BRITAIN’S smallest oil and gas companies could be forced into the arms of their larger rivals in order to finance their drilling projects after the global economic woes finally caught up with the buoyant energy sector.
The number of oil minnows on the Alternative Stock Market (Aim) is expected to drop during the second half of the year through mergers and acquisitions activity, according to the quarterly Oil & Gas Eye Index report from accountancy firm Ernst & Young.
The report, which is published today, found that 81 per cent of Aim-quoted oil companies posted falls in their share prices in the three months to 30 June, wiping out the gains made in the opening months of 2012.
The difficulties in raising cash from shareholders on Aim is expected to drive firms into deals with larger, cash-rich rivals in order to fund their drilling projects, the accountants said.
Ally Rule, a partner in the firm’s Aberdeen office, warned: “The first quarter of the year saw glimpses of light at the end of the tunnel – but that now looks like the glow of an onrushing train of anxiety.
“Markets will remain volatile while the eurozone continues to seek a more permanent solution to the region’s problems. This will realistically result in the delay of development projects, unless companies are willing to court larger, better capitalised partners or acquirers.”
Investors shied away from the perceived risk of oil and gas companies during the second quarter and headed instead for more defensive stocks.
Oil and gas companies aren’t the only stocks to have reported trouble in tapping shareholders for cash. Last week, Dundee-based medical technology maker 3D Diagnostic Imaging reported that it would dump its Aim listing after being unable to raise the funding it sought.
Yet other groups have been able to raise cash on the junior market and the falls suffered by other stocks haven’t been as large as those reported by Aim-quoted drillers.
Ernst & Young said Aim’s oil stocks had underperformed the wider junior market and their larger FTSE 350 peers.
Rule added: “With the outlook for oil and gas initial public offering activity remaining difficult, the signs suggest there will be a net reduction in number of oil and gas companies listed on Aim during 2012.
“Compare that to other sectors on London’s junior market in the second quarter in which more than £150 million was raised from 12 new issues.”
Scottish players were among the small number of Aim drillers that raised cash during the second quarter. Aberdeen-based Xcite Energy raised £6.4m in a private placing with Global Resource Funding Partners to fund the development of its giant Bentley field in the North Sea, while Trap Oil – which bought Aberdeenshire-based Reach Oil & Gas last year – gained £4.3m through a share placing.
Scots firms were also in merger and acquisitions action before the summer, with Aim-quoted Nautical Petroleum being snapped up by Edinburgh-based FTSE 250 driller Cairn Energy, while Aberdeen’s Deo Petroleum was bought by Aim firm Parkmead, run by Dana Petroleum founder Tom Cross. Both deals completed this month.