This article appears in Drillers and Dealers, March 2011, published by The Oil Council. (www.oilcouncil.com)
Written by Andrew Monk, Chief Executive Officer, VSA Capital
Everywhere you look there seems to be a new E&P company floating on the market or looking for Private Equity. I don’t think we ever have had so many Junior E&P companies before, certainly not quoted ones! And they are exploring everywhere from Africa to the FSU, Asia to North and South America and Europe and even Greenland. There is nowhere in the world that isn’t being explored and no stone unturned (almost literally now with all the oil shale plays).
Now, we know why of course. The oil price is so high that it is now probably commercially viable to look everywhere and, of course, investors are currently throwing money at people in the hope of that “big strike”. Some E&P companies have had such amazing performance and been “10 baggers” that your average investor wants a bit of that action too, but when everyone piles in, should the astute investor be piling out? Are we in a bubble or is it just frothy? When a software salesman is telling you that you must buy an oil company in the Falklands, isn’t it time to sell?
If we look back through history, the normal pattern was that there were a few E&P’s and they would grow over time and then get gobbled up by a major and that kept the Oil sector reasonably small and also fairly predictable as they nearly always did get taken over, as with the great names like Enterprise, Ultramar, Lasmo, Tricentrol, GOAL and Clyde. In fact the only one which seems to have just kept going is Premier Oil (LON:PMO) .
So, have things changed or will we revert back to the old ways? The answer is probably half and half. We will always have more Junior E&P’S now (so all those highly paid analysts are safe!) because it is more commercially viable, the majors are not going to look in the smaller areas and stock markets globally are now able to list these companies more easily. Also, the Geographic spread provides investors with more options. But at the same time there probably are too many companies and ultimately they won’t all be successful; and when you get to a certain size…
