junior oilers dec 14/15

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    Junior Oilers 14/15 Dec

    Another lacklustre week for the junior oilers with volumes down from previous weeks but prices in general slightly higher. Such attention as there is for the oilers is very selective, primarily announcement driven, and invariably temporary. It is hard to see what could revive interest in the sector. Most of us hope it will be the upcoming Perth Basin drilling but even the Cliff Head partners were again pretty quiet this week, with the exception of AWE after a positive mention in Shares magazine and federal government approval of BassGas.

    ROC Chairman John Doran’s Wednesday effort to dampen down expectations of the likely success of the Cliff Head drilling program can’t have helped stocks involved in the Perth Basin drilling and made me think he might be the reason why there is not more interest in ROC shares. A good PR person might help.

    The week’s best performers pricewise were AYO (Yogi you are on the money!), FAR, DLS, CVN, VOY and SUR . There were no really bad performers. EGO and KRZ probably registered the biggest percentage falls. AWE made the week’s best come back, closing at 91 cents on Friday after hitting 82 cents midweek.

    Oil finished the week slightly higher and natural gas prices in the US (Jan contract) went above $5.00 mmbtu for the first time that I can remember. As foreshadowed last week the war rhetoric went up a notch and the US (with Australian participation) held war games in Qatar.The Iraqi situation seems certain to be a priority news item in coming weeks as the UN and US analyse Saddam Hussein’s 10,000 page denial that Iraq currently has WMD or WMD development programs. And with the situation in Venezuela unresolved there seems likely to be continuing upward pressure on oil and gas prices.

    Those elusive 5,10 or even 20 baggers.

    Trading in the junior oilers is a high risk, potentially high reward game. We all hope to hit a big bagger at some point but the opportunities are few and the chances we will be on board, and more importantly stay on board, when the next junior goes for a run are not high. This week I looked at the three most successful oilers of the last couple of years, HDR, AYO and ARQ to see if there was anything I could learn from their exceptional runs that would help me identify the next big movers.

    The common thread not unexpectedly was drilling success and in the case of HDR and AYO success of elephantine proportions. The second element was time, getting in to the stock when it was struggling and unloved, and consequently cheap, and hanging on until the good times came around. This required lots of patience, something few of us have. I wonder how many people bought HDR at below 10 cents in 1999 and held on until they were over a $1.00 last year and then sold close to the high??? The third element was holding through the drilling, the real high risk phase of investing in the oilers.

    This is an oversimplification of the different experiences of the three stocks who had success in three different geographical areas, two with oil and one with gas, and whose time frames from low to high varied from a couple of months (AYO) to a couple of years (HDR). But it gives you the essentials.

    So my first task was to identify struggling oilers that at least have some prospective leases and preferably leases where some preliminary work has suggested they might hold some potentially big finds..

    Some of the struggling stocks in the truly penny dreadful class include AZL, WON, ICN, PCL, EGO, VPE, and KRZ. It wouldn’t take much for any one of these to go for a run on a bit of good news and given their low prices, a two, three or more bagger is possible. But these are very high risk plays and certainly not for the faint hearted. KRZ found money recently to pay its debts to Kufpec and is gaining revenue from its oil interests in Indonesia, but it has too many shares on issue and a share depressing consolidation seems inevitable. EGO is issuing more paper to raise the cash to drill Eclipse after failing to find a farminee. If Eclipse hits, EGO may go for a run, but it is targeting gas when oil would be better. VPE also has masses of paper and a pretty dismal drilling record. Still it might one day find something in one of its many leases. And it does have a small piece of Jingemia. WON has fewer shares on issue but nothing particularly exciting in prospect. South Crackling even if successful would not amount to a Hovea or Chinghetti. ICN and PCL have the least shares on issue, reasonable management but no money. ICN is waiting on Bayou Choctaw to be drilled and PCL has Jingemia for a bit of cash flow eventually and leases offshore Kenya and Malta to be baited up. If I was playing in this casino I would probably put some money on ICN and PCL and stick the shares in a bottom draw. But this lot are basically too risky for me even though I hold PCL from an earlier error of judgement. These stocks are really daytrader fodder. I don’t see any big baggers here but I am willing to be persuaded otherwise.

    One class up in the penny stocks category are companies like NWE, HZN, CUE, CVN, BUY, DLS, PPP, SUR and FAR There are some better prospects here with nearly all of them holding some interesting leases and some like FAR, CUE, CVN and DLS having the benefit of established if small cash flows.

    NWE s fate depends on the upcoming Perth Basin drilling and success here could see it significantly rerated. It has been a popular and rewarding stock to trade in the past but this of course is no guarantee that it will be so in the future. But the Perth Basin drilling is bound to attract a lot of attention and looks good on a risk/reward ratio, ROC CEO John Doran’s midweek comments notwithstanding. (I read somewhere this week that it was actually AWE geos who insisted on the drilling of CH 2 and that had it not been for them ROC would have walked away after CH1 - not sure if it is true or not) As the Perth Basin drilling nears, the question for some will be whether to sell on any pre drill rise in price and take a 10-20% gain, or hold through the drilling in the hope of a several bagger. This will depend on your risk profile. And of course you could sell some pre drill for a small profit and then let the remainder ride the well. I haven’t decided yet what I will do with my NWE.

    Three stocks I like and hold for the longer term are CUE, CVN, and FAR. CUE and CVN have fields under development (Oyong and Wichian Buri) and both should benefit from already announced further appraisal and development drilling. In twelve to eighteen months time I expect both to be double or triple today’s prices. I am expecting an announcement next week firming up the development of Oyong which should breathe some life into CUE. Bilip could do likewise though I think CUE will be a stronger stock within my time frame regardless of the outcome at Bilip. A lot has been said about CVN and some interesting charts prepared and posted on the bulletin boards. With six producing wells, a phase 3 drilling program on prospective leases in the New Year, my view is that given time, the stock will survive and prosper.

    FAR too I expect to be revalued from today’s prices just on its US gas production alone. There is more development work to be done at Rainosek for example. And gas prices in the US are going through the roof. Interestingly FAR’s share price picked itself up off the floor this week a little earlier than I expected. I have a 12 months time horizon for FAR. Should see a 20-30% rise if not more ahead of Banjo in March which would be the time to review my holding.

    To be continued

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