For those not afraid of a bit of risk, oil and gas producer and explorer Entek could be right up their alley.
At 15 cents the company has a market cap of almost $80 million and is described by one invested fundie as “a smaller version of Sundance Energy”.
Sundance (ASX: SEA) is a shale oil and gas producer and also has operations in the “Niobrara” shale region in the US. Niobrara refers to a large and very old inland sea that extends from Texas up through Colorado and Wyoming towards Canada.
Even after recent weakness, Sundance's shares have increased five-fold in the past year, but this relates to its activities in the Bakken region located to the east, primarily in North Dakota. This is shale gas technology has been most successful. Niobrara has much potential, but has had little success thus far.
The experts say that the engineering technology is improving all the time. For the optimists, the real clue to value in Entek is the heavyweights involved in production in locations close to Entek, which is in the Green River Basin in Wyoming, Utah and Colorado. These include Shell, Andarko, Questar, Double Eagle Petroleum and Gulfport Energy.
Broker Euroz's 27 cents a share valuation for Entek is based on a re-rating of its exploration “acreage” from $1500 per acre to $3000. This in turn relies on one of these heavyweight companies extracting oil in large quantities nearby to Entek's operations.
Of course, if Entek (ASX: ETE) can extract oil AND it can find a big partner, its valuation will skyrocket. You just have to look at Aurora Oil and Gas (AUT), which has a market cap of $1.3 billion to see what is possible.
As with any high risk exploration project, it is at a very early stage. Entek is due to start drilling five wells later this month.
Entek had a poor 2010, having been in an unsuccessful joint venture with US based New Frontier, which was as cash strapped as Entek. Fast forward to today and it has the cash. This month it announced an oil discovery in its well in the Gulf of Mexico and in April it raised $25 million in equity.
The elephant in the room for shale gas production is the environmental damage that was highlighted in the documentary “Gas Land” which was mainly set in New York State. According to analysts, this is not an issue for companies in the Niobrara or Bakken regions, because the populations are much lower and the exploration is mainly for oil and not gas, which can find its way into water systems much more readily.
One thing is for sure, though. When Entek does start “fracking” this month, most shareholders probably won't be thinking about the environmental impact.
Onthehouse could be ontherocks
Some fundies are looking at the 15 per cent fall in the onthehouse share price with a sense of “I told you so”.
The property website raised $55 million with an issue price of $1, and listed last Friday. Its shares were trading at 85 cents prior to today, giving it a market cap of just under $70 million.
“We thought it was overpriced and it had a business model that required the industry to change…which is very hard when you have such a dominant player as REA,” says Adam Smith Asset Management's Peter Mouatt, one of the three fundies we spoke to about the stock.
REA Group (ASX: REA) is the owner of realestate.com.au and has a market cap of over $1.5 billion.
The idea for onthehouse is to provide market data for free to anyone viewing its website, which is the innovative element to its business case.
The money raised was used to purchase two software businesses that give it access to the data filed by real estate agents when they take deposits on houses and then put those monies into trust accounts.
Estate agents pay a licence fee to use this software and the business generates about $20 million a year.
The core business, the onthehouse.com.au website, makes its money mainly from referral fees (at about $30 a pop) from estate agents and other providers to the property market, like plumbers, banks and insurers. It is estimated that the On the House website was losing over $2 million a year prior to the listing, which leads some to think that the aim of the raising was to provide an exit for seed investors.
On the Monday after the listing, one of the brokers to the float, RBS told clients that it believed most of the selling was “from early seed investors”.
Before these sales, the seed investors ended up owning close to 13 per cent after the float
Onthehouse chairman Jim McKerlie says that the vast majority (80 to 90 per cent) of the seed investors' holdings are “restricted” and not able to be sold for a period.
Everything has a price, they say. And just how far the share price has to fall before the naysayers become true believers, remains to be seen.
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