The Top 5 Small Cap Oil Stocks
A Special Report from James Faulkner of WatsHot.com
Markets don't know which way to go at the moment, with the spectre of a recessionary relapse balanced by the belief that such an event would prompt further monetary stimuli. However, whatever the weather, you can always count on a significant oil discovery to get a share price going. I believe the following five oil companies are among the shares with the best upside in the small cap oil sector.
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Max Petroleum ( MXP )
Kazakhstani oil prospector Max Petroleum hasn't been having the best luck of late. In recent months it has produced a stream of disappointing drilling results, become embroiled in a tax dispute, and had one of its licences revoked. However, a solid set of drilling results from the ZMA-A15 development well in the Zhana Makat field increased the likelihood that production from the Zhana Makat field will be significantly ramped up, helping to reignite interest in the shares. To put the firm's current 13-well drilling programme into context, 4-5 successful wells could result in 100 million barrels of proved and probable reserves. Peter Moss, Vice President Corporate Development and Investor Relations of Max, says he knows of another company on another block close to where Max operates which was producing 27,000 bopd from a 30 million resource. Max has enough headroom with its lending facilities in order to comp lete the current post-salt (low risk) drilling programme, with each well costing around $1.7 million a go.
When it comes to the more exciting pre-salt plays however, the company will need a helping hand in the form of a farm-in partner. These prospects are much deeper and much more expensive to drill (around $25 million each) than their shallower counterparts, but the upside is greater too. Max has identified six drillable pre-salt prospects and eight leads, ranging in size from 100 to 600 million boe of mean recoverable resources. The total mean resource potential of the deep prospect portfolio is currently estimated at more than five billion barrels of oil equivalent - a hell of a lot of oil for a company the size of Max. The company is on the hunt for farm-in partners as I write, and the share price should jump once one is secured.
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BPC ( BPC )
With a market cap of just over £30 million, BPC's multi-billion barrel offshore prospects in the Bahamas could make it a multi-bagger many times over. However, given that it is unlikely that drilling will begin until 2012, investors need to be aware that patience may be required in the meantime. Based on the BPC's own interpretation of its pre-existing seismic data (which it painstakingly pieced together itself over a period of many years and at a cost of many millions of dollars), 22 leads have been identified as potentially capable of trapping hydrocarbons. BPC believes these 22 leads, based on volume, could all be commercially exploitable. In August 2008 a Competent Person's Report found source rocks with similar characteristics to adjacent productive areas in the southern Gulf of Mexico and Cuba, leading to the suggestion that traps capable of holding multiple giant accumulations greater than 500 milli on barrels could be present. This premise is supported by a US Geological Survey conducted in 2008 (Report DDS–69-M), which estimated the potential for 7-14 billion barrels of oil equivalent (boe) of undiscovered resources in the offshore north-west Cuba Basin.
Offshore drilling is extremely costly and would be impossible for BPC to finance on its own. In light of this, BPC has brought in Norwegian major Statoil in a joint venture covering three licences - Zapata, Islamorada and Falcones - in the Cay Sal area to the southwest of The Bahamas. Although no specific details of the terms of the deal have been disclosed, the firm claims that the agreement eliminates the need for near-term funding on BPC's part for the JV. There are currently no drilling commitments and it is likely that the initial phase will concentrate on gathering data through seismic work. Bringing a major player like Statoil on board is a highly significant achievement for BPC. Not only does it remove a lot of uncertainty regarding future capital requirements for exploration, it also gives a lot of credence to the prospectivity of the region. The company has reached a point "where large scale Bahama s oil and gas exploration activities may now take place" . The most recent 2D seismic threw up some direct hydrocarbon indicators which, if confirmed, could indicate "an active hydrocarbon system in the area and significantly de-risk future exploration prospects".
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Tower Resources ( TRP )
Tower shares slumped in February after its Avivi-1 well in Uganda came a cropper which cast doubts over the prospectivity of its 100% owned EA5 Licence. The setback knocked around 75% off the value of Tower shares, which was strange given the fact that most of Tower's upside potential lies in its Namibian stake. In Namibia, Tower holds a 15% interest in Licence 0010 comprising three offshore blocks covering an area of 22,000 square kilometres of water between 200 metres and 3,000 metres deep. An 85% farm-out agreement with Arcadia Petroleum means Tower is fully carried for the duration of a 3D seismic programme and the drilling of an initial well, due early 2011. The 3D survey will cover 1,580 square kilometres of the Delta prospect (estimated to contain recoverable reserves of nearly 3 billion barrels of light oil or condensate) and take virtually all of 2010 to acquire, process and interpret. The other three p rospects that have been identified, Gamma, Alpha and Beta, are estimated to have recoverable resources of 4.5 billion, 800 million and 200 million barrels respectively.
In July the company announced the results of a competent persons report on the 0010 Licence which concluded that the net risked prospective resources attributable to Tower's 15% working interest is 170 million barrels of oil equivalent, having an EMV (expected monetary value) of $696 million (45p per share). DeltaM has been assessed as having a 26% COS (chance of success); DeltaP an 8% COS; GammaP a 12% COS; and AlphaP a 20% COS. Notably, the gross estimate for the licence, at 7.55 billion barrels, is better than the earlier estimate of 5.5 billion barrels. Notably, broker Westhouse's current valuation (13.3p per share) is composed solely of the Delta Prospect (9.7p) and the Delta Lead (3.1p), with no valuation at all attached to the other two leads and the three plays highlighted in the Independent Person's Report.
