The Financial Outlook for Junior Oil and Gas

Oil & Gas IQ

Recovery among junior oil and gas companies is outranking that of the larger industry players and is predicted to continue well into 2010.

Ernst and Young's Oil and Gas Eye index for the first quarter of 2010 showed growth of 20 percent, significantly outstripping the FTSE Oil and Gas Index, which saw growth of just 3 percent.

The index has been trending upwards since March 2009 and has seen growth of 167 percent since the beginning of 2009. However, it is still 8 percent below the levels recorded at the beginning of 2008.

It also highlighted that the price of oil was up in quarter one compared to the first three months of 2009, and during this time it was relatively stable, which is good news for investors in junior oil and gas companies.

Investing in Junior Oil and Gas

Ernst and Young predicts that current conditions within the market could lead to further investment in junior oil and gas companies.

"At the height of the financial crisis, investors demonstrated a preference for larger-scale E&P players, leaving many junior oil and gas companies struggling to raise funds," the report explained.

"The current weakness in refining margins and concerns over the long term growth prospects for a number of the larger, integrated players may lead to a renewed, albeit selective appetite for junior stocks," it continued.

However, it also suggested that investors within the sector may be "reaching saturation point."

Growth Strategies

The Oil and Gas Eye index further identified that companies that performed best in quarter one were those that were able to upgrade their reserve estimates or found new discoveries.

These included the increased reserves located in the North Sea by Ithaca Energy, alongside deepwater discoveries near Mozambqiue for Cove Energy and PetroNeft Resources beginning drilling ahead of schedule on Russian resources.

In April, Ithaca energy said that appraisals on the Stella field "proved the presence of significant additional volumes of hydrocarbon and excellent quality reservoir."

Investigations revealed that the hydrocarbon column height is in excess of 820 feet. In addition, it found hydrocarbons located at more than 500 feet lower than had been discovered in any previous wells.

Production of oil and gas in the Stella area is now due to begin in 2012, with Nick Muir, chief exploration officer, commenting: "Stella can now go forward as a standalone but expandable development that will allow for the future tieback of other Ithaca operated discoveries in the Greater Stella Area, such as Harrier and Hurricane."


Afren continued with its strategy to become "the premier pan-African independent exploration and production company" in the first half of 2010.

The company announced in June that it has acquired all shares issued and all to be issued share capital of Black Marlin in a deal that valued the shares at roughly C$0.51 each.

Black Marlin, which has a focus on the untapped potential in East Africa and in particular the hydrocarbon potential of rift margins, is due to become a wholly owned subsidiary of Afren in September 2010.

Afren already has operations in both Nigeria and Cote d'Ivoire, which will be complimented by Black Marlin's existing operations in Ethiopia, Kenya, Madagascar and Seychelles in West Africa. It also adds six exploration wells that are due to be drilled in 2012.

"Black Marlin has exposure to numerous high impact exploration assets which, combined with Afren's cash generative West African production base and development capabilities, is a complementary extension to our established West African platform," Osman Shahenshah, chief executive of Afren, commented.

Looking ahead over the next 12 months, Ernst and Young said that the companies which will attract finance and investor interest are those which have "a quality asset base, a history of delivering projects on time and within budget and a seasoned management team."