Oil and gas juniors slogging on the credit mountain

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Wednesday 16 May: Junior oil and gas companies’ insatiable appetite for investment capital is leaving them vulnerable to takeover, according to the latest EY Oil and Gas Eye.

The index – which measures the performance of the sector’s AIM-listed businesses – rose by 24% during the first quarter of 2012, reaching its highest level since the 2008 downturn before easing back slightly as the quarter ended.

This was achieved largely on the back of a series of explorations successes, which Jon Clark, oil and gas transactions partner, believes have resulted in as many difficulties as they have rewards.

“Many junior companies have climbed the mountain of exploration success, only to find a larger peak ahead of them in the shape of development delivery,” he said.

The firm’s Q4 2011 Oil and Gas Eye had suggested that the tightening credit market would result in the contraction of the AIM oil and gas universe as the largely well-capitalised majors and National Oil Companies (NOCs) exploited their balance sheet advantage, something that Clark says has been borne out.

“Securing the necessary capital and operational expertise while avoiding takeover approaches, or maximising the value of such a bid, is proving to be a challenge. As a result, the acquisition activity we previously predicted has become reality, driving the substantial increase in the index,” he said.

“The offers for three companies reported in the first quarter of this year alone are likely to be the tip of the iceberg,” he added.

The marked dip in secondary fundraising by AIM-listed oil and gas companies during Q1 accentuates the situation. Just £184.9 million was raised; 40% lower than the amount raised in the comparable quarter of 2011 and 30% down on the total raised in the previous quarter.

More than 80% of that total is associated with five companies, with 88% of juniors raising no capital at all over the quarter. By contrast, secondary fundraising across the wider AIM market was strong.

Clark concluded: “As many financial institutions maintain an aversion to risk, capital markets will continue to be the primary source of funds of funds to support investment in the mid-cap exploration and production community.”