Is the pessimism around AIM Oil & Gas justified?

With the likes of Bowleven, Gulf Keystone, Xcite Energy, Sound Oil, Red Emperor, Range Resources and many other AIM oil and gas stocks at apparently at or close to near term lows, it’s important to realise that the sector as a whole is actually still some way off its 2009 lows. The AIM oil and gas index, at the 3500 level is still almost double what it was at the peak of the financial crisis sell off in during the spring of 2009 as the chart below shows.

AIM Oil & Gas sector 4 year chart

Since the start of 2012, prices have dropped sharply. Brent crude has dropped from $128 in March to $115 currently, a drop of 10%, as a result of increasing supply and falling demand as well as reduced geo-political concerns. A strengthening dollar has also weighed on the oil price this year. The risk-off approach during late spring/early summer has already helped to drive the AIM oil and gas index down this year too.

Access to funding is a serious concern for many smaller oil explorers. Many have had to resort to unpalatable unconventional sources of finance through finance vendor companies such as Socius and which has resulted in highly dilutive share placings left, right and centre. Just look at the Premier Oil and Rockhopper farm in deal last month which cut Rockhoppers price by 50% at the lows compared with nearly £4 in February/March as Premier was deemed to have extracted a good deal for them to offset the political risk in the Falklands. Others like Max Petroleum have had to abandon drilling altogether after failing to secure additional funds following well problems.

Then there have been the drilling disappointments. Borders and Southern in the South Falkland basin with its Stebbing well, Red Emperor and Range Resources in Somalia. Any hint of a setback and the market marks the shares down aggressively. Borders were over 120p in May, now they’ve slumped to 18p and have been as low as 14p.

So many companies in the AIM oil and gas index look good value for money….but when will sentiment turn? Takeovers are still on the cards, just look at Nautical Petroleum, Agora and others in recent weeks.

We believe that he best picks in the sector on pure valuation terms and so susceptibility to corporate activity are Gulfsands Petroleum, Ithaca Energy, Bowleven, Chariot Oil & Gas, Ruspetro & Xcite Energy.

In the forthcoming edition of our magazine (release 25th August) we have an expanded version of this blog on the AIM Oil & Gas sector with updates on the companies comprised within our Dream Oil Explorers portfolio. Make sure you don’t miss it – subscribe on the right for FREE.