Oil and Gas Eye Q1 2014 in review

The index dips as investor confidence falters

  • Share

Index continues a downward slide

The index fell 15% in Q1 – the largest decline in eighteen months. This disappointing performance followed Q4 2013’s 3% fall.

The index has now fallen in three of the last four quarters – perhaps a reflection of current negative investor sentiment towards the junior resources sector.

Investors remain risk averse, and larger oil and gas companies with more stable cash flows, and a more balanced portfolio of exploration and producing assets, continue to outperform their AIM peers. The FTSE 350 Oil and Gas Producers’ index fell just 3%, and the wider AIM market was stable, with the AIM All-share index unchanged in Q1.

The Eye’s continued decline is perhaps more a reflection of underlying company performance and exploration success than wider macro industry factors.

It was not uniform across the AIM oil and gas universe, with significant variation in the performance of individual stocks this quarter. The best performer saw its share price rise 188%, while the worst saw a 61% fall. Factors such as sentiment around exploration outcomes, management teams and transactions, play an important role in valuation.

Those moving into negative territory were hit by poor drilling results and media speculation around potentially transformational projects.

Active engagement with key stakeholders is essential to preserve capital when investor appetite for risk is low.

Junior oil and gas companies are looking to preserve capital through a continuous focus on cost reduction. A key challenge when significant cost cuts are needed is to ensure reductions are consistent with the business’ strategic direction and will not cause further value erosion.

Those businesses that have not delivered tangible results, or at least movement in their portfolio either in terms of asset development or M&A, are likely to find it hard to maintain support from institutional investors.

Just 14% of companies successfully raised funds through further issues this quarter.

The one bright spot is that the IPO market has been fairly resilient. UK-focused Hurricane Energy joined with a market capitalisation large enough to enter the Oil and Gas Eye index at the start of Q2. Mosman Oil and Gas also successfully completed its IPO on AIM in Q1.

 


Performance of the Oil and Gas Eye index over Q1 2014

EY - Performance of the Oil and Gas Eye index over Q1 2014

Source: EY, Thomson Datastream


Performance of the Oil and Gas Eye index and oil price over Q1 2014

EY - Performance of the Oil and Gas Eye index and oil price over Q1 2014

Source: EY, Thomson Datastream


Oil & Gas funds raised as a proportion of total funds raised on AIM

EY - Oil & Gas funds raised as a proportion of total funds raised on AIM

Source: EY analysis of AIM market statistics