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Further turbulence expected for AIM's oil and gas companies

Friday 19th February 2010
By Mike Jones

Ernst & Young’s oil and gas eye index made further gains over the fourth quarter of 2009, ending the quarter up 6%, with 38% of the companies in the oil and gas eye universe posting share price gains.

Against a backdrop of a very difficult year for the global economy and capital markets, the index increased by an impressive 125% over 2009. However, this performance must be tempered by the 66% decline seen in 2008.

Alec Carstairs said: "Since the beginning of 2009 the index has posted gains in each successive quarter, contributing to a progressive reversal of the substantial declines seen in the closing months of 2008.

"Junior oil company stocks have benefited from the steady recovery in investor confidence and higher oil prices.”

Secondary fundraisings
The total value of secondary issues in the AIM oil and gas sector in 2009 was £1.1billion compared to £700million in 2008, an increase of 62%. Secondary fundraising in the fourth quarter totalled £547.2million, this was the highest amount raised by AIM listed oil and gas companies in a single quarter since Q2 of 2006. Some 36 oil and gas companies managed to raise additional funds on AIM during the fourth quarter of 2009.

Jon Clark said: "The high volume of secondary issues, particularly in the second half of 2009, reflected a need in established ventures to progress exploration and development activity in order to grow or survive and, in some cases to fill a balance sheet gap left by reduced availability of debt."

Despite the signs of recovery in investor confidence, no new oil and gas companies have joined AIM in the last 15 months. The outlook for natural resources IPOs in 2010 is more promising with several oil and gas companies actively working towards a potential IPO this year.

Clark said: "With economic recovery still some way off, there is concern that future bad economic news could destabilise the market, which could lead to a relatively short IPO window. Now that the capitalisation of existing investments has improved, investors are evaluating new investments. Companies should be getting themselves to a state of readiness so they can react quickly to opportunities when they arise."

Looking forward to 2010, the oil and gas eye is likely to experience further turbulence, with global macro-economic and tightened credit markets taking their toll.

Carstairs said: "The oil and gas sector is likely to fare better than most, given the sustained high demand for oil, but junior companies with few or no producing assets will find it harder to raise sufficient funds, and may be forced to consider alternative funding options.

"By contrast, larger companies in the sector supported by strong oil prices and more robust balance sheets are on the outlook for opportunities to expand their asset base. Expect more transaction activity in the sector as larger companies take advantage of the strategic opportunities presented by their junior counterparts."

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