Profiting from the energy conundrum

The BP oil spill has forced a reappraisal of the oil and gas business. Robert Tyerman looks at how some smaller operators are faring in this new climate

US president Barack Obama’s angry reaction to the disastrous BP oil spill in the Gulf of Mexico could ironically help bring benefits to some parts of the very industry he wishes to punish. The courts overturned a six-month ban on deep-water drilling in the area, but curbs are nevertheless still in the offing, and predictions from the International Energy Agency of ‘comfortable spare capacity’ in both oil and gas conflict with other influential voices predicting a looming supply shortage in the coming decade, offering both explorers and alternative energy providers encouraging opportunities ahead.

The US military has entered the fray, with a report from the Joint Forces Command predicting an end to surplus oil production by 2012 and a world shortfall of 10 million barrels a day by 2015. And the Department of Energy in Washington warns that there is a risk of a decline in world liquid fuel production between 2011 and 2015 if new investment is not forthcoming.

That could have a big impact on energy prices. Most market players agree that the surge in crude oil prices to $147 a barrel two years ago was fuelled by speculation, but, having plunged back to around $30, the price has already rebounded to $75 a barrel and bulls still argue that it could reach $100 a barrel on fundamentals before too long.

One entrepreneur who relishes this prospect is Irishman John McKeon, co-founder of Limerick-based AIM counter Circle Oil, which has promising interests in North Africa, the Middle East and Namibia. He helps run Oman Resources, a private concern that has joint ownership with major Turkish licence holder ARAR of Block 4077 in the country’s Konya basin, which the company reckons could prove to be Turkey’s largest gas discovery, with a potential 160 billion cubic feet of recoverable gas, whose price prospects are linked to trends in oil.

McKeon, whose links with Oman Resources’ influential Towfik Al Swaidi, a partner of hedge fund Cheyne Capital, have cemented these deals, is a consultant to Niche Group, a former investment shell-turned-volatile AIM high-flyer, which recently raised £5.7 million at 5p to fund a 20 per cent holding in Oman Resources. Suggesting that there could be as much as a trillion cubic feet of gas in the prospect, McKeon points to readily accessible infrastructure and aims to build a bottling plant to enable the company to sell its gas to the public and obtain a healthy retail mark-up.

Analysts believe Niche Group and Oman Resources could soon forge closer ties. That would do no harm to Niche shares, which bounded from 0.17p to 6.10p over the past year before settling to today’s 3.73p.

Circle Oil, meanwhile, chalked up its first production of oil in Egypt and gas in Morocco last year, achieving annual turnover of $15 million (£12 million). The company achieved an average price of $65.90 a barrel last year for oil from Egypt’s NW Gemsa Concession, where the eight wells it has drilled so far have all proved commercial, and $7.20 per thousand cubic feet for its Moroccan gas. Circle cites 43 million barrels as an estimate for its recoverable oil potential in Egypt and estimated potential gas resources in Morocco of more than 200 billion cubic feet.

However, the company, which raised £16.5 million at 27p in August, saw its losses rise 26 per cent to $13.5 million in 2009, which chairman Thomas Anderson blames on a ‘non-cash charge’ relating to the ‘fair-value accounting’ for a convertible loan. Circle hopes to start onshore drilling in Tunisia in 2011. In addition, the company is conducting marine surveys on its licence in Oman and is farming another group, Petroholland, into its prospects in Namibia. Circle’s tightly held shares, which have traded between 40.25p and 28.75p over the past year, are worth watching at 32p.

Global interests Elsewhere, another AIM counter, Northern Petroleum, is raising £10 million and selling ‘non-core’ assets for promising projects in Holland. The company has bigger fish to fry in Italy, but is currently losing money and trades at a depressed 90p.

Eastern Europe-focused Aurelian Oil & Gas has slashed annual losses and plans a crucial drilling programme in Poland.

Based in London and quoted on AIM, the company cut its 2009 loss by 90 per cent to e423,000 (£384,000) on gas sales revenues up 66 per cent to e3 million. Chief executive officer Rowen Bainbridge declares that Aurelian – which had its project portfolio independently upgraded to 372 billion cubic feet of contingent gas resources, 1.3 trillion cubic feet of prospective gas resources and 385 million barrels of prospective oil resources – now faces ‘the most exciting year’ in its history.

He refers in particular to the company’s ‘world-class’ gas project at Siekierki in Poland, where 2010 will see ‘two significant wells’ drilled. The withdrawal of Aurelian’s 40 per cent farm-in partner Canamens, ‘for non-technical reasons’, set the project back nine months, according to Bainbridge, though it did also give the company more time for further technical study of its own.

Aurelian, which raised £11.6 million at 12p last June and £33.6 million at 32p two months ago, is also drilling its first high-impact exploration well at Bieszczady-1 in the Carpathian region. In addition, the company will be completing a partnering process with its long-term Polish gas sales partner, Kulczyk, and bringing its analysis of strategic options in Romania to conclusion.

Floated at 55p in 2006, Aurelian shares fell to 11.5p at one stage, but have rallied more recently. Highlighted by Growth Company Investor at 33p in February, they now stand at 38.75p, at which level their prospects hinge on further successful drilling results.

Namibia is the focus for Chariot Oil & Gas, whose recent seismic survey results have shown a 62 per cent increase in prospective resources to more than 8.5 billion barrels. The AIM-quoted group explains that the resource increase results from volumes being attributed for the first time to the central blocks of its offshore licences following interpretation and processing of the survey. Three prospects, Klipspringer, Hartebeest and Oryx, have been high graded for inclusion as ‘prospective un-risked resources’.

Chariot points out that it now has resource potential in three geologically distinctive basins and argues that it is therefore ‘well positioned across the Namibian South Atlantic margin’. Chief executive officer Paul Welch maintains that these seismic survey results ‘underscore the potential that we believe is present offshore Namibia’.

Floated in 2008 with a £45 million placing at 130p, Chariot shares collapsed to 15.75p last year. Highlighted by Growth Company Investor at 27.25p in November, they have now reached 120.25p and, though involving a significant degree of risk, could go further if present progress is maintained.

More speculative is US-oriented Nighthawk Energy, headed by entrepreneurial small resource company player David Bramhill. Trading at an undemanding 25p, the company has been seeking a partner for its promising Jolly Ranch prospect in Colorado.<

Falklands frenzy The South Atlantic around the Falkland Islands is attracting keen attention these days as a potentially rich oil province, despite periodic rumblings from the Argentine government. AIM-quoted Falkland Oil and Gas expects its giant partner, BHP Billiton, to report drilling results any day now from the South Atlantic’s Toroa prospect.

Falkland, which has three other prospects in the area, has seen its shares double in a year to 197.5p. The company draws encouragement from cheerful early indications from another company, Rockhopper Exploration’s, Sea Lion prospect in this region.

Rockhopper has drawn the crowds with recent upgrades to reserve estimates at its Sea Lion prospect in the North Falkland basin. Analysis firm RPS Energy increased its estimates for the amount of recoverable oil there from 170 million to 242 million barrels.

The analysis has confirmed that the oil at Sea Lion is medium-gravity crude. ‘Rockhopper has now confirmed the first contingent oil resource in the Falklands,’ enthuses managing director Simon Moody. ‘Our analysis of the data from the Sea Lion well suggests that there is significant potential upside on our acreage.

Rockhopper shares, which soared from 28.5p to 319p over the past year, now trade at 261.75p, following a £48.5 million placing at 280p. If Sea Lion does not disappoint, the shares could make more progress.

Other Falklands counters include Borders & Southern Petroleum, chaired by entrepreneur Harry Dobson, now 64p, which raised £113 million lately at 50p to fund operations in the South Falklands Basin. Desire Petroleum, steered by oilman Stephen Phipps, with a promising gas find in the Liz well in the North Falkland Basin, tapped the markets for £60 million at 70p last year and now trades at a still inexpensive 87.25p.

Alternative players Pressure on conventional energy sources should focus attention on alternative energy concerns, despite the stock market volatility of many companies in this field. One such company is clean fuel innovator Oxford Catalysts, whose current commercial demonstration in Gussing, Austria, of its Fischer-Tropsch technology for converting biomass, waste and coal to liquid fuel could lead to significant orders for the loss-making AIM-quoted company.

Portuguese entrepreneur João Pereira Coutinho’s renewables backer, SGC Energia, has funded the project to the tune of $35 million (£23.6 million) and Oxford Catalysts’ chief executive officer, Roy Lipski, sees SGC as a likely first customer, while some observers envisage a closer relationship in the future.

Equally significant could be a demonstration in Brazil next year of the technology’s application in gas-to-liquid conversion, supported by Brazilian oil giant Petrobras with Japan’s Kobe Steel providing reactors for the demonstration. Lipski argues that Oxford Catalysts, which nearly doubled losses to £6.1 million last year but upped revenues sevenfold to £8.6 million and slashed its second-half cash outflow from nearly £4 million to £400,000, is poised to become a ‘fully commercial organisation’ in six to nine months’ time.

Lipski cites interest by the US Air Force in testing this technology to help meet its target of 50 per cent ‘alternative’ fuel use by 2016. He also believes that the technology could have wider applications in the chemicals field.

Profits are still some way off, but, if the demonstrations in Austria and Brazil go well, the longer-term possibilities could be exciting. Highlighted by Growth Company Investor in February at 49p, the AIM-quoted shares now trade at 75.25p and, though by no means risk-free, they should have more mileage yet.

Fellow AIM counter and European wind farm investor and operator Renewable Energy Holdings turned a £2.1 million loss into a profit of £11.2 million last year, having sold its ‘CETO’ wave technology to Aussie-listed Carnegie Wave Energy in exchange for a significant stake in the Antipodean concern. The shares have lost nearly two-thirds of their value over the past year, falling to 11.5p, but might reward a brave punt.