Situation 'nearing critical' as oil and gas juniors struggle to raise cash

Published on Sunday 16 November 2008 20:52

OIL and gas companies on London's junior stock market have endured the worst quarter since 2004, new analysis shows, after being hit by unusual selling patterns, difficulty raising debt and plunging commodity prices.

Ernst & Young's Oil & Gas Eye Index, which monitors all Aim-listed companies in the sector, showed a 44 per cent fall in the three months to the end of September, the worst since the index was created in 2004.

Alec Carstairs, oil and gas partner at E&Y, said firms had been hit regardless of their size: "In just three months, all the gains made since mid-2004 had been wiped out in a steep downward trend, which has continued into the fourth quarter of 2008."

Many oil and gas firms on Aim are almost entirely exploration plays, with no revenue or cash flow of their own, meaning the ability to raise cash is essential. Carstairs said the current difficulties meant many might now be under threat. "The situation for many oil and gas juniors is nearing critical," he warned.

"The doors to equity and capital are fast closing and the importance of cash cannot be underestimated. A number of companies are already beginning to warn of uncertainty as to their ability to continue as a going concern."

Scotland is home to a number of Aim-listed companies in the sector, most of which have been punished in recent months. Kevin Hart, the chief executive of Edinburgh-based explorer Bow-Leven, hinted recently that its market valuation was making it difficult to secure a deal to develop part of its Cameroon assets.

"It's very difficult to sell something for ten that the market values at one," he told The Scotsman this month, as BowLeven announced it was seeking permission to raise hundreds of millions of pounds.

BowLeven, which focuses on exploration in West Africa, has seen three-quarters of its market valuation wiped out since a recent peak this year on concerns it may be forced into a fire-sale of its assets or become prey to an opportunistic acquirer.

E&Y said the fall in share prices had been exacerbated by institutions reportedly liquidating their positions. "This retreat by some institutional investors from the sector represents the loss of a key source of funding for Aim's early-stage explorers."

Jon Clark, a director in E&Y's oil and gas team, said the market difficulties were likely to hasten consolidation in the sector.