Recovery for junior oil and gas explorers

Junior oil and gas stocks are recouping last year’s losses and new entrants are eyeing the market as investor confidence starts to recover.

Consultancy Ernst & Young’s index of 109 small-cap companies in the sector posted a 35 per cent year-on-year rise in the third quarter of the year, taking it to 114 per cent growth over the year as a whole. In the three months to September, some two-thirds of its members’ share prices rose. Alec Carstairs, the oil and gas partner at Ernst & Young said: “Oil company stocks have benefited from the cautious recovery in investor confidence and higher oil prices.”

Secondary fund raising is also booming, with £333m raised in the third quarter, the highest total since early 2006. And merger and acquisition activity is also set to rise as credit markets start to show signs of life. Although the record deal volumes and values of early last year are not expected to return, joint ventures and strategic alliances between smaller and medium-sized players are on the up. Larger companies selling off non-strategic divisions acquired during the mega-mergers of the 1990s are also expected to gain momentum.

With recession wreaking havoc across the economy this year, no new oil and gas companies have listed on the Alternative Investment Market (AIM). But there is a pipeline of candidates now preparing for initial public offerings (IPOs), triggered by increasing market stability and a return of investor appetite for risk, according to Ernst & Young. Mr Carstairs said: “With the pipeline of IPO candidates continuing to build, the competition will be fierce. Investors will be seeking the highest quality candidates who will have a strong growth story, visibility of cash generation, credible management, conservative capital structures and the scale to generate liquidity in the stock.”