smh article - nen

Analysis

In the rough and tumble world of oil and gas juniors, investors are actively avoiding exploration risk but that doesn't mean there isn't room to make big returns – just look at the 30 per cent rise in Neon Energy last week, and Buccaneer Energy's shares which have more than doubled in the past three months or so.

The reason for explorers not enjoying the same level of investor support can in part be traced back to the shale gas revolution, which only started in earnest less than 10 years ago, according to Canaccord Genuity's energy analyst Johan Hedstrom:

“Only five years ago a share price normally had a run up as drilling commenced, but now that's not the case. There have been too many disappointments and most investors have lost money punting on exploration wells.

“The game changer has been shale gas revolution, which has taken away much of the exploration risk, and replaced it with engineering and completion risk. Investors would rather punt on this than wildcats, where the track record has been patchy.”

In Neon's case, last Tuesday the oil company with operations in California and off-shore Vietnam updated the market regarding the much anticipated drilling of the latter. And about time! In the past couple of months its shares had drifted down until the announcement. The company is finally getting its act together and said that drilling at Block 105 had uncovered four reservoirs with gas. The complicating element is with the fourth and deepest, which experienced big pressure, or a “gas kick”.

Without going into details, Neon is stabilising the hole and will re-drill this section to gather data on the thickness and amount of oil and gas.

This will take time and money. Neon has farmed the venture out to an Italian operator, ENI, which paid the first $25 million of development costs. Now that costs are blowing out, Neon is on the hook for its 25 per cent share. At this stage Neon might have to pay $5 million, up from the $2.5 million originally budgeted.

Neon has $18 million in cash, and is getting money out of its Californian wells. If its Vietnam wells come off, we're talking about a deal worth hundreds of millions. Neon's shares will have exploded and then the inevitable capital raising won't be a problem.

Under the Radar Report: Small Caps, edited by Richard Hemming.