Unlike most equity markets, the junior oil and gas sector has yet to regain its
composure after a torrid summer. The AIM Oil and Gas Index is down 27% since
equity markets took a turn for the worse in mid-May. This contrasts to the FTSE350
Oil and Gas Producers Index which is down 5% over the same period and 10% off
this year's high.
The oil price has not helped the market performance of E&P companies. The front
month future is down 19% since mid-May but interestingly, longer-dated futures
prices remain robust and are still at the $67/bbl level. The shape and height of the
forward curve suggests that the investment thesis for junior E&P companies
remains intact and valid.
However, the sector's poor market performance tells us that the market is no
longer interested in the E&P juniors despite a renewed appetite for risk (check out
the volatility index). For some time, we have suspected that investors favour a bout
of consolidation in this overcrowded sector.
This week, three AIM-listed E&P companies have announced that that they have
received offers for their entire share capital. On November 13th, Centurion Energy
announced that Dana Gas had made an all-cash offer for the company. On
November 14th, Equator Petroleum confirmed that it had received an unsolicited
offer and on November 15th, Bowleven made a conditional all-share offer for
FirstAfrica. It is early days but there are now signs that the market may yet get its
way regarding consolidation. And with mid-cap indices at an all-time high, there
has never been a better time to take a second look at the juniors.
Resource
Encore Oil stock quotes
Encore Oil stock charts
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