junior oilers 12/13 april

junior oilers 12/13 april

The media says expectations of a sharp fall in the price of oil and gas after the Iraqi crisis is over is weighing on energy stocks, including the junior oilers. I am not so sure. That may be the case for the big guys WPL, STO and BHP but I think the juniors dance to a different tune, one largely orchestrated by drilling activity.

The fact that we have recently come through a high profile drilling program, and a disappointing one at that, seems to me to be more of an influence at the moment. People have lost money and are not willing to spend more on the oilers for the time being. As acturtle said last week, the oil speccie market needs a constant flow of new capital. Right now there is nothing much to entice money into the broader market itself much less the oilers. And what speculative money there is is mainly in the biotech and hitech sectors.

So last week was another week of relatively low turnovers and generally quiet price action in the junior oilers.

West Oil provided the most excitement when its board was ousted and a new lot installed. Thirty million shares changed hands at 1 cents, more than 25% above the then prevailing market price in a trade that has yet to be explained. Be interesting to see what the new directors plan for the company. Is it for a back door listing as some are suggesting? And what is the connection to Leyshon Resources apart from the common director Middlemas?

Drillsearch also surprised many with its placement of a twenty million shares at 5 cents to friends of a director of the company. That will possibly include a free option if an extraordinary meeting of the company so approves. What about giving shareholders a slice of the action Phil?

The Oil and Gas Bulletin gave DLS a big promo in its most recent issue saying the gas DLS has in the Marina prospect on its Bonaparte acreage could be worth $4 a share to DLS. But Quentin also added that so far none of the biggies (WPL or STO) seem interested in farming in, despite having adjacent leases and in the case of WPL the nearby Blacktip Discovery. DLS obviously can’t afford to drill itself despite the fund raising. And my understanding had always been that DLS expected oil not gas on these leases.

Of the 33 stocks on my watch list 10 rose, 16 fell and 7 stayed the same. There were no spectacular gains among the week’s winners. Stocks that have been trending up in recent times such as Amity and Hardman strengthened again. Another PSA gave up some of its recent gains.

AYO

Amity rose to as high 77 cents midweek on strong volume before losing some of those gains on Friday when it closed at 73 cents, a two cent rise for the week. Amity has two wells to spud in April and a third, depending on a farm out, in June. The company was not backward in telling the market about the potential of all three wells including a P90 figure of some 530 million barrels for the third well. Amity also announced that it was in negotiations with Korean interests seeking to farm in to Whicher Range. I have had a lot to do with the Koreans over the years and I’ll believe that when I see it. But at least there is some activity on this gas lease south of Perth.
Expectations of Amity are now high. Since its recent low of 58 cents on 12 March it has risen as much as 20 cents to a close of 77 cents on 9 April largely I suspect on the back of the upcoming drilling program and the barrage of media releases. There could be some weakness now as the drilling nears and those buying in for a predrill gain take some profits. If Amity’s drilling program is successful the shares will be above a dollar in a flash, but some dusters and look out below.

HDR

Hardman gained a cent over the week but seems content to trade sideways at the moment in the 45 –50 cents range. Volume was a quarter of the previous week’s trades. Hardman has not issued a press release since 13 March so media announcements are not responsible for the current strength in the stock. One assumes people are getting set for the drilling program off West Africa later in the year. Drilling contracts were to be finalised by May/June. Or maybe the buying is anticipation of an announcement that the operator, Woodside, had presented a Chinguetti development concept to the joint venture. They were expected to do this in April/May

Also HDR will drill Leafcutter in the onshore Perth Basin in May and this may excite some interest given the relative success of onshore wells in the area (Hovea, Jingemia and Eremia) as against the recent offshore drilling. Leafcutter is in the Woodada production license and not far from the currently producing Woodada field. If I am not mistaken it is targetting 16 million barrels of oil in the High Cliff/Irwin River Coal measures. HDR has a 75% interest, BUY 25%.

ICN

Interest in Icon Energy has been stronger in the past few days. The only thing that would really ignite some interest in ICN is an announcement that drilling operations were to resume at Bayou Choctaw. Some short while ago ICN made mention of the possibility of arranging a huge US dollar loan to drill a whole lot of wells on the leases but one jv participant told me during the week that a much less ambitious drilling program was in the wings. Other participants in Bayou Choctaw, a salt dome prospect in the Louisiana swamps, are Horizon and First Australian Resources.

Amongst the weeks losers were two stocks that had been trending down of late CUE and FAR (after the failure at Banjo) and one that had been trending up, PSA.

PSA

Petsec Energy gave up 3.5 cents week on week closing Friday at 42.5 cents. This still represented a gain of 70% or 17.5 cents for the year and a gain of 25% or 8.5 cents over the past three weeks. I am no chartist but PSA continues to make higher highs and lower lows which is supposed to be a good sign.

Most of the fall on Friday came after the company announced its final annual report for 2002 and upcoming drilling program for 2003. The company made no forward predictions of revenues for 2003 and understandably this is dependent on production rates and the price of Henry Hub gas particularly over the summer months. The HH gas price has held up quite strongly so far closing this week at $US 5.41 so the revenue outlook for April looks good after two months of exceptional $US 4 million plus net inflows.

Ball park figures for the remaining nine months of the year at an average gas price of $US4.50 and average daily production rates of 18 mmcf a day (lower than current production of 23 mmcf a day to account for some decline in reservoirs and well down time for workovers) to be about $US 18 million. This together with the $US 9 million from the first quarter alone adds up to $US 27 million more than sufficient funds to cover the $US 11 million drilling program foreshadowed for 2003, including 2 wells on West Cameron in June, one on Vermilion and one offshore China.

Wonder what PSA will do with the $US16 million left over? Hopefully $US 3 million of that will be spent on a production platform at Vermilion, a prospect that I suspect will be drilled earlier than currently planned. This project is begining to look like a repeat of West Cameron.

Hard to say when PSA will resume its uptrend. There aren’t many institutions on its top twenty list so if some serious money becomes interested in the stock the climb might restart. It been said a thousand times this is one that has been to hell and back and there are people out there that would obviously not touch it with a barge pole.

PSA has to prove to the market that it is back on track and only money in the bank is going to do that. The next impetus would most likely be the March quarterly activity report due at the end of April. It should also include revenues for the March quarter and give us an idea of what a successful start PSA has made in building back its funds base.

Lastly, PSA Managing Director, Terry Fern attended the APPEA conference in Melbourne but I don’t know if he made any presentations or not. Can anyone out there help?

FAR

FAR’s share price closed at 7.5 cents on 15 November but since then it has been mostly down hill. Drilling failures at Argos and Banjo in the Carnarvon Basin and a ridiculously priced capital raising at 4.5 cents have ensured the company’s shares regularly make record lows. The most recent was a close at 3.1 cents last Thursday. Come Friday morning it looked like FAR shares were set to break below 3 cents but some sanity prevailed and buying interest kept the shares in the low 3 cent range spiking to 3.7 cents on a small order on the close.

Given FAR’s cash flows from its US interests, its cash in hand, and its wide range of interests, the shares seem to me to be ridiculously priced at these levels and I have been accumulating them this week. FAR’s 5% interest in Beibu alone is potentially worth $25 million. But it also has an interest in Bayou Choctaw, in more Carnarvon Basin wells including the follow up to the Sage discovery and in a deep gas play at Lake Long in Louisiana. I would hope to see them back at 6-7 cents in the latter half of the year. Their March quarter cash flow statement and activity reports should give a good indication of the extent to which these shares are under valued.

CUE

I very reluctantly bailed out of my CUE shares this week following the release of the company’s quarterly cash flow report.

I wrote in February that the short term problem for Cue was that it did not have the cash in hand or alternative financing arrangements agreed, for its share of the development costs of the Oyong and Bilip oil and gas discoveries. And it will only just have sufficient cash to pay for its share of two new wells in the Sampang PSC (Mangga and Wortel) due to be drilled mid year. These will cost around $US 1 million each or $US 300,000 all up for CUE

At the end of December CUE had $NZ 4,195,000 in cash but continued to spend more money on exploration and evaluation (eg.seismic) as well as development, production and administration costs, than it received from oil sales from its one producing asset, the SE Gobe oil field. In the March quarter CUE had revenues of $NZ1.8 million but spent $NZ2.0 million on exploration, evaluation and production. Cash on hand decreased from $NZ 4.2 million at the end of December to $NZ 3.6 million at end of March.

And in the current quarter exploration and evaluation is expected to jump to $NZ2.7 million while revenues will decline because of lower unhedged oil prices. So at the end of June another $NZ1.0 million could be taken out of the piggy bank to leave $NZ2.6 million. The fact is while expenditures are increasing revenues are stagnant and cash on hand is depleting.

Cue estimates that the development costs for Oyong, its cornerstone gas and oil discovery in the Madura Straits off Indonesia, will be around $US 100 million. This will cover three central gas wells and two horizontal oil wells, a production platform, either permanent or floating, and a gas pipeline. CUE is going to have to find $A25 million of that. I understood from CUE that at least three banks are interested in financing the project. But one wonders whether they will finance 100%, thus forcing Cue to go back to shareholders. And it is this prospect that made me jump ship this week. I might get on board again at a later date once the finance is sorted.

There are some on Hotcopper who think that CUE has now become a takeover target and that Santos will eventually buy them out. I personally don’t see that happening. CUE is just too small to warrant the effort and wouldn’t bring anything to Santos that the company doesn’t already have. But I guess you never know. I guess Cue could always sell its interest in Oyong if it can’t raise the its part of the development costs.

Beibu Field , Offshore China

I mentioned this project above in discussing FAR. Just because we don’t hear much about what is going on with various projects doesn’t mean to say nothing is happening. I understand from an inside source that the Beibu JV is very happy with what the 3D seismic is throwing up and that there is talk now of this lease containing up to 100 million barrels recoverable. The development costs will be less than $3.50 a barrel and the reservoirs are very good (better than Cliff Head was the comment). And plans are definitely going ahead for another exploration well later this year.

Trading the junior oilers.

Thanks to all who contributed to the thread on trading strategies last week, including pj, fludy, blackgold, were and acturtle. Looking forward to were’s part 2 commentary this week on trading HDR..

In reflecting on the exchanges it seems that even those of us who have made a point of following and researching oilspecs, and think we know what we are doing, still get caught up in the hype occasionally. Perhaps we still aren’t as disciplined as we ought to be. I know I am not and that it has cost me. Like me buying PCL at 6.3 cents in the belief that Huinga 1B would be sidetracked, or finally buying Norwest on the news of oil shows in Mentelle that subsequently came to nothing. This after I said I wouldn’t hold NWE through the drilling of the Perth Basin wells.

I have lost money on BLO (HZN), PCL, NWE, WON and others too numerous to mention because I didn’t really have a proper strategy for the trades before I made them, neither an entry nor exit strategy. There are two reasons why I am still in the market. One is the fact that I have at least executed some stop losses and prevented worse blood letting than might otherwise have been the case. And two I have made gains on PSA which have thus far offset the losses. And I didn’t have any particular strategy for buying into PSA either except that when they announced the West Cameron drilling successes the likely production figures and thus cash flows seemed too good to be true.

So I think the most important thing any of us can do in trading the oilers or I suppose any other stocks for that matter, is write down the reasons why we are buying a stock and what we hope it will do in the market and under what circumstances we will exit. It seems to me important to keep those reasons handy and read them and re read them as we follow our stocks, because believe it or not we do forget why we bought them and what we expected of them. And too often we act on impulse or at least I do. With modern day technology which allows us to watch the market so closely it is too easy to be influenced say by by daily price variations or pre market stackings.

I think it was Yogi who directed us to a website which had an interview with a futures trader on his strategy for success in the market. This was a person who might be in the market for no longer than 5 minutes or for as long as five days. He was something of a guru amongst his peers. The one interesting thing that I learned from reading the article was his comment that if a trade doesn’t do what you were expecting it to do close the trade. And that goes just as well for an investment.

He emphasized the importance of not letting the market tell you you were wrong, because by then it is usually too late. The article underscored the importance of being very sure of why one entered a trade, monitoring what it does over your trade and investment time frame and if it doesn’t live up to your expectations then quitting the trade. Only that way can you be in control in the market not the other way around. You can never be in control of the market but you can be in control in the market.

Here is an example of what I have written down for myself from my own trading this week. I have been accumulating Bounty Oil and Gas (400k) in the belief that the company was oversold after the Twin Lions duster, a well that it was free carried for any way. I think interest may return to the stock with the drilling of Leafcutter in the Perth Basin in May. My average entry price is 9.3 cents. Providing the liquidity is there, I will sell 300k shares at the end of April or a week before spud date, which ever is later, regardless of where the stock is at that time, and keep 100k through the drilling of the well. I have researched the stock and believe it has enough funds to see it through Leafcutter so it should not surprise with another capital raising so soon after the last one.

As I have noted before BUY is a newcomer to the boards, has few shares on issue, and is linked to Hardman through a common director (Ellyard). If Leafcutter is a success I have a 100k stake in it. If it is a failure I will keep the interest for the next drilling (Thomby Creek) and may even think about topping up depending on what the share price does. Right now Bounty it totally unloved and unwanted. If acturtle is right and the “buy early sell before spud” strategy doesn’t work in this current bear market then come the end of April I will lose on the trade.

For the similar reasons I have invested in Cooper Energy buying after the failure of Karbine in the hope that the stock would bounce back as this year’s drilling program got underway. My average entry price is 12 cents so at Friday’s close of 11 cents I am currently still under water though not as much as I was back in January when the stock was 9 cents. Again I am looking for a pre drill rise in price. I will exit a week or so ahead of the spud of Christie 1 regardless of what the share price does. Sounds easy doesn’t it??.

EGO

Be interesting to see what EGO does this week now that Eclipse has finally spudded. Good luck to all that are sitting through the well.



As usual do your own research before spending your hard earned. The foregoing is to stimulate discussion so join in and develop the thread.

Disclosure: I hold BUY, COE, FAR, FAROA and PSA