Junior Oils Trust: Small cap oil stocks gearing up for a rally

Small-cap oil shares are enjoying a rebound in investor confidence as production cannot keep up with the pace of US demand, according to the Junior Oils Trust.

Junior Oils trust manager Angelos Damaskos says refining giants such as Exxon-Mobil and BP have reported drops in reserves and production while their cost base is rising. They say this confirms the view that the large oil fields of the world are in decline.

He says: “Those smaller, oversold companies that have been able to survive the last two years of bear markets and secure the backing of larger peers are likely to outperform the sector and the market.”

In addition, outages of production from countries such as Nigeria place further constrain on supply while Saudi Arabia now reportedly produces more than 10 million barrels a day, its highest ever level of production.

Damaskos adds: “There is potential for release of constrained production from politically unstable regions such as Iran and Iraq sometime in the future, but the timing and probability of this happening is questionable.”

Brent oil prices surpassed the $111 a barrel to a four-month high this week over concerns of unrest and in Egypt, which could further add to the supply disruption problems of the region. In mid morning trading today, Brent Crude was trading at $109.32 a barrel.

Damaskos believes the supply-demand outlook is likely to sustain prices well above their target floor of $100/barrel. 

Two stocks Damaskos tips and holds within the fund, which has fallen by some 8 per cent in the past 12 months, are Caza Oil & Gas and FAR Ltd. Recently Caza’s drilling results confirmed the production potential from its portfolio of properties and its shares re-rated by more than 20 per cent.

For its part FAR, managed to entice super-major Conoco Philips into an acquisition of a 35 per cent carried interest in acreage offshore Senegal. FAR will be carried through two wells up to a cost of $190m and will receive $9.8m for past costs. FAR shares rose by more that 40 per cent subsequent to the announcement.