No Pain, No Gain: Torment and ballyhoo won't stop Nighthawk
Saturday 27 September 2008
The once high-flying shares of Nighthawk Energy, the US-focused oil and gas explorer and producer, have failed to respond to what can only be described as encouraging developments in some of the more remote corners of America.
A few months ago, the price hit 116p. As I write, it is around 60p, after briefly touching 48p last week. Why the weakness? I doubt those infamous short-sellers are responsible.
The seemingly never-ending stock-market torment is, of course, a major factor in the decline. So is the fall in the price of crude oil. It is now some distance from its peak, helping to strip many fuel shares, particularly small caps, of the glamour ratings they once enjoyed. There is also talk, which I don't support, that resource stocks should be abandoned as demand could falter. And another possible influence behind the price fall is disappointment that the group has yet to deliver a rumoured upbeat appraisal of its flagship Cisco Springs development.
Even so, I am surprised that Nighthawk's shares have not displayed more resilience. After all, it is not often that an energy group produces back-to-back cheer. The first announcement dealt with its Jolly Ranch projects in Colorado, where one well is already spurting oil and two others near to production. Oil from the producing well is being trucked to a nearby refinery. The second report covered the group's operations in Missouri and Kansas.
Here again, hopes run high. In Missouri, oil and gas are flowing in smallish quantities. The company's stockbroker, Hanson Westhouse, believes the Missouri upside could be as high as 100 million barrels for Nighthawk. And it is a similar story in Kansas, where there are high hopes that modest production levels will swell significantly. In addition, the group continues to expand its US acreage. So, what about that Cisco Springs assessment? I wouldn't be surprised if a positive statement appears soon. David Bramhill, the group's managing director, says: "US refining demand remains robust, and we expect these projects to provide significant and growing long-term cash flow for Nighthawk."
Many of the areas where Nighthawk is active are, in effect, abandoned energy fields. Once, oil and gas flowed from them in large quantities. But that was in the days when fuel cost very little. As extraction became more difficult and expensive, the fields lost their appeal, with losses replacing profits. Nowadays, with prices, despite the recent fall, still high by historic standards, and equipment much more sophisticated, the old fields where fuel remains can again be worked profitably.
Like most junior explorers, Nighthawk has yet to roll out profits. But such a day may not be too far away. I would guess that it could be in the money this year. It is, unlike many explorers, not short of cash, with an estimated £11m in the bank.
The No Pain, No Gain portfolio descended on the shares at 44p in August last year. Naturally, I was delighted when they romped ahead. At 60p, the gain has been watered down, but I am not planning to sell. I draw comfort from some of the predictions flying around. Stockbroker Daniel Stewart has a 130p target price, and researcher GE&CR offers an impressive 173p valuation. Hanson regards the shares as "materially undervalued". Nighthawk, capitalised at £120m, is the portfolio's first – and only – exploration stock. Indeed, I have always avoided junior players in what is often an investment minefield. Mike Wagstaff, the chief executive of Venture Production, the North Sea oil group, probably summed up my attitude when he said recently: "Exploration for small oil and gas companies is a bit like going to a casino and putting all your chips on double zero."
I was attracted to Nighthawk because of the track records of its directors. Many explorers operate in some of the more hostile areas of the world where military and political unrest reign. Nighthawk concentrates on the US. Although the financial implosion could make life difficult for UK and US businesses, it will not have the dramatic impact that a political upheaval could have on an explorer seeking riches in some distant, unstable country.
Nighthawk has the advantage of operating in an environment where the political excitement is confined to orchestrated election ballyhoo.
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