This magazine, as regular readers will know, believes that the AIM Oil & Gas arena is in the latter stages of a bear market/the embryonic stages of a bull run – one that will be peppered with corporate takeover activity over the ensuing months. Such are the valuations on many of these stocks, particularly those with proven reserves, that it is almost impossible for valuations not to normalise. Our favourite picks are Bowleven, Heritage Oil, Gulfsands, Northern Pet, Ithaca and Xcite Energy.
The lesson that we hope many punters learned with Borders & Southern (if not with Desire Pet) is that the real frontier stocks with no 2P reserves are extremely high risk and moves of 50-80% to the downside can and do happen when drills disappoint. Look at the chart below for a lesson in the cycle of investor emotions from scepticism, to acceptance to outright rampant speculation. There is something about Oil & Gas exploration stocks that seem to accentuate these emotions even further.
Borders 4 year weekly chart – right back to where we started from
Borders & Southern have now returned exactly to where they start over 3 years ago before they embarked upon the high risk drilling program in the South Falkland Island basin. Remember that many of these fields were abandoned in the 70’s by the Oil majors as being technically too difficult and almost unexploitable. That there is oil there is not without doubt, as Rockhopper (so far the singular success) proved. The lesson here is that if you are speculating in these stocks then
(a) do it with only a small portion of your portfolio and preferably not on a leveraged basis and
(b) DO NOT get carried away with emotion and excitement. If you bought at 20p and they go to 40p before a drill – take your original capital out – you’re then in for free, playing with “the markets money” – mentally, a nice place to be.
What now for Bor? News is due shortly on the condensate analysis from the Darwin East drill. Many analysts think the stock is now oversold – this is not in question, but even if the condensate results show commercially feasible volumes of gas – how will they fund it and at what cost to shareholders? Just look at what happened to Rockhopper recently and they are in a much stronger position.
Perhaps the next place to look is FOGL whose shares will most probably experience a bout of speculation on the approach to the drilling results of Loligo – they have been shaken down in sympathy with RKH & BOR in recent days and I personally believe there is easier speculative money to be made here than in chasing BOR now which seems like a spent force (quite literally!)