Incremental yields oil, gas profits from year dot John Beveridge From: Herald Sun March 23, 2011 12:00AM
IT is a very rare thing to come across a junior oil and gas company with a strong focus on immediate cash flow, profits and eventually - cough, splutter - dividends. Normally smaller oil and gas companies are on to a "sure thing" - they just need you to provide plenty of cash so they can drill another hole to prove it.
Well, the team from Incremental Oil and Gas are very different from most of their West Australian cousins, being cut more in the mould of a mini-Wesfarmers than to an Alan Bond template.
Having graduated from Incremental Petroleum, which fell to a profitable takeover in 2009, a very similar team led by experienced managing director Gerry McGann had another crack with the formation of Incremental Oil and Gas in July 2009.
Since then Incremental has built up an impressive array of producing onshore wells in California, many with significant exploration potential and production upside.
Unusually, most are 100 per cent-owned and operated by Incremental, keen to avoid the joint ventures that litter the oil and gas exploration space like confetti.
While California might seem an odd place to look for oil, very few mid-sized companies operate there and significant hydrocarbons were left untapped.
Of the 452 oil companies in California, only 57 produce more oil than Incremental and the San Joaquin basin is still an incredibly rich oil source, with 10 times Australia's total reserves.
Due to all that activity and available drill rigs, onshore drilling costs about only a quarter of Australian prices, with the chances of hitting oil much higher.
Gerry said Incremental was not afraid of exploration but kept the risks of dry holes at bay by never betting more than 10 per cent of the company on it.
Having produced an after-tax profit in its first year, Gerry said Incremental aimed to increase unrisked reserves and resources by doing seismic tests, drilling new wells and re-entering and testing old ones.
Acquisitions are not out of the question, nor Incremental growing considerably over the next couple of years.
I rate it a rare straight buy in the junior oil and gas space, due to strong cash flow and low-risk/high-reward exploration.
