Look to small oil explorers for big profits

Kathleen Brooks
AFTER a 20-year ban, President Obama has given the go-ahead to oil drilling off the Virginian Coast. It would appear that the US hasn’t lost its appetite for hydrocarbons.

The green energy revolution hasn’t lost steam, but governments have started to realise that it will take many years before green technology can fulfil the world’s energy needs. For example, wind turbines produced a mere1.3 per cent of the US’s total electricity generation in 2008. The Department of Energy has said that wind could produce up to 20 per cent of US electricity, however, it predicts that this won’t happen until 2030.

Industrial nations still need oil, and demand in the short to medium term will remain strong. President Obama said that reversing the ruling against offshore oil drilling in Virginia was important to secure energy security in the US. European countries will also need to secure oil and gas supplies while the infrastructure for green energy is built.

Spread betters can take advantage by looking beyond the usual suspects in the oil sector. Multinational behemoths BP, Royal Dutch Shell and Exxon may pay reliable dividends but for a more speculative play on the oil price spread betters should look toward small and medium-sized companies.

Gulfsands and Petroleum, an Aim-listed oil exploration and production company with assets in Syria, Iraq and the US, announced solid results for 2009 last week. Revenues rose by 57 per cent and oil reserves increased by nearly 30 per cent. The company is also embarking on an investment programme this year, which includes participating in the drilling of four new wells. Stockbroker Killik & Co remains positive on the stock because it believes that Gulfsands and Petroleum is ripe for takeover. It anticipates a bidding war for the company later this year from Oil India, the Indian Oil Corp and Chinese oil firm Sinochem.

Likewise, Richard Curr, head of dealing at Prime CFDs, recommends investors take a long position in Tullow Oil due to strong results for 2009 and continued exploration success in its Tanzanian oil field Likonde-1. Curr says that Tullow Oil’s exploration progress in Uganda and elsewhere in eastern Africa provides “ample scope for further progress.” If the crude oil price, currently above $80 per barrel, remains supported this should benefit Tullow Oil’s share price.

Often investing in oil firms is risky, non more so than in start-ups. But Kea Petroleum, Ian Gowrie-Smith’s latest venture after the phenomenal success of Rift Oil, offers some counter-balance to that risk because it is looking for black gold in the sleepy hills of New Zealand’s north island. Since listing on Aim back in February, Kea Petroleum’s share price has risen by a whopping 36 per cent.

Spread betters who think that the world’s appetite for hydrocarbons has not yet been satisfied should look beyond the FTSE 100 for investment opportunities.