Derek Pain: Nighthawk may be flying towards a happier horizon

No Pain, No Gain

My in-tray indicates that the performance of Nighthawk Energy is worrying some readers who follow the no pain, no gain portfolio. They are not alone; I am deeply disappointed, and have on several occasions contemplated cutting and running.

As I write the shares are around 27p, against 44p paid by the portfolio in 2007 and a 116p peak. Last month they were down to 20p.

But perhaps happier days are on the horizon. This week the US-focused oil and gas group said it was seeking to sell a stake, presumably a minority one, in its star US field, the Jolly Ranch in Colorado. A previous attempt ended in humiliating failure. Nevertheless, if Nighthawk can clinch the sort of cash mentioned last time, then the group's valuation would be transformed.

There is little doubt that it has some intriguing prospects on the Jolly Ranch and elsewhere. And the US, despite the commercial and political rants over BP's misfortunes, should remain one of the most attractive lands in the world for UK companies.

The stock market can be an impatient place, and although Nighthawk is already producing, progress has, in the view of many pundits, been painfully slow. They expected a more robust display.

Among the analytical community the group still commands support, with some analysts suggesting that the shares should be much higher, although it is apparent that earlier forecasts, often exceeding 200p, have been quietly dropped.

But, as I explained to an email correspondent, I believe much of Nighthawk's malaise has been self-inflicted by its insatiable desire to raid investors for cash. It has satisfied its hunger by raising £58m (against an £88m capitalisation) through private placings at prices ranging from 46p to 20p.

Placings may be a relatively cheap and quick method of financing but often spell instability for the shares. Too many placing shares end up in the possession of spiv traders and other short-termers. In the main buy and hold investors, who would be more inclined to hang on to any new shares, are left out in the cold. I favour rights issues where all existing shareholders, most long term, have the opportunity to subscribe. A more stable environment is therefore established.

Exploration and setting up production facilities burns cash at a ferocious rate. So Nighthawk's hunger is understandable. When last year it attempted to sell a stake in Jolly Ranch the deal, which would have produced nearly $40m, was abandoned when, mysteriously, the cash failed to arrive. The latest sale move lifted the shares a few coppers. After the earlier fiasco caution is bound to prevail.

Another constituent,, has delighted shareholders by holdings its year's dividend, despite a profits retreat. The shares consequently enjoy a yield of around 8 per cent, compared with the abysmal rates offered to many high-street savers.

Although trading has been tough, the printer, operating mainly through franchisees who dispatch orders to its Manchester plant, has found the British market reasonably resilient. It is the Irish operation, as the Celtic Tiger died, that is responsible for much of the decline as profits emerged at £1.7m against nearly £2.1m.

I would guess that profits this year could be similar to those just reported, and with £2.1m in the bank another unchanged dividend is on the cards. In the past five years little, capitalised at £17.7m, has returned more than £6m to shareholders. No wonder it is probably the best income stock on AIM.

Another constituent, Clarity Commerce Solutions, has splashed out £150,000 for 80 per cent of Cyntergy Services, a company it sold for £500,000 two years ago. At that time Clarity was struggling. Since then it has enjoyed a remarkable resurgence and is expected to have achieved profits of £1.8m last year. Clarity, which provides software to leisure and retail groups, is expected to continue to progress this year and the stockbroker Arbuthnot is looking for profits of £2.5m.

Finally, I was disappointed to see a flurry of director share sales at Booker, another portfolio member. After the cash and carry group's splendid results, four directors offloaded 30 million shares, worth more than £12m. I realise directors sometimes need to crystallise their assets, but I am invariably encouraged when they buy shares in their employer. An array of sales must, therefore, be unwelcome.