THE STANDARD (CHINA): Crash fears as oil minnows swim into big money pond: “Make way for the black gold rush ... “ (ShellNews.net) 24 March 05

Charlie Zhu

March 24, 2005  

Make way for the black gold rush ... A new generation of oil and gas companies has raised billions of dollars from global stock markets in the past two years, bankrolling high-risk ventures hoping to cash in on high oil prices. More are poised to go public this year.

Shares in dozens of these small explorers and producers (E&P) - those firms are valued at less than US$500 million (HK$3.9 billion) by the market - have shot through the roof, outperforming larger oil companies.

Yet many of the firms have yet to strike oil or gas, prompting some experts to liken the investment rush to the dotcom bubble of the late 1990s.

``There are now so many companies valued so highly on the exploration concept. Some of them will not work. And when they don't work, the shares will crash,'' John Doran, chief executive of Sydney-based ROC Oil, said.

``There is a definite exuberance and that is probably irrational,'' said Doran, whose firm is a regional explorer with a number of overseas projects set to pump oil soon.

Of the 433 small-cap E&P companies listed by FTSE index compilers, more than 90 have seen their shares rise between twofold and 10-fold in the past year. On average, the stocks have gained 57 percent.

``The greatly expanded sector, with no apparent end in sight of new ventures coming to the market ... could be subject to severe stress testing during the year,'' Tony Alves, analyst at investment bank KBC Peel Hunt, said.

Many of the E&P minnows went public in recent years, contributing to a surge in cash raised by the sector. Globally, oil and gas companies raised more than US$5.6 billion last year, up from US$940 million in 2003, according to financial data firm Dealogic.

This year, they had raised US$700 million by March 21.

More firms are angling to issue shares this year. For example, Southeast Asia-focused explorer Pearl Energy is eyeing an initial public offering in Singapore.

The money has financed exploration in areas ranging from the North Sea to Africa, the Middle East and Australia. That has brought high-profile success for some, including Britain's Cairn Energy, Burren Energy and Premier Oil, Canada's First Calgary Petroleum and Indonesia's PT Medco Energi. Some have seen their shares surge after major discoveries.

Cairn, which has made a series of big finds offshore India since last year, has tripled in value to around US$3.4 billion.

But exploration is a high-risk game, with each prospect carrying a 50 to 90 percent chance of becoming a commercial failure, KBC's Alves said.

Usually, when a small explorer gets a ``dry hole,'' its share price crashes. Shares of Scottish oil and gas firm Ramco Energy collapsed by more than 90 percent last year after a gas field ran into production problems.

Enterprise Oil and Lasmo are two lessons from the past. They boomed with North Sea oil in the 1970s and 80s. But when oil prices fell their shares languished for years. Enterprise was eventually taken over by Royal Dutch/Shell, while Italy's ENI bought Lasmo.

In general, investors should be wary about firms that have yet to start production, analysts say. In Australia, for example, only a handful of E&P minnows, such as TAP Oil and Arc Energy, are pumping oil.

``I think the small-cap E&P sector in Australia is actually a bit short on production,'' said Sinclair Currie, portfolio manager at Deutsche Asset Management in Sydney, which holds two small-cap E&P stocks that he declined to identify.

Nearly all minnows are niche players, and may remain so. They are neither competing with larger oil firms nor venturing into sophisticated projects such as deep-water drillings, due to financial and technical constraints.

At times, they work with bigger firms on projects by contributing technical expertise. Often, they pick up exploration projects shunned by larger firms, Wood MacKenzie analyst Norman Valentine said.

They also join in exploration licensing rounds tendered by governments, sometimes succeeding because they are less bureaucratic than the bigger companies.

But small producers are unable to fully enjoy the current record strength of oil prices because they have to hedge all or part of their production to secure bank financing.

``However, offsetting that is the fact that they can hedge up the oil price risks at pretty attractive rates at the moment,'' Deutsche Asset's Currie said.

REUTERS

http://www.thestandard.com.hk/stdn/std/Markets/GC24Ag04.html 

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