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August 13, 2012

Junior Oil Companies Stock Performance in Review

By Ernst & Young via Commodities Now 
Oil and gas investors are facing disappointment as AIM-listed companies appear set to defer and/or scale back on development commitments, according to Ernst & Young. The firm’s latest Oil and Gas Eye Index – which measures the performance of the sector’s junior companies – plummeted by 20% during the second quarter of 2012, erasing almost all of the gains achieved in quarter one.
Jon Clark, oil and gas partner at Ernst & Young, believes that the only certainty facing AIM companies is that a further period of uncertainty is on the horizon. “The first quarter of the year saw glimpses of light at the end of the tunnel, but that now looks like the glow of an onrushing train of anxiety,” he said.

“Markets will remain volatile while the eurozone continues to seek a more permanent solution to the region’s problems. This will push investors towards safer havens, as evidenced by the 38% drop in secondary fund-raising activity between April and June. This will realistically result in the delay of development projects, unless companies are willing to court larger, better capitalised partners or acquirers,” he added.
The report notes that just 19% of the 115 oil and gas companies listed on AIM achieved share price gains during the period covered as they underperformed the wider AIM market and their larger FTSE 350 peers.
Clark also believes conditions will result in a contraction of the AIM oil and gas universe as the year progresses. “With the outlook for oil and gas IPO activity remaining difficult, the signs suggest there will be a net reduction in number of oil and gas companies listed on AIM during 2012. Compare that to other sectors on London’s junior market in the second quarter in which more than £150 million was raised from 12 new issues,” he concluded.

Outlook Remains Challenging

Stock markets will remain volatile while the Eurozone struggles to find a more permanent solution to the region’s financial problems. As the summer progresses, fund-raising conditions are likely to remain challenging for most junior oil and gas companies. Those companies with weaker balance sheets, and particularly those with development projects pressing, may find themselves turning toward larger, better capitalized partners/acquirers. The alternative may be to defer or scale back development work commitments, which could disappoint existing investors, who may take matters into their own hands.
With the outlook for oil and gas IPO activity remaining difficult, all signs suggest there will be a net reduction in the size of the AIM oil and gas universe in the remainder of 2012.
Courtesy Ernst & Young’s Oil and Gas Eye index via  Commodites Now (EconMatters author archive here
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters
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Item Reviewed: Junior Oil Companies Stock Performance in Review Rating: 5 Reviewed By: EconMatters