If that programme is successful, ROC's interests offshore China would be right up there at the same level of relevancy as Cliff Head - possibly higher. (my emphasis)

    I have said before in these weekly market reports that I think China is one of the more interesting and potentially market moving plays for the stocks involved (ROC, HZN, FAR and PSA) later in the year. I think John Doran would like to say that the Beibu discoveries could together bring in more than100 mmbs recoverable but the Chinese won’t let him. Horizon got a rap over the knuckles from the Chinese recently for the fairly innocuous statement it made about Beibu a week or so ago.

    So you won’t see this prospect hyped by the participants. But speak to them privately as I have done, and you can tell that they are very excited about it but a bit frustrated at the slow pace at which the Chinese, CNOOC, take decisions.


    I attended the FAR AGM this week in Perth. FAR has been around as a junior oil and gas explorer/producer since the late 80’s. It came in to being largely at the instigation of Chairman Michael Evans who still heads up the company. By Evans own admission FAR has not been the success he would have hoped but all is not lost for this Perth junior.

    First FAR has revenues from oil and gas production in the United States. These revenues have been held up by high prices because volume has actually been declining. Evans hopes to turn that around this year.

    FAR has also made the sensible decision to put a lot of effort into the United States where there remains small highly profitable prospects on proven fields for the juniors with established infrastructure, great prices and a demand for gas in particular outstripping supply. FAR hopes to repeat onshore the United States what Petsec is doing offshore in the Gulf of Mexico though on a smaller scale.

    Second FAR wisely stayed out of the recent offshore Perth Basin drilling program and was not seduced into taking a high priced stake (AS Voyager did) only to see it come very little. As Evans said it could have spelt the end for FAR .

    FAR’s has a lot riding on the Terry Ewing #2 well which is about to spud in Jackson Parish, Louisiana. This is essentially a development well sited 200 metres from the Terry Ewing #1 well drilled a couple of year ago. That well proved up two gas discoveries one in the shallower Hosston Sands (10,000 feet) and one the Cotton Valley at depth (16,000 feet . The shallow reservoirs in the first well were damaged beyond repair by drilling mud necessitating a new well. Terry Ewing #2 will only target the shallower sands which FAR hopes contain some 55 bcf and should flow at 3-4 mmcf pd. If that is successful then FAR and the jv may look at going after the deeper sands at some later stage.

    FAR has a number of other interests that are of company making significance (eg. A 5% interest in Beibu offshore China) but its most immediate priority is to build back its revenue stream. Its shares are at an all time low of 2.8 cents and tax loss selling could possibly see them going lower still.

    FAR is a potential turn around stock. I hold but am not expecting to see any re-rating until after the Terry Ewing #2 well is drilled. This is not a stock for the faint hearted. I didn’t get the impression that FAR would have to pass the hat around for more cash in the foreseeable future. It has paid for Terry Ewing #2 and is free carried for the first well on Beibu later this year.

    As usual do your own research and talk to the experts before investing your hard earned in speculative stocks.

    Disclosure: I hold BUY, BUYO, FAR, FAROA, HDR and PSA
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