Good dealmaking and plenty of cash gives this small oil share downside protection.
Small-cap oil shares are always risky investments, but I believe that today's company has got the risks covered much better than most.
Trap Oil Group (LSE: TRAP) floated on the AIM in March 2011, raising £60m and positioning itself to become a significant player in the North Sea exploration sector.
Since then, it has expanded its portfolio of North Sea assets, confirmed a seven-well drilling programme for 2012, and acquired a 15% stake in the Athena field, which is due to start production shortly.
North Sea still ripe
To misquote Mark Twain, reports of the death of North Sea oil have been greatly exaggerated.
A new £3bn deep sea field is currently being developed by BP (LSE: BP) and others to the west of Shetland, and numerous smaller fields are currently in production or being developed.
The North Sea oil industry also received a useful tax boost in yesterday's Budget, making today a perfect time for Trapoil to publish its first full-year results as a public company.
Free drilling
Trapoil is planning to drill seven wells in 2012, targeting an estimated total of 14.3mboe (million barrels of oil equivalent) of resources. The clever bit is that it will only have to contribute funds to two of these wells.
This feat is the result of carry agreements; deals whereby partner companies pay exploration costs up to the point of production, usually in part payment for their interest in the field.
Production imminent
For me, the final piece in the Trapoil jigsaw is its 2,000bopd (barrels of oil per day) production target, the cashflow from which should fund its exploration activities.
Trapoil's recent £34.5m purchase of a 15% stake in the Athena field from Dyas UK Limited should enable it to meet this target by the end of 2012, with production due to start in the next quarter.
The Athena stake will be paid for in stages and Trapoil believes that by offsetting production revenues against the final payment, the actual cost will be £26.9m. Based on current estimates, this should equate to about $21 per barrel, leaving plenty of profit -- even if the oil price falls. The Athena deal also includes the transfer of £12m in tax allowances from Dyas.
Some of the Fools on the Oil & Gas board have gone over Trapoil's figures with a fine toothcomb -- their conclusions are worth reading.
No trap here
Trapoil's management team are experienced and appear good dealmakers who are astute at spreading risk and cost.
Its current net assets equate to about 29p per share, but its share of production revenues from the Athena field should increase that to at least 50p per share, with further benefits if any of its 2012 wells are successful.
This makes Trapoil's current price of about 28p look good value, if not plain cheap.
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