Small Oil With Big Potential

Published in Company Comment on 20 April 2012

This small oil exploration company represents a good risk-reward ratio.

Small oil exploration companies with big potential are ten a penny. Deciding which will hit and which will miss is impossible. So all private investors can do is weigh the risk of the prospects and the extent to which they're proven against the potential rewards. Each situation is different.

Some you get spectacularly right, others miss the targets despite extensive seismic work. One I've bought into recently with money I can afford to lose is New World Oil and Gas (LSE: NEW), an AIM-listed investment company focused on investing in oil and gas, currently in Belize and Denmark.

The combination of an AIM listing and focus on oil exploration means widows, orphans and others for whom capital preservation is paramount should stop reading now. New World has some very interesting prospects, but it's entirely possible that they'll come to nought.

But it looks an interesting investment nonetheless. At 8.8p per share, New World's market cap is just £21.5m. As is often the case, its prospects are enormous if successful.

The company's stated intention is to concentrate on late-stage exploration and development projects in countries with favourable fiscal terms.

Best communicator out there

I previously mentioned the commendable efforts made by New World in communicating effectively with shareholders. Full credit where it's due here, this has to be one of the best companies out there for sharing information with private investors.

In December, New World gave us a very upbeat update on its competent person's report (CPR) concerning two drilling prospects at its Blue Creek project in Belize. This raised the prospects of drilling success to one in five. Blue Creek is the company's real biggie, but do bear in mind that one-in-five chance of success. If it comes off, though, the expected monetary values for the prospects are $1.09bn and $440m.

In February, New World took an additional 10% working interest in Blue Creek in return for additional seismic work on the prospects. As a result, before the company decides whether to drill or not, it will have earned a 35% interest in the project.

More cautious investors may deem it wiser to wait for the further (and imminent…) CPR and/or actual drilling results before investing. Often, small-cap oil companies' share prices take a while to catch up with events.

From the horse's mouth…

The December CPR and other issues are explored in detail by in three videos. One of these shows executive directors George and Peter Sztyk discussing the prospects in Belize, and interestingly talks about how and why the country is a good place to invest. Another looks at the company's strategy with William Kelleher, chairman & CEO, and previously successful creator of value in Victoria Oil & Gas (LSE: VOG), and there's also an update on the Belize operations from 26 March.

We also get to hear from private investors, who tell us how many shares they've bought and why. This offers a very welcome perspective from people who've put their money where their mouths are.

Last month, New World told us it had raised £8.5m at 8p per share, which it said would leave the company in a much stronger position to continue negotiations with potential farm-in partners. It would also enable the company to meet its current commitments in both Belize and Denmark, and to take advantage of any suitable opportunities that meet our investment criteria.

And earlier this week, New World completed a farm-out agreement with Danica Resources to acquire an initial 12.5% but up to an 80% working interest in a highly prospective onshore and offshore licence in Southern Denmark. This looks like a sensible move from a steady company that appears to be nicely balancing risk and reward overall.

And that's all we can do as investors in such exploration companies; balance risk and reward -- and never invest more than you can afford to lose.

We cover these types of investments – and make specific share recommendations – in Motley Fool Share Advisor, a premium investing service designed to help you preserve and grow your wealth. If you'd like to see for yourself how we can help, start your 30-day free trial today. There's no obligation to subscribe.

More from David Holding:

> David owns shares in New World Oil and Gas.

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