by Matthew Lynn
16-03-05
Where is the best place in the world to look for oil? The London stock market is going through a speculative frenzy over oil
exploration stocks. Investors are piling into stocks based on little more than
rumours and hope. Shares are being sold on the back of the purported expertise
of developers, not business plans. For a flavour of oil mania 2005, here are two examples. On March 14, Afren, a
new oil and gas company, listed its shares on the London exchange at 20 pence
each. By lunchtime, they had jumped to more than 56 pence, almost tripling in
just a few hours. The London-based company raised £ 8 mm ($ 15.3 mm) in its
initial public offering. Investors in White Nile, however, might regard those gains as relatively
paltry. In February, the company soared in value. White Nile is an exploration
company set up by the former England cricket star Phil Edmonds. Listed on the
London market at the start of February, the shares increased more than 11-fold
in a week before being suspended. In total, 24 new oil exploration and production companies have been listed in
London in the last 12 months, according to research by Al Stanton, an analyst
with Bridgewell Securities in London. The oil exploration frenzy is starting to show some spooky similarities to
the dot-com bubble of five years ago. Take companies such as Afren and White
Nile. They don't actually own any oil in the ground yet. Afren has an agreement
to take part in a field in Nigeria. The rest of the money raised from investors
will be used make acquisitions. While oil exploration by its nature always has been somewhat of a guessing
game and companies jumping into that world may go on to great things, many of
the new companies seem to be as much about presentation as future production.
There are few better illustrations of that than FirstAfrica Oil. It actually
used to be a public relations business called Financial Development Corporation
before a reverse takeover at the start of this year. It's now in the oil
exploration industry (and had been rewarded with a tripling of its share price). It's not necessarily a bad thing that some oil companies are being floated on
the backs of personalities. The oil industry depends on contacts as much as
anything else. The more difficult the territory, the more important it is to
know the right people. That may well be a crucial factor for success.
Source: BloombergDrilling for oil? Start prospecting in London!
Under the Indian Ocean? In some of the remote regions of Africa? Down around
some of those countries with long, tricky-to- spell names that used to be part
of the Soviet Union?
No. The best place to prospect for oil right now is London.
Is this just another dot-com style bubble? Or is there a real investment
opportunity underneath the hoopla and the hype?
Afren has a starry pedigree. The directors include Rilwanu Lukman, a former
president and secretary-general of OPEC. Another director, Egbert Imomoh, used
to run the Nigerian operations of Shell. The company clearly has people on its
team who know a lot about oil.
The Financial Times reported that the UK Financial Services Authority was
investigating the price surge, which came just before an announcement that White
Nile had obtained a stake in an oil field in Sudan. The shares are still
suspended.
"Every day there is a thump on the door, and it's another oil company
prospectus landing on the doormat," said Stanton. "Share prices are
being pushed up very quickly, with what I suspect are thin volumes and a lot of
trading from private investors. The man in the street could well get
burned."
Likewise White Nile. Again, no actual oil. At least not yet. According to a
company statement, it was created "to identify and acquire projects in the
natural resources sector with particular emphasis on oil projects within
Africa."
The prospects for small, nimble companies that are good at finding oil haven't
looked better in years. The demand for oil has been rising strongly during the
last two years, and so has the price. The oil giants need to replenish their
reserves.
The trouble is, a genuine investment story is being over-hyped, just as it was
in the technology bubble. The market is channelling investment into an industry
that needs it. Yet it is also creating unrealistic expectations and a playground
for speculators. Very few of the technology companies that surfaced during that
bubble actually went on to make any money, and the same will almost certainly be
true of London's new wave of oil companies.