Derek Pain: Circle Oil defies the gloom over the black stuff

No Pain, No Gain

The decline in the price of crude oil and an acute shortage of cash for exploration has had a savage impact on small-cap oil groups. But, perhaps not surprisingly, some are surviving these straitened times in far better shape than others.

My research last week into this year's spirited performance by Blavod Extreme Spirits, selling a black vodka, produced an unexpected sidelight in the shape of Circle Oil, an AIM-traded Irish explorer with an intriguing "black gold" discovery under its belt. Its shares, too, have enjoyed a heady run. They have come close to doubling this year and now reside at around 18p. Even so, like Blavod, they have seen much better days, once briefly topping 50p.

Recent strength stems from drilling results. In Egypt, oil and gas has been identified at a site 200 miles south-east of Cairo. Production may not be far away. Circle has also had success with the drill bit in Morocco, where it has established some significant gas flows. The group can lay claim to a growing pool of reserves, mostly ripe for development. It also has exploration interests in Namibia, Oman and Tunisia.

When it arrived on the stock market in 2004, Circle had Caribbean and Central American ambitions but these appear to have dissolved.

Exploration is an expensive occupation. Like many explorers, Circle is still loss-making – but that has not prevented it from tapping the stock market and investment world for extra funds. Indeed, its coffers should not need replenishing for some time. In September, it raised a cool £33m, selling shares at 19p. As a result, Libyan interests acquired what was then a 29.9 per cent interest, and Kaupthing, one of the subsequently distressed Icelandic banks, 15.6 per cent. The Icelandic interest is presumably up for sale. Such an overhang will weigh on the share price until cleared.

Nighthawk Energy, the only oil and gas group in the No Pain, No Gain portfolio, has also sprayed shares around to raise cash. It has pulled in another £7m, placing shares with City institutions at 20p. In November, it raised £5m selling shares to institutions at the same bargain price.

The trouble is that such manoeuvres tend to have a negative influence on the shares. After all, even the proudest City institution is not above taking a quick profit. Nighthawk's shares have been above 40p since the first placing and the temptation to snatch a nice little earner could have proved irresistible for some.

But Nighthawk needs the cash. Its aggressive US programme is hard on its bank balance. And it is not yet producing enough oil and gas to cover its costs. Still, production is increasing, oil is being sold and there are hopes that revenue is on the verge of hitting $200,000 (£140,300) a month.

Gas is also contributing, and Nighthawk has recently added to the flow by hooking its latest discovery to a pipeline system which enables it to sell into the local market.

Although share placings are not popular with small shareholders – only the mighty are prevailed upon to take part – they are a useful money-raising route. It is said that placings remain the least expensive option.

Rights issues are labelled too time-consuming and expensive, and borrowing, if that is at all possible for an oil adventurer, is hideously onerous. But Nighthawk does have another cash-raising manoeuvre up its corporate sleeve – it plans to sell minority interests in some of its US operations. The shares are 23p against a 116p high. The portfolio paid 44p.

Hargreaves Services, another constituent, is also in the energy business – coal and coke represent its involvement. The group, which also has transport and waste disposal interests, duly checked in with impressive interim figures, £12.2m against £6.6m.

Stockbroker Brewin Dolphin now expects year's profits to hit £28.5m and has an 850p target price on the shares, which are now around 550p (the portfolio paid 417p).

The group, thinking of moving from AIM to a full listing, intends to expand its coal production. It has one of the few deep mines still operating and has plans to develop an open-cast coal project, with four million tonnes potential, in South Wales. Other surface sites are being explored. So, despite the environmentalists, old king coal is clearly still alive and well.