Despite record high oil prices, attractive cash flow multiples and strong balance sheets, the average junior oil and gas company’s share price slipped one per cent in the second quarter of 2004 and two per cent in July and August, says a recent survey.
An analysis of the second-quarter financial and operating results of 79 junior oil and gas companies by Iradesso Communications Corp., suggests investors have not yet profited from the growing strength of the junior sector.
For the first eight months of 2004, the average junior’s share price lost three per cent while the S&P/TSX Canadian Energy Index, based on large-cap energy stocks, gained 11 per cent over the same period.
Iradesso, an investor relations firm based in Calgary, conducts a quarterly survey, the IQ Report, of Western Canadian companies that produce between 500 and 15,000 barrels of oil equivalent (boe) per day and trade on the TSX and TSX Venture exchanges.
“When you consider the strength of many junior oil and gas companies, it’s surprising that the share prices of juniors have yet to reflect the record high commodity prices,” said Peter Knapp, president of Iradesso. “Cash has been flowing into the sector.”
Iradesso’s survey shows that juniors are trading at historically low cash-flow multiples.
“When shares prices remain flat during a time of high commodity prices, the result is low multiples and increasingly attractive investment opportunities,” Knapp said.
Junior oil and gas companies also looked strong based on other parameters.
The average company in the sector increased its production from the first quarter to the second quarter of 2004 by 10 per cent. Luke Energy led the way with a 313-per-cent increase in production, followed by Geocan Energy (83 per cent), Galleon Energy (78 per cent) and Fairborne Energy (54 per cent).
While the sector as a whole managed to cut its total net debt by 29 per cent to $1.27 billion, this can be explained in part by companies exiting the category with higher debt than those joining the category.
Although high commodity prices are pushing up profits, 14 junior oil and gas companies lost money in the second quarter, due in part to the higher cost of doing business.
Operating expenses rose to $7.82 per boe in the second quarter of 2004 from $7.17 per boe in the first quarter. Average general and administrative expenses of $3.06 per boe in the second quarter of 2004 were 22 per cent higher than $2.50 for the first quarter.
