The oversubscribed £10m placing of Anglo African Oil and Gas plc last week, an introduction to the stock market facilitated by finnCap, highlights an increasingly buoyant fundraising environment enabling companies to capitalise on the growing confidence in the oil and gas sector. The company will use the cash to acquire Petro Kouilou, with a plan to increase production six times of what the field in Congo is currently producing, demonstrating a strong start for the company.
The flotation of Anglo African sits alongside those of Diversified Gas and Oil (DGO) and the comparatively more modest IPOs of Saffron Energy and Eco Atlantic Oil and Gas. Global Energy Development, now trading as Nautilus Marine Services, also completed a successful reverse takeover and raised over $10m as another example of the uptick in capital raising activities of smaller companies. The trend to float on the Alternative Investment Market (AIM) specifically however can be attributed to certain key drivers which are threefold.
The first is a focus on production growth stories, such as Anglo African, and the development of high-margin barrel projects through maximising the potential of existing reserves and confirmed discoveries. The second is the monetary incentivisation in the form of an attractive dividend policy now being offered by many companies. DGO, for example, is offering its investors exposure to the US energy market through its policy. The oil & gas industry hasn’t previously been known for returning money to shareholders so this is a welcome development to those seeking to buy in to the sector. Finally, management remuneration is playing a part in maintaining investor confidence. Remuneration packages that are determined by meeting production targets have been especially helpful in getting the attention of institutional investors.
Following a doubling of the oil price in 2016 after the destabilising downturn in the oil market which resulted in weak balance sheets, oil and gas companies with operations in a range of geographies are turning their heads towards AIM in an effort to find growth and reignite investor interest. To demonstrate, there were 58 new entrants and re-admissions to AIM in 2016; 5 were in the oil & gas industries and raised £194m combined. This plays well into the fact that after mining, oil and gas was the best performing sector in 2016 overall.
The Chancellor this week announced plans in the Budget to revive the North Sea oil and gas industry through exploiting remaining reserves and making asset transfers easier. Oil and Gas UK also called for an extension to investment allowances to support activity in region with production expected to rise from 1.73m BOEPD in 2016 to1.9m by 2018, according to its most recent business outlook. Based on a glance of activity and prospects, the future of the North Sea lies with small and mid-sized companies as new partnerships in the region have already begun to surface. But this view is not limited to the North Sea region alone. Rather, it is evidence of a wider global trend of the resurrection of smaller, niche oil and gas companies.
In summary, the outlook for the oil and gas sector looks positive, especially for companies that are benefiting from new contracts and improved margins. If the rise in commodity prices stay at current levels, costs are sensibly managed and there is a commitment to efficiency, more and more oil and gas companies may see a broader range of investors allocate more of their capital to the sector. One should therefore expect to see AIM getting busier with ITFs over the next year or so.
Dr. Dougie Youngson, is an oil and gas analyst, with finnCap a British investment bank and a corporate and institutional stockbroker, based in London.
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