A higher-risk opportunity for small-cap oil punters.
Yesterday's announcements from Providence Resources (LSE: PVR) and Lansdowne Oil & Gas (LSE: LOGP) confirmed the oil and gas potential of the Irish Sea. They also confirmed my belief that SeaEnergy (LSE: SEA) provides an attractive high-risk, high-reward route into this region's oil and gas business.
Lots of high-quality oil
The announcement yesterday confirmed the presence of high-quality light, sweet crude oil -- the most valuable kind -- in the Barryroe Well in the North Celtic Basin Area of the Irish Sea, 50km off the coast of Ireland. This is jointly owned by Providence (80%) and Lansdowne (20%).
The test well achieved a stabilised (sustainable) flow rate of 3,514 barrels of oil per day (BOPD), almost twice the target of 1,800 BOPD, the level necessary for the find to be commercially viable.
Gas is also present and testing for gas flow rates will start shortly, which could lead to further good news.
Limited downside, 100% upside?
SeaEnergy owns a 24.68% stake in Lansdowne Oil & Gas. Lansdowne's current market capitalisation is currently about £68m, valuing SeaEnergy's stake at around £17m. What's more, SeaEnergy's last accounts carried cash of £27m, and no debt.
In contrast, SeaEnergy's current market capitalisation is just £22m at 32p, meaning that as long as Lansdowne continues to prosper -- and the cash pile is not wasted -- there is solid support for the group's share price at around double its current value, limiting your downside and offering good possible upside. Many Fools have spotted this valuation opportunity, too.
SeaEnergy vs Lansdowne
All three companies involved in the Barryroe field saw their share price rise yesterday, but Lansdowne's dropped back immediately to close to its previous level, suggesting that the market believes most of the good news was already priced in.
However, Lansdowne will undoubtedly make big gains if the Barryroe well makes it into production, so it could be a reasonable investment for the longer term.
On the other hand, any rise in Lansdowne's value should be reflected in SeaEnergy's shares; the key decision is whether SeaEnergy's other oil interests are likely to add or detract from this over time.
The potential is there -- SeaEnergy also has interests in Iraq, Bulgaria and the North Sea -- but the prospects are currently quite uncertain. Indeed, there's a chance the cash hoard could be wasted entirely on dud wells and other fruitless developments.
Decision time…
Investing in small-cap oil and gas companies is risky and you need to do your own research first. Depending on your assessment of each company's valuation and prospects, you might decide that Providence or Lansdowne make a better investment than SeaEnergy.
However, I believe that if you truly want a high-risk, higher-reward punt, then a small investment in SeaEnergy might be the way to go.
> Get the latest on investing and the markets, direct from the desk of David Kuo. You'll also receive a special free report on '10 Steps To Making A Million' if you join The Motley Fool Collective today.
More from Roland Head:
