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Geometric Drilling - UK Based onshore drilling contractor

Valiant effort by small cap oil and gas companies

18 September 2009

NEWS this week that AIM listed oil and gas explorer Valiant Petroleum had delivered a maiden revenue in the first six months of the year came as wider confidence in the junior end of the oil and gas sector showed signs of improvement.

After 18 months on the market Valiant proved that its initial plans to capitalise on under-explored areas of the North Sea were not only workable, but profitable too. It is now pumping oil from wells in the Don and Don Southwest fields and said it was on the look-out for further acquisition and consolidation opportunities in its North Sea area.

Peter Buchanan, the company’s chief executive, said the transition to become a fully fledged oil producer meant shareholders could see the company as “an exciting investment opportunity” for years to come.

Like almost all of its peers, Valiant’s share price has endured a rollercoaster over the last 12 months – from 612p it fell to 247p last December before rebounding this week to 595p. But unlike many others, Valiant has also enjoyed the support of its lenders, who have been amenable over the company’s c.£200m of debt.

The issue of funding for small cap oil and gas groups was one of the key issues in a recent report into how companies in the sector are currently performing.

An index of the sector worked out by business advisory firm Ernst & Young, showed that companies made gains of 24% in the second quarter of 2009 – the second consecutive quarter of growth in the index. The same index has risen by 57% since the start of they year, but remains 58% down on this time last year.

According to Alec Carstairs, an oil and gas partner at Ernst & Young, the steady but cautious recovery in the performance of the oil and gas eye index is in part supported by higher oil prices but working capital constraints and access to affordable financing cannot be ignored.

“Future prospects for oil prices stabilising at higher levels depend on the speed and strength of global economic recovery and investor confidence may not return to every company in the sector,” he warned.

Investor interest

Most oil and gas companies rode the upward trend during the second quarter, with 92 of AIM’s 115 oil and gas companies ending the period in positive territory. Nineteen of these companies were successful in securing finance as investors started to return selectively to the sector.

£281 million was raised in secondary issues by oil and gas companies, the highest quarterly amount since the last quarter of 2007 and significantly higher than the £25m raised in the first quarter this year. However, fundraising from new issues remained at nil during the second quarter.

Jon Clark, an oil and gas director at Ernst & Young, pointed out that while, for a third consecutive quarter, no new oil and gas companies had joined AIM, there were no exits from the market – bringing a halt to a recent trend in the first quarter where three companies delisted as a result of market conditions. Those companies were Caspian Energy, Elixir Petroleum and Equator Exploration.

Looking ahead, Ernst & Young reckon that the oil and gas sector will continue to see an easing in the availability of capital – but not for everyone.

Mr Carstairs said: “Amidst the economic gloom and volatility in oil prices, opportunities have emerged. This trend will continue for some well capitalised oil and gas companies to position themselves for the upturn, for example, through acquisitions of distressed targets, or falling costs. The future outlook, although not certain, is becoming more positive.”