Aminex v. Dominion

5th Jul '10 by Isaac

39 comments 15451 reads

Aminex (LON:AEX)

- Already widely discussed, everyone knows my thoughts on this.

Dominion Petroleum (LON:DPL)

Great presentation published today

http://www.dominionpetroleum.com/_uploads/user/The%20Growth%20Summit%20for%20Junior%20Oil%20and%20Gas%201st-2nd%20July%202010.pdf

I like the prospect/acreage Dominion have, great upside. Most notably DRC and Uganda, with a bit of Tanzania.
Good management team, Roger Cagle and Atul Gupta ex-Burren man.

Both companies are punts IMO, however it is my view that DPL offers much better upside then Aminex. If I was holding Aminex today and wanted to continue taking a punt then I would sell Aminex and buy Dominion.

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Isaac

Premium Member

39 comments

Norman115

21st Jul '10

Anyone who followed Issac's suggestion of switching from Aminex to Dominion can't be feeling very happy today.

Isaac

21st Jul '10

muchshifter / Norman

What is different from when Aminex was at 15p prior to Likonde results being published compared to the 6p level Dominion was prior to todays results?

Aminex is about half post those results and Dominion is not that far off either post Ngangi result.

As I said both are punts, this result does not surprise me at all. I made it very clear this well will be black or white, you either find oil or you don't.

The reality is if Dominion found Oil neither of you would be here posting your comments above.

The direction Aminex/Dominion sp has gone is the very reason why I don't like taking punts. I don't hold any small caps.

My preference is to take a medium level of risk where 90% of the time I can be pretty sure of making money. All my investments reflect that level of risk and I am very comfortable with my positions.

I do not and did not have any position in either Aminex or Dominion and I continue to believe both are punts and have no plans of making an investment in either stock.

hannibal

22nd Jul '10

Isaac,

How do you feel about John Kay's assertion (made in The long and short of it) that small punts, say 1% of your portfolio, in high risk/ high gain situations can actually reduce the overall risk of your portfolio, that is, if you understand risk to be the difference between potential outcomes and not just losses on individual positions (i.e missing out on the next potential Tullow is equally a risk).

This is a counterintuitive idea , and Kay spends a lot of ink explaining just what exactly he means. Essentialy, by including some exposure to risky but potentially rewarding situations, he argues that you can lower the overall risk of a portfolio, because that danger in limiting all risks is that you also limit your exposure to unlikely but potentially significant outcomes.

It would seem that fundamentally Kay is making a distinction between two views of risk management:

risk management as avoidance of all potential risk
risk management as calculated exposure to risks

To demonstrate this point, think back to last year, Falklands exploration was clearly high risk, and to put all your money in this area would have been foolish. But to have no exposure means you have missed out on one of the success stories of the year. A 1% exposure split between Desire and Rockhopper, would now be worth around a 4% gain on your portfolio and by the end of the year could be a 8% or even 20% + gain (if Ernest is successful % Desire finds something) , impressive for a risk outlay of only 1%. Hindsight is of course 20/20 and you would have need to have reached the conclusion that FOGL was too risky a play - a 6 sigma event - as opposed to Desire and Rockhopper who were set to drill 6 wells, with chance alone dictating at least one successful outcome.

This is by no means a criticism, and I would be interested in hearing how others manage portfolio risk, especially in E&P. A lot of investment literature concentrates on choosing individual positions, the discussion of overall portfolio management and risk assessment receives some what less attention, though is ofcourse just as important.

repobear

22nd Jul '10

Both are serial disappointers to date and are far too prone to going back to shareholders for more money.

Only for the brave and those who invest more in hope than anticipation, in my opinion.Judging by the activity on various bulletin boards there are many private investors who 'nvest' on this basis. I just don't get it any more.

Of course some people just simply wait for AEX to place more shares and take their 15-20% profit and move on until the next time.

The information about how much Dominion's management are taking out of this arrangement hasn't yet come to light in this thread. Frankly I don't care but suspect it's far too much for my liking.

repobear

PS For those who say well this time it's different go to he graph at the top of he hred ,click 5 years and reread post 14 above. Then reread the introduction and take a look at AEX's 5 year graph. You need to feel lucky to be in either of these, imo.

emptyend

22nd Jul '10

I would be interested in hearing how others manage portfolio risk, especially in E&P. A lot of investment literature concentrates on choosing individual positions, the discussion of overall portfolio management and risk assessment receives some what less attention, though is ofcourse just as important.

John Kay is absolutely correct. Risk Management is not about trying to avoid risk - it is about taking sensible risks.

The problem with E&Ps however is sorting out which "punts" are worth backing and, importantly, exactly when (which is a vastly more difficult question than which - and probably incapable of being rationally analysed or planned for!!). In the context of DPL, for example, my understanding is that they aren't too surprised or too disappointed by the result of the first well in Uganda......reservoir was the main risk and there was always thought to be a high chance that it would have been impacted by an adjacent fault. Finding "something" in early wells is always important - and the more one finds, the better.......but the market is still likely to take a dim view of anything other than a flowing commercial well, even if actually it has been a pretty good technical success and has provided vast amounts of information!

Personally, I don't think one can spread one's E&P portfolio very far without diversifying away most or all of the upside. For example, whilst plainly investing in Rockhopper, Encore or Gulf Keystone at the right time would have paid off handsomely, it would have been extremely easy to buy into Encore, Gulf and probably Rockhopper far too early - well before they made a big find. There must be a stack of holders of Encore who bought in the 30p+ area who (if they were to benefit from the rise to 50-60p) probably saw their holdings halve first.

So my approach is to weight what I think are the more solid bets quite heavily, and not to have more than 5-6 stocks at any one time. Of course this means that one "misses the boat" when a company one doesn't hold makes a good find....but one must expect that to happen unless one has overdiversified by owning the entire sector.

djpreston

22nd Jul '10

And in the other camp (or maybe not too far away really), my own approach with clients' funds is to build a solid core of "lower risk" E&Ps and then have a spread of smaller speculative positions for just the reason that John Kay (and Hannibal) mention - they can make a big difference.

What people dont often appreciate is that, even though I may have a large position in AEX, it isnt that big on an individual client basis and Id hazard a guess that many PI's have much bigger holdings (in terms of % of portfolio).

John Kay's approach is similar to that used in many more speculative areas such as biotechs and tech stocks on the old rule that if you have 10 such positions, some will go bust, some will struggle along and some will bring home the bacon and the rewards will far outweigh the losses. As it happens, I dont look at biotechs (cos Im a simple grammar school oik who hasnt got the brain power to understand them - E&P's however are much simpler).

Isaac

22nd Jul '10

Hannibal,

How do you feel about John Kay's assertion (made in The long and short of it) that small punts, say 1% of your portfolio, in high risk/ high gain situations can actually reduce the overall risk of your portfolio, that is, if you understand risk to be the difference between potential outcomes and not just losses on individual positions (i.e missing out on the next potential Tullow is equally a risk).

I am very aware that if one finds a 2-3 bagger and only has a tiny amount of their portfolio in the stock then it can make a decent impact. However how many of these type of so called stocks do you have to find before it comes good? I don't know.

What I do know is I don't like this kind of uncertainty. My approach is very simple, find a few good companies and research them back to front and back them big once they pass the Isaac test.

Being heavily exposed to SOCO International (LON:SIA) has worked against me the last two years, however I am well aware of the drilling programme as well as the risk I have taken and the upside that is on offer in the next six months. I still back myself to come out on top despite the underperformance the last two years.

I don't manage risk by avoiding it, I manage it by minimising it. I don't trust most of the managers that run the small companies, most don't have a track record or long term profitability numbers. I want to do business with people who have been around in an industry a very long time and have a tracl record demonstrating success. This type of behaviour can reduce my risk.

Did you read post 14?

I stated...

For those that have'nt bought Dominion, given that the market has been pretty lousy towards it shares despite drilling a significant well I would wait for good news and then buy on a decent RNS. One clearly has to be quick enough to trade when news is released but I still think the market will be quite slow to respond even on success.And as nearby prospects get de-risked this will provide further upside.

I very much stand by those views. I believe they apply to any small cap E&P. The problem with most people is they are lazy, they won't do research in the small caps to understand what is going on with them unless they have a stake at which point they do thorough research. I have learnt to take an active interest in other companies in the sector even if I do not hold. This makes me ready to take action when there is key news. The greatgeraldo is VERY GOOD at doing his research on a range of companies.

Of all the companies you mentioned whether that be Rockhopper Exploration (LON:RKH), Desire Petroleum (LON:DES), Encore Oil (LON:EO.) or even Nautical Petroleum (LON:NPE), anyone that did their research could have bought soon after the 'success' RNS was published and could have made from between 10-50% return in the space of 1-3 months.

You and others may think it is a good strategy to buy 1% stakes in small companies and wait many many months for that one Jackpot, but I prefer to buy a small cap on a decent RNS and hold it a few days to a few months for a decent 10-50% return. As they say small caps are so under researched that the crowd simply does not understand them when the RNS is published and therefore overlook them until it sticks out like a sore thumb - this gives those that work hard and research acively an opportunity to make a decent chunk of money by not taking too much risk.

I'd rather take 10% leverage and buy mid to large caps then trapping money in a small cap that is more likely then not to go bust.

I know a individual who doesn't spend much time in the markets, his strategy is very simple.

Stock markets go up over time therefore Buy and hold works. He buys mid-large caps that make a profit and pay a dvidend, he takes dividends and reinvests it in more shares. When a stock drops 20% from its peak he sells the stock and buys another mid cap. He believes in diversification and therefore is spread out in about 15 sectors.

His ARR over the last 5 years is about 10%. To put this in perspective that is equivalent to doubling your portfolio every 7 years & having a return of 983% over a 25 year period.

Not a bad strategy for someone who spend a few hours a week in the market and the rest of the time just gets on with his life.

I aim for an ARR of at least 30%, that requires a lot more hard work and focus.

nigelpm

22nd Jul '10

A thought provoking post there repo.

It hinges in a similar vein to my post regarding the lack of interest in Encore when it was almost (barring fraud) a one way bet.

However, generally I see equity investment as downside vs upside. Downside in Aminex is now 7.5p against upside of many times that (with or without dilution).

I notice that there's been very little comment on Faroe Petroleum Plc (LON:FPM) today which is looking a bit like the downside is homing in on the current market cap with upside once again much higher.

hannibal

22nd Jul '10

Thank you empty-end, Isaac and djpreston for your comments; all very thought provoking points.

As John Kay mentions a large part of risk is about perception and individual comfort levels. While there may be a mathematically correct investment choice in terms of expected value (i.e propability of success x monetary value of success), it is also possible that more than one strategy may prove correct, i.e there is more than one way to make a decent return, more than one way to reach a destination.

Isaac, your answer is particularly interesting, and will require further digestion. For the record, you're absolutely right about buying after 'success RNS', only the numbers are much higher. For example, you could have made 50% on Rockhopper Exploration (LON:RKH) buying a substantial time after the RNS relase, and in fact had you bought before close on the first day of the RNS, you would be sitting on a 125% return. With Encore Oil (LON:EO.) , even buying on the second day would have lead to a 100%+ return. Of course, there are risks with this strategy, as oil finds may turn out to be of low quality a la Desire Petroleum (LON:DES) . Yet, and those of you with more experience should be able to confirm this, I get the impression that 9 times out of 10 this is a profitable operation - which we should be keeping silent!!!!!! Not that this would make much of a difference, as this arbitrage opportunity - I assume - is caused by the lag it takes for big fund money to analyze, decide upon and enter into a situation - which will always take time given the bureaucracy and sums involved.

Isaac, you also make a valid point about unproven companies and those with a poor shareholder value record - it's wise to avoid these completely, and as that wall street legend Peter Lynch once said it isn't necessary to chase every penny - shares that double bag have a habit of double bagging again, and you can make substantial sums even after the first big successes.

Diversification is indeed a paradox, you need it to avoid unknown unkowns, but too much as EE mentioned negates the value of your decision making - in effect too much diversification means you beleive in the EMH -, and you might as well avoid all the hassle of discussion and research and just buy yourself a tracker. Yet Kay's small punt thesis is still valid, as even more paradoxically you need to both expose yourself and protect yourself from those unknown unknowns, as djpreston intuitivley understands. Though Isaac is also right in saying you can still be profitable by avoiding these small punts all together and the costly analysis time they consume; I think a mathmatical model and some philosophy is needed to resolve this issue - and indeed there maybe no definitive answer!!!

Another point worth raising here, is one of the key Investment principles of John Milton Keynes, which is the relativity of investment. I.e investment is never solely a question of 'is this a good position to take', but rather 'is this a good position to take relative to what else is available'. In this sense, the prospect of a 20% return though excellent when considered individually, is rather foolish in a market full of 50% - 100% oppurtunities. Likewise, a potentially profitable investment in an E&P company with an aweful shareholder value record may make for a good investment case when considered in detail individually, but is rather foolish when there are equal or better oppurtunities in half a dozen other companies with better records.

Some of Buffet's students express that last idea more simply, by saying that the measure of any new potential investment should be the investments you already own - or even more simply that you shouldn't add a position without first removing one.

Very generous of you Isaac, to share you expected annual return. I wonder if other people wouldn't mind mentioning what their expected or target annual return is; I.e what is that % ARR, below which you feel you would have wasted all your effort, and all those hours of research?

This may sound crazy, but I feel given the quality of many of the investors here, that many of you would consider anything less than a doubling your money on an annual basis to be a complete failure?

extrader

23rd Jul '10

Hi hannibal,

I aim for a 20%+ annual return (which I've managed for better or worse the last 8 years of active investing). It could be a bit more , as I look (rather lazily) at annual increase in TNW, so includes cost of living (rel. cheap/LBYM) and a daughter still at Uni ;
Most of the portfolio is LTBH (my tax return shows 22 taxable events for 2009/10); I try to be tax-efficient in use of ISA, SIPP and S/Bets. Latter is just to 'ginger up' the return/generate spending money, and if you only put 1 or 2 % of capital to work this way, the risk/return ratio can be v satisfying.

One curious thing I've noticed : the s/bet return that pays for the groceries or fridge repair or weekend away seems much more 'real' than the 000's made or lost on paper over the same period !

Cuthbert C

23rd Jul '10

I don't understand the idea of a target or expected annual return expressed in absolute terms. My own approach is to try and beat the market in the long term - ie over a multi-year period. If the market is generally 20% up then I would regard a 20% return on my portfolio as disappointing. If the market is generally 20% down then I would not be disappointed by a 15% fall in my portfolio - although I would re-examine my strategy. Although having said that I do that all the time anyway.

Actually I think my approach inverts the idea of annual targets and focusses on the income stream I can derive in the long term.

I maintain a spreadsheet which shows my actual financial position over the past 10 years and my forward projections for the next 20. One column per year. It takes account of total portfolio value; income; expenses; predictable major committments (mortgage repayment etc); pension lump sum; pension draw-down; state pensions; final salary pensions; etc etc etc

The bottom line (or perhaps more accurately, the bottom lines) of the spreadsheet show when I will be able to start sustainable draw down from my personal pensions and how the amount of maximum permissible draw-down will change over time. My target is not investment return but the total income I regard as sufficient for a decent standard of living.

The primary variable in the spreadsheet is the level of investment return. I run multiple scenarios using assumed returns which range from 0% upwards in increments of 5%. (If I expected a negative return I'd exit the markets for a period).

What this means is that if I have a good year - say 25% actual - then the % return I will need in future will be reduced - and/or drawdown is brought forward. If I have a bad year -and I've had a couple of very bad years over the past 10-15 - then the future return required is increased and/or drawdown is delayed.

So when I have a good year I think of it as meaning that from here on in, I only need x% in order to be secure and comfortable and can plan to draw pension earlier . If I have a bad year then I need y% (Y>X of course) and will have to delay pension draw down.

Rule of thumb, given the regulatory restrictions on draw down is that I translate gains into income at 6%. Which levels down good years and is good for one's humility and vice versa in bad years.

The way I think about returns is that if I am in a position where I only need 5% annually in order to sustain a decent standard of living forever, then I feel in good shape. If I need 20% annually then I feel that's a bit over-ambitious.

Sorry if I'm expressing myself in a rambly kind of way, but I hope you can get my drift.

kyu66

23rd Jul '10

The way I think about returns is that if I am in a position where I only need 5% annually in order to sustain a decent standard of living forever, then I feel in good shape. If I need 20% annually then I feel that's a bit over-ambitious.

That is the same approach I take (I also have the 'life project' spreadsheet) - I aim to increase my net worth year-on-year whilst sustaining an acceptable standard of living whilst keeping a close eye on the hurdle rate. When I started as a full-time investor I had a planned return and I maintain a graph of this 'plan' alongside actual and forecast values. My initial hurdle rate was set at 10% pa from my personal investments and 6% for pension plans (seems a little niaive now, but hey I was young(er) and full of optimism).

At one point in the heady days of late 2007 early 2008, my hurdle rate dropped to around 3%, at which point I could have bought a stack of fixed interest instruments (instead of being 100% equities) and gone to the beach - however, I didn't and we all know what happened next :-(

Well I am older and wiser now, so am more inclined to preserve what I have rather than aiming to shoot the lights out year on year. So although predomintly an equity investor, I also keep an eye on fixed income returns and try to keep a balanced portfolio with the aim of lowering the hurdle rate while minimising risk to capital.

marben100

23rd Jul '10

Hi Isaac,

Haven't looked in here for a while but am surprised no-one has noticed an error in your calculation of Aminex's cash position (apart from that, good & useful analysis of the "cash burn").

Therefore net cost to Aminex to drill Likonde was $4.916m

At this stage we are left with cash of $6.773m.

Let's take a round number of $5m for the well, net to Aminex. What you're not taking into account, however, is this, from the prelims:

Total non-current assets of US$45.8 million have increased during the year by US$4.5 million. The increase comprises additions to exploration and evaluation assets of US$5.0 million, a net reduction in property, plant and equipment of US$0.4 million and a further decrease in other investments of US$0.1 million.

The increase of US$5.0 million in exploration and evaluation assets consists mainly of the pre-drilling, long lead items and mobilisation expenses for the Likonde-1 well on the Ruvuma Production Sharing Agreement and the acquisition and processing of transition zone seismic over the Kiliwani North gas discovery on the Nyuni licence.

[my bold]

Given that a significant chunk of Aminex's share of the Likonde-1 cost had already been paid for in 2009, it seems likely to me that Aminex's current cash position is at least $2-3m better than you estimate.

For the second half of 2010, we also have the benefit of 150bopd+ of production from OM-1. At $70 oil, that's another ~$1.8m on the revenue line (but somewhat less at the net level). Pretty good payback on the well cost, don't you think? ;0)

Cheers,

Mark

flyingbull

23rd Jul '10

.....doubling your money....[hannibal]

Yes, no problem. Lots of hard work, time spent, sacrifices......in return passion, self-worth, belief......
http://boards.fool.co.uk/Message.asp?mid=11979326&sort=postdate

Fangorn

23rd Jul '10

Some chunky rises across the Oil Cos I follow(or own).

Aex up 16.3%,
GKP up 18%
Pele up 22%!

Is this presumably all on the back of Knoc's 1800 offer for Dana(up 14% or 214 to 1719).

doverbeach

23rd Jul '10

no - those three have all been going up since early this morning ...

db

Isaac

15th Nov '10

Surprise Surprise.....

AMINEX RAISES US$2.7 MILLION

Aminex announces that that it has raised approximately £1.7 million (approximately $2.7 million) net of expenses. Shore Capital Stockbrokers Limited and Davy, joint brokers to the Company, have procured subscribers for 24,073,250 new ordinary shares ("New Ordinary Shares") at a price of 7.5p per share. The issue of these New Ordinary Shares will represent in aggregate approximately 5.6% of the existing issued share capital of the Company and are being issued under existing allotment authorities granted by shareholders. The new funds will be used partly towards securing long lead items for drilling the Nyuni-2 well in Tanzania and partly to assist the development programme at Shoats Creek, Louisiana.

http://www.investegate.co.uk/Article.aspx?id=201011150700081449W

How long will that cash last? I think Aminex would have been better of just raising a large cash pile rather then doing loads of small placings! There is only so much you can do with £1.7 million in the Oil business..

peterg

15th Nov '10

Hi Isaac,

As the RNS says the cash is for long lead items for Nyuni-2. So they need some cash now, and yes will need more later. However, there are presumably various options that might present in 6 months time or so, loans, farm out or more rights/placing but with the real possibility of being at a higher SP. No reason to go for a large fund raising now and push the SP down when there are likely to be other better options in due course when more funds are needed.

Isaac

15th Nov '10

Yes Understand all of that Peter. I hope it works out for Brian & Fellow shareholders. All he needs is one decent strike.

jonnyt

16th Nov '10

They already have had one decent strike....

The shares have since more than halved.

JonnyT

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Isaac

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