Share price increases disguise challenges facing AIM’s oil and gas companies

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Wednesday 7 November: Junior oil and gas companies outperformed their larger peers during the third quarter of this year, but the resultant increase in the value of its Oil and Gas Eye Index masks the sharply contrasting fortunes of the sector’s small cap players, according to EY.

The index – which measures the performance of AIM-listed oil and gas businesses – recorded a 5% increase during Q3, meaning that, despite a sharp drop in Q2, it is now higher than at the start of the year. In contrast, the FTSE 350 Oil and Gas Producers’ index fell by 1% in the three months to the end of September.

Junior companies experiencing contrasting fortunes

However, Jon Clark, oil and gas mergers and acquisitions (M&A) partner at EY, said that funding conditions remain challenging, particularly for development projects.

“Those companies with cash flow from producing assets and financed near-term development programs continue to receive investor support, but that obscures the fact that 43% of junior oil and gas companies recorded a fall in their share price during the period covered. There is an increasingly clear split between the ‘haves’ and ‘have nots’,” he noted.

Consolidation to continue via takeovers

At £48.9 million, the total raised from further issues by AIM’s oil and gas universe was the lowest quarterly amount since the first three months of 2009, with over a third of this related to just one company.

Using this as an indication of the future, Clark added: “Consolidation of the AIM oil and gas universe accelerated during the third quarter, with the completion of three takeovers of its businesses, and we expect acquisition activity to remain brisk between now and the end of the year.

“There is a diverse range of potential buyers open to companies looking to maximise shareholder value through a sales process, with junior oil and gas companies finding themselves attractive to National Oil Companies (NOCs), majors, larger independents and AIM-listed peers with stronger balance sheets.”

New admissions offer hope

Glimmers of hope were to be found in the completion of an initial public offering (IPO) by West African-focused Eland Oil and Gas – the largest AIM IPO in three years, raising £118 million – and the admission to AIM of shares in Bridge Energy ASA.

Eland has since stated that it will seek to acquire and develop further under-explored upstream assets in Nigeria, while Bridge, which is also listed on the Oslo Axess, believes the additional listing will provide broader access to capital.

“Companies with acreage in highly prospective regions will continue to attract investment. Bridge’s belief that AIM offers additional liquidity to the Norwegian markets also demonstrates the enduring attraction of the market to oil and gas companies,” concluded Clark.