junior oilers 1 dec paet 1

Junior Oilers 1 Dec
Last week began disappointingly as Ceres joined Argos as another Carnavon duster, the market couldn’t decide on the significance of the Bilip 1 discovery, and Huinga 1B JV partners decided against spending any more money on a well thought to be water filled. Capital raisings were announced by NWE and BUY. Partly because of these disappointments and the soon to commence drilling in the Perth Basin, volumes continued to grow but generally speaking the junior oil sector remained a poor cousin to the tech sector in the speculative small cap market.
Oil prices remained relatively steady during the week while gas prices weakened but the Jan natural gas contract remained above $US 4.00.
In Iraq UN weapons inspectors began their task of uncovering Saddam’s weapons of mass destruction.

Picking junior oilers

Some of us use either technical analysis or fundamental analysis to select stocks or a combination of both. Yogi throws astrology into the mix. Some study media announcements (media analysis) to time entries and exits to coincide with good or bad news.
But Alistair reminded us this week that there were other things to take into account as well. Trying to find a reason for the less than enthusiastic response
to Cue’s Bilip 1 discovery he noted that CUE operates in politically and economically unstable environments (PNG and Indonesia) and environments that are becoming increasingly unpopular with explorers, especially PNG as Yogi pointed out.
I would add that fiscal regimes of host countries are also important, just ask Matrix Oil which had to pay something like 85% of revenues less production cost to meet Indonesian government taxes and royalties. Countries with generous fiscal regimes include the US and UK, Australia and New Zealand, Thailand (important for CVN), China (important for the Beibu JV partners) the Philippines and Mauritania (according to HDR). In these countries the government’s marginal take is around 50%. The gougers with rates of 80% or more include PNG, Indonesia and Vietnam.

Other things to take into account obviously include the time it takes to bring discoveries into production (proximity of established infrastructure eg good in the Gulf of Mexico but non existent off Mauritania), the availability of markets (can’t do much with gas in PNG) and the prices received especially for gas. Natural gas prices in the US for example are two or three times higher than they are in Australia and New Zealand. So US gas prices are good for FAR,and PSA; and for potentially for ICN, FAR and HZN if Bayou Choctaw is ever drilled.

Media analysis

I said last week I said I was going to buy PCL in anticipation of the announcement of a decision to sidetrack Huinga 1B. What a mistake that turned out to be. The announcement on Tuesday that the well was considered to be water filled and that no further drilling was in prospect slammed PCL and HZN (though AWE was not affected). The lesson for me was that I broke a rule of trading on media releases ie. “never trade in anticipation of a media release unless you are damn certain about what is in the release beforehand”. (And that would probably constitute insider trading!). What I should have done is wait for the release. If the news had been as I expected there still would have been time to get a trade on PCL. When the news was bad a trading opportunity presented itself when PCL fell to the low of 2.1, 2.2 cents.

I also broke another rule with PCL and that is never trade in junior oilers that don’t have a reasonable cash flow from producing assets or the prospect of achieving that in the short term. Any way lesson learned. I might still be able to salvage something as PCL were back at 2.7 cents by weeks end. I bought my swag the previous week at 2.8 cents.

See Part 2 for review of selected oilers.