Well, cheaper, anyway. Is now your chance to take a toehold in the sector?
If Disney was to create an investing theme park, then the small cap oil ride would surely be the most terrifying rollercoaster with the toughest height restrictions.
Investing in shares always entails ups and downs over the short to medium term. But small cap oil companies, like others in the resource space, are also subject to distinct multi-decade cycles.
For most of the 1990s, with the Brent spot price bumping around the $20 a barrel mark, the directors of small cap oil companies could barely give their shares away. In hindsight it was the opportunity of a lifetime.
Since then the oil price has soared to a roughly seven-fold peak in 2008, hauling the prices of a fleet of oil explorers and producers up with it. There followed a bust as oil plunged below $50 a barrel, with the plummeting value of operationally-leveraged oil outfits exacerbated by hedge funds dumping their holdings. Declines of 75% were the order of the day.
Just when things looked bleakest, the markets bottomed, sparked by unprecedented monetary easing in early 2009. Small cap oil shares surged with the oil price, and investors didn't look back.
Well, not until now.
From macro moves to margins
Having marched up above $125 a barrel (twice) by April of this year, the price of Brent Crude seemed to be climbing inexorably towards those 2008 highs.
Then, as commodities are wont to do, the price suddenly dropped. Oil trading derivatives suffered their biggest one-day fall since the financial crisis. Brent Crude dipped below $110, before edging up once more.
All sorts of reasons have been advanced for the lurch, from Japan to Libya to slowing US economic growth and the impact of speculators, a few of which seemed contradictory. The leading suspect is a change in margin requirements on the exchanges that forced over-extended traders to reduce their positions.
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Whatever the cause of the moves -- and the inherent volatility of commodity prices make share prices look placid -- the impact on oil producers listed in London was significant.
The entire sector routed in the first week of May, with many companies seeing 10% or more wiped off their valuation. Prices have since rallied a little, especially for the larger firms, but most are still firmly in the doldrums.
Down but not out
The following table shows the share price moves of a dozen key London-listed companies since 28 April to date, ranked by market capitalisation:
Encore Oil has its own distinct issues (a disappointing drilling result). But the overall picture is of across the board weakness, especially among the small companies.
Buying the dip
Seasoned oil company investors will take 10% declines in their stride, though our boards did see at least one poster radically reassessing their attitude towards this risky sector. The oil price already seems to have firmed, too.
Long-term investors in the better performing small cap oil companies will be sitting on enormous gains, anyway, with multi-baggers commonplace over the past decade.
For those who've missed out, the current weakness could be a chance to dip at a decent discount to last month's prices, presuming you think the long-term prospects remain positive. Our Oil & Gas -- Companies board is hugely knowledgeable, and a great place to lurk and begin your research.
Alternatively you could consider trickling money into a fund, such as the Junior Oils Trust we recently profiled. The fund's manager, Angelos Damaskos, claims to have been defensively positioned since the start of 2011, and tells investors in his latest update:
"Looking forward, we believe that investors are becoming more risk averse and taking profits in those oil companies that have performed the best recently. Oil prices have declined as speculative traders changed their positions but remain supported by the geo-political unrest in North Africa and the Middle-East even though demand in the developed economies is still weak.
We expect increased volatility through the summer with possible stability in the last quarter this year. In a price range of $85-105/barrel, producing oil companies are making attractive profits."
At least outsourcing management to him saves you having to worry about this volatility, but you'll pay a steep 1.75% annual charge for the privilege.
More company comment:
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