Small Oil Company Shares

Monday, 13th December 2010 09:22 - by Robbie Burns

Yes, it's that time of the year Finance Writers love - they can cut & paste the ‘Santa Claus rally’ piece they wrote last year...and the year before...and the year before that... The FTSE pretty much always goes up just before Xmas, 21 times out of 23, blah, blah...now stretch it out with some more stats, article done, last down the pub is a pillock. Oh, then easy to fill more space quickly with ‘Tips for 2011’. Pick a few at random, hope two of them do really well, crow about those, and then conveniently forget the stinkers. However, I am made of sterner stuff (Not really, I keep conveniently forgetting to write columns but I do remember sometimes). No, I really am not going to cut & paste a ‘Santa Claus rally’ piece here. I am going to write something about oil exploration companies instead. So there! Santa might happen, but the FTSE has gone up a lot in December already. I thought I'd do this because I know for a fact you have some shares in at least one oil explorer. Actually, I bet more than one. Come on...at least six. Ten, you say? Yes, that's about average! I also bet you made a lot of money on one, but lost a packet on one or two others. You did, didn't you? Look, I know you did. There’s no point in trying to fool me. 2010 has been the small oil stock crazed year. Last year small-cap punters were all in Provexis, which everyone bought at 15p and then sold at 4p. See, I know these things. Some small oilers have gone up, some have gone down. Some just went down. Bulletin boards are full of blokes fighting each other and rowing about them. You hardly dare read a board when one of them suddenly goes down 50%. The fighting! The bitching! The more fighting, the more bitching on particular boards, and probably the bigger stinker the company is. Trouble with these small oil Shares is that they really are a total gamble. Take the most popular one with small punters - Desire Petroleum. It's crazy. Take a look at the chart. 25p up to 100p; right back down to 25 again; up to 125 and then down to 45; then up to 160; back to 40; up again to 125 and as I write, back down to 70’ish. Ok, I guess if you're on the right side of it enough times, there might be a few quid in it, but a quick look at the bonkers bulletin boards and you'll probably find more people losing than making on it. They also seem to enjoy releasing that anger on each other. Some obviously need to see a psychiatrist. A couple of weeks ago, they thought they'd found oil, then last week it was probably water. Because so many people are in these companies, it's almost certain a lot of them are over-valued. If you're in one of these, never be surprised if you lose half your money overnight. You can't value companies like this on normal profit valuations or use P/E ratios. They are a gamble, nearly all of them - consider it the same as sticking money on a horse. With small oil stocks, you'll win some and you'll lose some. For example, Frontera went from 120p to...er, 5p! Probably the worst of the lot that lost small punters the most was Victoria Oil; falling from 250p to...3p!! You can bet there are still punters in both who bought near the top who reckon "It's ok, they will come back". I have the odd play with them with my Pension monies - for fun and entertainment only. How do you stack your odds in favour of an oil punt? First thing to do is 'Google' the management. Did they have success with a company before? What about the company's assets -- have they found any oil already? If they have, then that's a ‘plus’. Think Rockhopper and Encore Oil; both successes so far. How much cash have they got? Are they going to need to raise money soon and will that mean tapping shareholders? Are their statements confusing, odd, full of PR speak, or are there clear signs of promised production rates? Avoid the ones that have no track record or licences in dodgy areas. Avoid ones with bonkers bulletin boards, because the price is probably over-inflated. Here's my couple of punts based on previous success of managers. Parkmead - because Tom Cross (who made such a success with Dana Petroleum) is on board; and President Petroleum, because Peter Levine (who had a major success with IEC) has a big stake. These two wily and obviously successful men could be worth backing. Of course, it doesn't necessarily mean either will do well, but it gives some sense of at least they know what they are doing. The main thing with these oil stocks? Don't bet your house on them, and especially not on one. Have some for small money as part of an overall balanced portfolio, together with companies that already make a profit and aren't oil stocks. I wouldn't have more than 15% in any of my portfolios. If you strike it lucky, then great. If one goes down it won't be so bad. So, in the end, it's probably better to own a few than have a big punt on one. I'm off to South Africa now to enjoy the weather over Xmas and I'll be back in the New Year. If there is a ‘Santa Claus rally’, enjoy it and say “Ho ho ho!” If there isn't, blame all the Journalists and their cut & paste ‘rally’ articles and say "Bah, humbug!"