A high-risk small-cap oil company to watch

By Tom Bulford Jul 08, 2010

Tom Bulford

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BP shareholders may be suffering from gloom and anxiety. But elsewhere in the oil sector there is no shortage of excitement.

Last week, shares in Encore Oil (ticker: EO.) jumped by 50% after it reported a major oil discovery in the North Sea. It's up 227% in a month – great news for investors who own these penny shares. A move like that would turn a small £500 stake into £1,635.

Another good mover was Dana Petroleum (ticker: DNX), which focuses on what it calls "high impact opportunities" in Europe and Africa. This one-time penny share has jumped 32% to £14.50 in a week on a bid approach from the Korean National Oil Corporation.

And shares in Falkland Oil & Gas (ticker: FOGL) added 22% last week in anticipation of drilling results from its Toroa prospect. Yesterday, the company said results are being delayed until next week. So the waiting game continues and the excitement builds…

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But today I want to bring you another oil story that I heard last week. As you'll see, this one is very intriguing. It concerns US Oil & Gas (ticker: USOP). US Oil & Gas has its shares traded on PLUS Markets, the small cap stock exchange that competes with the London Stock Exchange's AIM.

If the optimism of chief executive Brian McDonnell is anywhere close to being justified, then shareholders of US Oil & Gas are in for an exciting few months.

Last week McDonnell told me about a new exploration technique that he believes will solve the hitherto insoluble challenge posed by the geology of Nevada.

How this oil junior could transform the economy of Nevada

Apart from some successful silver mining, Nevada is renowned for easy marriage and divorce, legalised gambling, and legalised brothels. But if McDonnell is right its economy could be transformed by oil.

Nevada lies on the Sevier fold-and-thrust belt. This is part of the continuous ribbon of mountains running from Alaska, via the Rockies, down through the US and all the way to the tip of South America. This is the type of geology that typically holds oil, but so far little effort has been made to explore Nevada. And there's a good reason for that: it's difficult to find.

The problem is that the oil-bearing sedimentary strata have first been covered with volcanic debris and then shattered by tectonic eruptions. Traditional seismic surveys deliver little except white noise, and few of the oil seeps provide any decisive evidence for prospectors.

That Nevada has oil is undisputed. Just ten miles away from US Oil's Hot Creek licence area, oil was found through wildcat drilling at Railroad Valley. By 'wildcat', I mean drilling in a hitherto unexplored area. It's high risk, but with potentially huge rewards if a strike is made.

At Hot Creek, 50 million barrels have so far been produced. Just a little further to the east, the privately owned Wolverine Oil & Gas discovered the one billion-barrel Covenant field in 2004.

Industry experts believe that these discoveries are being fed by a vast, deep oil reservoir and that Nevada could be sitting on at least 30 billion barrels of recoverable oil. The problem, though, is locating it.

How US Oil aims to tap the Silver State's vast reservoir of black gold

What US Oil has done is to conduct an intense programme of geochemical tests on just one small area, while also employing a technique called 'passive seismic'.

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Passive seismic has emerged from Russia, where it was developed as means of detecting submarines. It is now marketed by the Italian firm Geodynamics which describes it as "the next global standard for direct hydrocarbon detection in exploration and in oil field monitoring".

Let me just explain the jargon. 'Active seismic' is a technique which bounces signals off sub-surface rock faces and then measures the rebound. 'Passive seismic', though, listens to the low-frequency sound generated by the earth itself. It's a technique that has already been used successfully in the Middle East as well as by AIM-quoted Victoria Oil & Gas (ticker: VOG).

The idea is that different types of underground materials and structures produce different sounds. Oil has a unique 'signature'. And, according to US Oil, when you detect this signature there is an 80% probability that you have found oil.

McDonnell calls this "listening for oil". But while the technique can discover the existence of sub-surface oil, it cannot detect its exact depth. So US Oil has been combining the results of its passive seismic surveys with well-log data and gravity gradiometry (which measures anomalies in the earth's subsurface and is useful in targeting mineral deposits). The results are so consistent that McDonnell is confident that drilling later this year will find oil.

Last week, at the same time as raising £280,000 through a placing of new shares at 5.5p, US Oil made three very interesting claims about its Eblana project in Hot Creek:

• its source rock is five times richer in hydrocarbons than the Covenant field;
• its site has a porous and permeable reservoir rock, through which oil should flow;
• the potential oil in situ is of a low viscosity.

McDonnell described the signs the company has seen so far as 'encouraging'. All that is left is for US Oil to position the drill rig, start it up and keep all fingers tightly crossed. A drilling campaign is likely to start in September.

US Oil has identified three drilling targets any one of which, according to McDonnell, could be a "bonanza". Well, it's too early for anyone but the most risk-tolerant speculator to get too excited about this one. But it's certainly a very interesting story and one to watch!

• This article is taken from Tom Bulford's free twice-weekly email The Penny Sleuth  

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  • 1. Aidan Christopher Ulrich Powlesland

    (08 July 2010, 01:30PM)  Complain about this comment

    Tom Bulford says of Falklands Oil and Gas,

    "...added 22% last week in anticipation of drilling results from its Toroa prospect. Yesterday, the company said results are being delayed until next week. So the waiting game continues and the excitement builds…"

    I enjoyed Tom's use of the word "excitement" given that the stock fell 13% in the first three days of this week prior to the above sentences being written.

    If I were Tom I would remind the reader that if the company announces a dud well we might look forward to the "excitement" of a 50% fall in price next week but then I lack Tom's remorseless optimism.

  • 2. Aidan Christopher Ulrich Powlesland

    (08 July 2010, 01:41PM)  Complain about this comment

    Concerning Falklands Oil and Gas on Tuesday 06-07-10 Tom Bulford wrote "Yesterday, the company said results are being delayed until next week. So the waiting game continues and the excitement builds.."

    If the excitement Tom refers to is the 1.5% fall in price on Monday and Tuesday (prior to his writing the word "builds") then that was nothing in comparison to the excitement of the 9% fall to the low on Thursday 8th July morning. As for the perhaps 50% fall we are going to see next week if the well results are announced and the well is dry , I wonder if Tom's optimism will extend to calling that "excitement building" too?

  • 3. gary mason

    (08 July 2010, 02:21PM)  Complain about this comment

    the ticker symbol you recomended usop are you sure thats the ticker symbol and not usog????????? as on yahoo finance nothink comes up on usop...

    thanks g. mason

  • 4. Brian Blandford

    (08 July 2010, 03:02PM)  Complain about this comment

    As a geologist I am sceptical about 'passive seismic' but look forward to being proved wrong. On the other hand I am much more confident about the technique known as CESM which offers a clear yes/no result regarding the presence or not of hydrocarbons.
    Now Dr Pierre Jungels a geophysicist PhD by background and the Chairman of Rockhopper Exploration was previously the Chairman of OHM (Offshore Hydrocarbon Mapping) which is the leading provider of this specialised technique. Dr Jungels role when he was Chairman of OHM was to proselytize about this technology and the results it delivers to big oil company Exploration Directors who tend to be notoriously conservative in their thinking. Eventually however I suspect he decided he could make more money by finding an oil company where he could apply the technique himself so convinced is he of it's effectivness. Surprise, surprise Rockhopper has run CSEM over all it's Falklands prospects prior to drilling them. And guess what?

  • 5. Brian Blandford

    (08 July 2010, 03:04PM)  Complain about this comment

    Their very first well strikes commercial quantities of oil! CSEM is a proven technique and he would not be adding to his already substantial holding in Rockhopper if he didn't know exactly what he is doing and believe there will be further good news to come. Expect further very encouraging news when details of Rockhoppers next prospect Ernest are released and dont be surprised if they achieve a 100% success rate on every well they drill.

  • 6. conrad hughes

    (08 July 2010, 04:56PM)  Complain about this comment

    brian hi are you in to des, fog,bor,rkh xel be intrested in your thought as i am new to oil i am needing some help .. do you think the cesm hit rates are going to be 100% thats going some

  • 7. SJ

    (08 July 2010, 06:54PM)  Complain about this comment

    I don't mind a bit of enthusiasm from Tom. The share forums have been utterly miserable on FOGL of late, literally talking themselves into scenarios of failure before official news! It's like everyone's a FOGL employee of the month right now, telling tales of woe. So a little positive never goes amiss in all the doom clouds. I'm in FOGL and RKH and hope both do well. I'd like to request Tom does a write up on Borders and Southern in future because it's such a mysterious company and no-one can find out anything about its plans. That would be great.

  • 8. AH

    (13 July 2010, 10:47PM)  Complain about this comment

    SJ Register on LSE, scan Borders news history and you`ll see all you need to know about the company. Unlike a lot of oil explorers, they don`t need the help of an oil major, they have the cash to fund their own drilling program. A good board of directors who don`t make misleading announcements. Take a look at their website. I got into BOR some time ago and it has weathered nicely making new highs despite traders profit takings. The next announcement will be procurement of a rig which should (hopefully) be announced soon and ready for the good weather down there. Risk is just the same as FOGL yet FOGL might just produce a better result(s) and this latest result will be all forgotten. I like Borders, good board, financed sensibly, no fuss, no muss. I have a good feeling about this one, it ticks all the boxes for me. Maybe Tom is keeping this one for later.

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