Hope springs eternal in volatile world of oil and gas

Granby Oil & Gas took its name from its early office space above The Marquis of Granby pub in London’s Covent Garden.

The Marquis was a dashing cavalry commander who charged so hard into the Battle of Warburg in 1760 that his wig fell off, generating the expression “going bald-headed at it”.

That was indicative of the ambitions of the five former Enterprise Oil executives who set the company up shortly after the independent oil explorer was acquired by Shell. The company joined Aim in summer 2005, raising £10m through a placing at 84p a share.

However, it was only a couple of weeks later that the company admitted it had abandoned drilling at its first North Sea well when it was found to be water bearing. The shares, which had risen to almost 130p, fell to 81p.

The decline continued after further bad news from the North Sea. Earlier this year Silverstone Energy, a private North Sea operator, was able to buy Granby for £23m, equivalent to 63.45p a share. But at the time it was a premium of more than 20 per cent to the price.

The story highlights the risky nature of the Aim oil and gas sector. Ernst & Young’s Oil & Gas Eye index – launched four years ago to track the performance of the top-20 companies in the sector – also shows its volatility in spite of record prices.

Over its life, the index is up 150 per cent. However, this year it got off to a dismal start, only to be followed by a 27 per cent rise in the second quarter. Then July wiped out most of the second quarter, reflecting the downturn in the Aim 100 and Aim 50 indices reported in last week’s column.

Overall, the sector looks robust enough. While two other companies – Global Marine Energy and Prometheus Energy – joined Granby in delisting, three more companies joined. Petro Matad, the first Mongolian company on Aim, arrived via an introduction. But Chariot Oil & Gas, which is hoping to strike oil off the coast of Namibia, raised £45m through a placing, and Indus Gas, an explorer focused on the Indian province of Rajasthan, raised £25m.

Nevertheless, according to John Clark of Ernst & Young, half of the more than 100 companies in the sector are trading below their flotation price, and many have less than £10m of cash left. Exploration companies are finding it hard to raise debt and even harder to issue equity.

There is always the possibility that they will be taken over like Granby as consolidation in the industry continues. But Mr Clark also sees an emerging trend for partial divestments. Strategic investors are starting to take minority stakes in Aim’s exploration companies. The investments provide access to underlying reserves and a much-needed cash boost for companies looking to access sufficient capital to continue to deliver against their strategic objectives.

A good example is Petroceltic International, the Irish company with assets in Algeria, Italy and Tunisia. The shares peaked at 23½p in 2006, but were at a low of 6.3p in early June. Then Iberdrola, the Spanish utility, took a 23 per cent stake for $55m, or 13p a share. The investment will be used to finance the exploration and appraisal programme for a field in southern Algeria in which Petroceltic has a 75 per cent stake and which could hold up to 3,000 cubic feet of gas. Iberdrola hopes to secure supplies for its domestic market.

Similar deals are likely to become more common. As Ernst & Young says, a small number of institutional investors own a large percentage of the sector’s assets. If they decide not to commit further funds to the sector, companies will be under pressure to find alternative sources of capital.

Spotlighting Indian energy

The Indian energy market deserves a closer look. Companies reporting good results have largely gone unnoticed. KSK Power Ventur, which specialises in building power plants in India, has announced $3.6m (£1.9m) of operating profits on the back of a twofold rise in revenues to $31.6m. The shares closed at 367p yesterday, well below the peak of 636p in June. Greenko, which owns 90MW of biomass and hydropower projects in India, reported maiden pre-tax profits of €2.5m (£2m) on turnover of €13.1m in the year to March 31. The shares, priced at 98p for the November flotation closed yesterday at 117¼p.

The company chose Aim after looking at the possibility of raising money in Mumbai and on Euronext. It attracted institutional investors such as Artemis and Standard Life. Timothy Bowen, the finance director, says the company is benefiting from the emergence of a huge well-educated middle class demanding power. But it is “a little frustrated” about the lack of understanding of the Indian market. A reason, perhaps, for some City analysts to emulate the Marquis and go at it bald-headed?