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junior oilers 5/6 april

  1. jocam9

    1,317 posts.
    Junior oilers 5/6 April

    This week the most traded stocks by value were Oil Search , Arc Energy, (due largely to a one off sale by Rothchilds), Hardman , Amity Oil, Roc Oil, Petsec Energy and Australian Worldwide Exploration.

    Of the 33 oilers on my watch list 10 stocks rose, 18 fell and 5 remained the same.

    PSA

    For the second week in a row the best performer was Petsec Energy (PSA) rising 7 cents or almost 20% over the week. Most of the gains came on Friday when there was a mini run on the stock apparently following briefings to brokers by PSA managing director Terence Fern. Some 640,000 shares traded on Friday compared to a daily average of 170,000 on the previous four days. The increased interest pushed the share up 5 cents on Friday alone. The question is can PSA keep the momentum going this coming week?

    The answer depends largely on when and how the company will announce its March quarter revenues. It is not required to put out quarterly cash flow reports but has had a habit of including some financial information in its quarterly activity reports. It usually issues these on the last day of the month following the end of the quarter ie. in this case on 30 April. If it were to publicise these revenues earlier, for example next week, we could see another kick up in the share price. Otherwise you would expect some profit taking after the stocks recent strong gains.

    But what seems to be happening here is a significant re-rating of the stock after some years in the sin bin. Demonstrating through increased revenues that it is very much back in business in the highly profitable Gulf of Mexico will see it graduate to serious stock status and a place in the portfolio of longer term investors. I think there is plenty of upside left in this one yet.

    Friday’s volume of 640,000 shares which pushed the price up five cents was still a small plunge/splurge compared to the four million shares traded in two days for a nine cents rise at the end of January. That was when the company announced the commencement of production from West Cameron.

    HDR

    Another strong gainer for the week on good volumes was Hardman Resources which was up some 8% at week’s close. Buying seems to be in anticipation of a resumption of drilling off Africa later in the year because there have not been any significant press releases since the CEO’s presentation on 13 March. Stock rose as high as 49 cents on Thursday but closed Friday at 47.5 cents.

    AYO

    Amity Oil was another stock to show good gains this week up 5 cents from 66 cents to 71 cents, a gain of about 8% for the week. Imminent drilling activity in Turkey seems to be responsible because the company is still struggling to increase its gas sales from the currently producing Gocerler Field. Latest fortnightly sales were up a little at an average 12.8 mmcf a day or 6 mmcf attributable to AYO but this is small beer compared to the 23 mmcf PSA is currently pulling in. AYO is hooking up new customers over the next four weeks and this plus drilling success is essential if the shares are to represent value at current levels.

    I noticed that AYO has contracted out the drilling of the next two wells which begs the question what happened to its own rig which was taken to Turkey amidst much fanfare last year. AYO will spud Cayidere 1 on 20 April and Adetepe 1 on 25 April according to a media release issued this week. AYO has a 50% interest in both wells.

    PPP/COE/EGO/WON/FAR/DLS

    Pan Pacific Petroleum (PPP),Cooper Energy (COE) and Empire Oil and Gas (EGO) all rose this week but on small volumes. PPP is participating in the drilling of Montgomery 1. COE announced good revenues from Sellicks and its 2003 drilling program . (BPT also announcedthis week its Cooper/Eromanga drilling program for the year.) And EGO has at last found a farminee for the drilling of Eclipse and the well should spud soon.

    The major losers for the week were WON and FAR as a result of drilling failures at Crackling South and Banjo. I think FAR has better chances of an early recovery than WON but see below. Horizon also took a dive this week on low volume while DLS announced on Friday that it had placed 20 million shares at 5 cents. This could keep the lid on DLS for a while. It has traded very erratically of late

    OSH

    Oil Search has been sliding for some time and dropped another 6% this week or four cents from 64 cents to 60 cents and this despite the company’s buy back of its shares. The market’s perception of OSH has a lot to do with whether the PNG/Qld gas pipeline will go ahead. And related to this an announcement about Alcan’s gas purchases intentions had been expected before the end of March. I think OSH is fundamentally a good company working in a tough environment in PNG. If the pipeline is eventually canned and OSH shares take a hit, I think they would then represent good buying for contrarian investors.

    ARQ

    Arc Energy shares also dropped this week. Rothchilds sold some 3.3 million shares early in the week at 66 cents but that was the high for the week. ARC closed at 61 cents on Friday. ARC issued an upbeat update on operations on 2 April but there were a few things in the release to take issue with. One, the announcement of a production manager was welcome but you would have to wonder why it has taken ARC so long to recognise that they needed the position . Two, the company reported that it still had an $11.4 million debt to Rothchilds but no indication if that was the extent of its total debt. And three, it seemed a strange oversight not to mention how the Hovea production facilities upgrade was progressing or give any details about likely production from Eremia.. I think ARQ will come good in the end but I would expect some weakness ahead in the share price given the end of its drilling activity until later in the year and the fact that ARQ still has to answer some questions about production rates at Hovea and the development of Eremia.

    CUE

    Cue’s decision to list ADR’s in the United States was an effort to try and spark some interest in its shares. It will not involve a new issue of shares. Each ADR’s will represent 100 shares and as I understand it the US issuer will have to buy those in the Australian market. So far the affect has been negligible. CUE shares have if anything been weaker since the announcement. The problem for CUE is the financing
    of its $25 million share of Oyong’s development costs and the markets belief that CUE will have to go back to shareholders to raise at least a portion of that. I can’t see any renewed interest in CUE until that question is resolved.

    Trading the Junior Oilers

    The Turtilian Strategy

    I thought it might be useful this week to review our strategies for trading the junior oilers. It is some time since we had an exchange of views on the topic. And as we have come through a recent interesting period for a number of oilers ( the Perth Basin and Tui drilling) and there may be things to learn from the experience.

    The most straight forward strategy I have come across is one favored by acturtle. He will correct me if I am wrong, but as I understand it, the basic idea is to identify stocks well ahead of a drilling program, buy them when they are out of favour and sell them when they rise in value as the drilling program nears. This strategy is remarkably successful and can deliver gains of up to 100 % in a matter of months in a best case scenario.

    A recent example was Pan Pacific Petroleum (PPP) which spent much of last winter around 7 cents sometimes lower. There was very little interest in the stock so over time it was possible to accumulate shares at this level. The reason for buying the stock was an expectation that it would be involved in the drilling of the very large Tui prospect offshore New Zealand later in the year.

    OnceTui became a firm drill the punters started to show interest in PPP and it began moving up. By the beginning of November it had reached 10 cents. By the end of November it was 12.5 cents. And by January, a few short weeks before Tui was to spud, the stock was trading at the 13 to 14 cent level. A month later after the disappointment of Tui the stock had fallen back to 7 cents .

    So if one had bought PPP in August/September at around 7 cents and sold in January at 14 cents you would have made a 100 % profit. You could even have traded 500,000 shares without too much trouble though not two or three million. I make the latter point because the trading strategies we are talking about here are for small retail investors with limited funds not the big guys with lots of cash who need liquidity in stocks.

    There are other examples of this strategy in the last twelve months. Hardman was around 60 cents early in 2002 ahead of its drilling program offshore Mauritania. As the drilling program got closer the price of the stock rose to 80 cents.

    Australian Worldwide Exploration (AWE) could be bought for 80 cents in early November ahead of the drilling program in the offshore Perth Basin. As that program neared AWE rose to $1 . And there are other examples such as Northwest, Bounty and Voyager ahead of the Cliff Head drilling.

    The point needs to be emphasized that the strategy involves getting out of an oiler before it actually spuds a well. Obviously that means missing out on the subsequent rise in the stock’s value if the well is a success. But given the 10-20% success rate of wildcats that is a risk those following this strategy are prepared to take.

    One could vary the strategy by selling part of a holding ahead of a well so as to be free carried for the remainder through the drilling. A success and the investor is well ahead, a duster and he/she is no worse off. I think acturtle will tell you that keeping a portion of your original holding through the drilling of a well defeats the purpose of the strategy. The idea is to make money out of the fact that a stock will normally rise ahead of a drilling program.

    Ah but sometimes they don’t! WON didn’t rise ahead of Crackling South and FAR didn’t rise ahead of the drilling of Banjo. So what went wrong?

    Companies obviously know their shares will often strengthen ahead of a drilling program and so take advantage of that to raise capital through a share issue of one sort or another. WON did it ahead of the drilling of Crackling South as did FAR ahead of Banjo. The issues are often pitched 10-20% or more below then market price and have the affect of stopping a share price rise dead in its tracks. So the lesson here is that for a pre drill rise pick a stock that actually has enough money to see it through the drilling.

    But not all such capital raisings defeat the strategy by preventing a pre drill share price appreciation. Bounty, Voyager and Norwest Energy all had capital raisings ahead of the Perth Basin drilling program. Bounty raised funds at 7.7 cents, Norwest at 8 cents and Voyager at 18 cents. Yet all three managed good rises before the first well spudded and thus provided an opportunity to take good profits.

    The difference between these capital raisings and those of WON and FAR was the different nature of the drilling programs the companies were undertaking. The Perth Basin drilling program involved a series of four to five high profile wells and expectations were high. On the other hand WON had a small part in a shallow Carnarvon Basin well. FAR had a larger interest in another Carnarvon Basin well but the expectations for Banjo were never great. FAR for example had found no industry interest in farming in to the prospect. And unfortunately for WON and FAR their wells came after the disappointing results of the Perth Basin program and the start of the war against Iraq, two events which negatively affected the broader sentiment for speculating in junior oilers.

    Another question about this strategy has to do with the extent of the pre drilling rise and the factors that influence this. Acturtle again will correct me if I am wrong but I think the theory is that the more important the well is to a company the bigger the likely price rise. In other words if a project is a potential company maker the stock should rise significantly ahead of the spudding of the well.

    In a similar vein, if a drilling program attracts a lot of media attention it will also attract the speculators. And lastly if the well is drilling a large prospect such as a Tui (700 million barrels of oil potential) one can reasonably expect the pre drilling price appreciation to be higher than if a company is drilling much smaller prospects.

    So where does that leave us. In summary the strategy recommends investing in companies with an upcoming drilling program, with sufficient funds to see it through that drill program and with the expectation that the prospects being tested could be highly significant for the company. It also helps if the company is prepared to promote its activities with the media because this helps bring it to investor attention.

    So are there any companies that fall into this category that represent good buying at the moment? Last week I mentioned Cooper Energy as a company with good exposure to the forthcoming Cooper/Eromanga Basin drilling program. The company shares have been out of favour following the failure of Karbine a pre Christmas well drilled in PEL 93 and could be accumulated in recent months at around 10 cents. The company announced this past week that revenues from its successful Sellicks oil well were above budget and that production from the well was soon to be increased from 450 bopd to 750 bopd with the installation of pumping equipment

    The company also announced it 2003 drilling program, a series of four wells from May through to November and. funds for the first couple of wells should be no problem. The shares didn’t trade on Monday or Tuesday and only 74,000 shares traded on Wednesday. Following the press reports on Thursday over 500,000 shares traded with the shares moving up 10% to 11 cents. On Friday COE traded back at 10 cents as 211,000 shares changed hands. I think at these levels Cooper Energy offers potential upside ahead of the first well, Christies 1, due to spud in May. COE has a 25% interest in this well, and although it is not targeting a large prospect, it is drilling near last year’s Sellick’s discovery in PEL 92 which adds some interest to the well. I would expect COE could get to 12 or 13 cents by the end of April.

    Another stock that should rise in coming months as the next round of drilling offshore Mauritania nears is Hardman. HDR has been as low as 39 cents in recent weeks but, as mentioned earlier, pulled up strongly from that level to touch 49.5 cents in intraday trade on Thursday. It closed the week a tad weaker at 47.5 cents. HDR will be drilling up to 8 wells off West Africa beginning July/August and has sufficient cash in hand to meet this year’s commitments. In the meantime Jingemia will be production tested and Leafcutter is to be drilled in the Woodada production license in May. These events should maintain interest in the stock. HDR seems to me to be good buying in the 45 – 50 cent range for a 15 to 20 cents appreciation ahead of the African wells. Only question is timing, does one get in now and sit through Leafcutter or wait until that is drilled before taking a position. My money would be on entering earlier rather than later.

    BUY is an unloved stock but one which has a couple of confirmed wells, Leafcutter and Thomby Creek coming up. It is reasonably cashed up being free carried through the recent drilling of Twin Lions so shouldn’t be coming back to the market for cash ahead of the drills. In any event both wells will be cheap as they are shallow and onshore and in the case of Leafcutter will be drilled by Hardman’s own rig. I personally think Bounty is a real sleeper with good assets, not much paper on issue and adventurous management linked to Hardman. But the stock is a real market Cindarella at the moment which mean it is probably a good time to accumulate. PPP was in a similar situation much of last year but came to life quickly when drilling loomed up on the horizon. I think BUY should move past ten cents by May, up a couple of cents from its current level.

    Other Trading Strategies

    Another trading strategy for the junior oilers is to buy them on bad news on the reasonable assumption that the market will oversell any stock that disappoints. It depends what the bad news is of course but the most common bad news, that of a drilling failure, can put a big dent in a company’s share price but not necessarily a fatal one.

    Thus punters are prepared to buy WON at 0.007 cents after the duster that was Crackling South in the belief that WON will recover some loss ground as attention switches to its other interests, eg Puffin. However having done a considerable sum of money on the pre drill rise that never happened I am not about to give WON a second chance.

    But I am going to stay with FAR because I just don’t believe it is a three to four cent stock. It is at these levels because of the failure of Banjo this week not because the circumstances of the company worsened in any way as a result of the drilling. Clearly they haven’t. The stock price fell because the company making opportunity didn’t eventuate. FAR has producing assets in the USA and should report good revenues this quarter on the back of higher oil and gas prices. There is a possibility that drilling action will start at Bayou Choctaw at long last (hence the strengthening of the offers for Icon this week) and China will see more drilling in November. I am hoping FAR will make it back to 7 cents by October/November so buying now at the 4 cents level represents a reasonable return over a six month period. FAR had indicated to ASIC that it has sufficient funds to meet all commitments to the end of the year. This is definitely a case of buying on the bad news.

    Does Norwest fall into the same category? For me,no. The reason is simple, like WON it has no producing assets and may need another capital injection before the year is out. Of the two I think NWE is probably the less risky play but neither will attract any interest from me. A decision to drill again on the Puffin lease would probably excite the market but I am not even sure a heads of agreement has yet been signed with the two US companies that were supposedly interested in an 80% interest in the lease. It would pay any prospective punter in these two stocks to look very closely at their next quarterly activity and cash flow reports. These can’t be far away.

    Another company that has had a run of bad luck lately is Essential Petroleum. After drilling failures at Koriot West and Banganna the retesting of Port Fairy has also disappointed. I am not sure where EPR goes from here so will look forward to reading its activity statement this month and to seeing how much cash it has left. EPR has some strong partners in Origin, Beach and Mitsui and some prospective acreage in the onshore and offshore Otway Basin. The drilling failures have hit the share price hard. It has fallen from a closing high of 26 cents on 15 January to a low of 13 cents earlier this week. At these levels EPR is worth putting on one’s watch list particularly if there is still some cash left in the kitty. EPR was reasonably cashed up last quarter but must have chewed through some of that this March quarter.

    As usual do your own research and check with an expert before spending your hard earned on what are very speculative stocks.

    Disclosure: I hold BUY, COE, CUE, FAR, FAROA, ICN, GBG and PSA.






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