Neon lights up the investment sky for Under the Radar02.12.2011

CaToday's Fairfax column shows one stock we will be keeping an eye on: Neon Energy. It has not one, but two highly prospective projects in the oil and gas space and is well funded.

This is contrasted to Jupiter Energy. Although this stock has loads of promise, because it needs cash, investors sense weakness. And that can be fatal.

It also talks about the difficulties facing companies that need to raise cash - which hardly needs pointing out. But it does show some examples. Can you believe that the biggest capital raising this year is a small cap, Collins Foods?

Neon Energy set to shine

Richard Hemming

December 2, 2011 - 9:51AM

For those interested in speculative oil and gas plays, Neon Energy is ticking the right boxes. Then again, if its share price heads further north, it will definitely raise the curiosity of every punter.

The company is exploring on-shore in California and off-shore in Vietnam. On Thursday it announced some intersections from its Paloma Deep prospect, in the San Joaquin Basin, California.

The results, “are the best possible that (Neon) could have hoped for”, according to Johan Hedstrom, the oil and gas man at Bell Potter.

Neon is currently producing oil out of the North San Ardo oil field, in the Salinas Basin, also in California. It has a reserve base of 3 million barrels of oil, generating about $9 million in cash a year. It also has $23 million of cash in the bank.

It is using this to grow the business, and is investigating possibilities in shale oil and gas extraction. And Paloma Deep is one of those prospects, with both conventional and shale potential.

Hedstrom says that the discovery could be us much as 30 million barrels of oil, 10 times bigger than its producing assets.

The company is working to prove up its find. If it is economic, the time to production should be very short - only a matter of months. This is because the prospect is located near Bakersfield, where oil fields were first found and developed in California, leading to the subsequent production of billions of barrels of black gold.

Neon’s shares (ASX code NEN) are 44 cents going in to today, and have only moved up a few cents since the announcement, which amazes Hedstrom: “This is a very exciting stage for the company and it’s really too small a share price rise for the potential.”

Part of the reason that investors don’t have Hedstrom’s optimism could be that we haven’t got flow rates (how many barrels a day can be produced) from the Paloma Deep conventional targets, and the shale targets are speculative. Shale potential is still very new in California, unlike the Midwest, USA.

Neon has said that the shale intervals at Paloma Deep appear to be low in clay, are brittle and have natural fractures. Doubts will remain until it shows economic viability, which should occur in the next six weeks.

Hedstrom’s valuation of $1 was done prior to the Paloma discovery. The Californian assets only account for 40 cents of the total. The majority relates to the company’s Vietnamese ventures.

The company has two exploration licences off the coast of Vietnam, the prospects of which can only be described as huge. Based on reports earlier this year, one of the prospects has the potential for 14 trillion cubic feet (TCF) of gas.

To give you an idea how big this is, when Woodside Petroleum first started producing from the North West Shelf it had a reserve base of 12TCF.

At this point, Neon is in talks with one of the big guns of the oil and gas world in order to farm some of the project out. This could mean it reduces its 50 per cent holding to 25 per cent, but doesn’t spend anything on its development.

It could be as soon as Christmas that we hear what a big player like Chevron thinks of its prospects.

Alliance: “Second biggest” float of the year pulled

As this column wrote last Friday, the float for fly-in fly-out airline Alliance Aviation was hitting more turbulence than the current Qantas chief would at a Transport Workers Union meeting.

It appears that the float, and the $100 million plus capital raising to be arranged by Credit Suisse, has been pulled… for the time being anyway.

You know it is a bad year for investment bankers when the two biggest IPOs of the year are both small caps - stocks with market caps slated to be less than $250 million. And it’s an even worse year when the first one, Collins Foods (CKF), has proven to be a disaster for initial investors, and the other one is pulled.

Companies that need to raise cash are in all sorts of problems.

Jupiter losing orbit

Your intrepid columnist spoke to Jupiter Energy’s chairman Geoff Gander, while his company’s shares were in free fall. The would-be Kazakhstan oil and gas producer has a great deal of potential, having been granted two production licences. But at 45 cents, its shares now stand at just over a third of where they were in March this year.

Jupiter (ASX code JPR) has started trading on the AIM market in London this month, but has not raised the $30 million or so investors anticipated it would need.

Gander, who in another life was a Perth-based IT entrepreneur, says the company could exist without raising money with its $10 million of cash, but the long and the short of it is that it won’t go anywhere, unless it gets its hands on more dough.

“It’s a long road to Cairo and (not raising money) is probably not optimal, but it’s pointless to raise large amounts at the current market cap. It would be far too dilutionary,” he says.

Double-discount and more

Another company straining to raise capital is Hillgrove Resources (ASX code HGO) a South Australian copper developer. At 18c, its shares have halved in the past eight or so months. Radar understands it needs to raise upwards of $20 million to complete its development, but hasn’t been able to.

It must be noted that some capital raisings are actually occurring, but they are at what some refer to as “a double-discount”. This means there is a discount because the market knows it has to do a capital raising, and then when there is a capital raising, it needs to do a discount to attract investors.

But even this isn’t enough to spark a post raising share price bounce. This week junior iron ore miner Northern Iron (ASX code NFE) announced it had raised $20 million at 64 cents a share. Its shares now trade at 66 cents, a steep discount to their 12-month high of $2.09, reached back in February.

At the very least this means that many investment bankers won’t be getting their Christmas bonuses. Even the one percenters can feel pain.

About the Author

Caroline Mark

Caroline is the publisher of Under the Radar Report. She has a diverse background, from producing financial publications, to fundraising and marketing.

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