Why I have...increased my holding in Nighthawk Energy (HAWK)
28 January 2010
CELEBRATED Roman poet Virgil once wrote that ‘fortune favours the brave’ – a rip-roaring call to arms adopted by fearless adventurers ever since. Those adventurers that count stock-picking small cap natural resource companies among their pastimes should remember, however, that Virgil also pointed out that ‘the greatest wealth is health’.
Anyone buying and selling small cap shares over the last 18 months will be all too aware of the health risks involved. Despite the claims of huge value in AIM stocks by brokers and fund managers alike, making the right call is far from straight forward.
SmallCapNews is now inviting investors to tell us which way their cash is going and why. In the first salvo, one plucky investor tells us why he’s backing perennial oil and gas favourite Nighthawk Energy as a jolly good bet.
Why I have...increased my holding in Nighthawk Energy (HAWK)
I bought a tranche of Nighthawk Energy shares on the back of the reserves update on 20 July 2009, and was subsequently dismayed to see that HAWK placed new shares at 35p just a few days later. Nevertheless, as I had bought in for the Jolly Ranch upside I convinced myself to hang in there.
I increased my holding earlier this week following HAWK's update of 26 January 2010, and here's why:
The Jolly Ranch project is HAWK's flagship project onshore USA; a 50% share in 370,000 acres, 246,000 of which are estimated by Schlumberger to have oil in place of 1.462 billion barrels. In July 2009, house broker Westhouse Securities applied a 20% recovery factor to that oil in place number, giving HAWK (potentially) a net 146 million barrels recoverable. The remaining acreage was not evaluated by Schlumberger so there is further upside potential.
Excluding everything else in its portfolio HAWK's current market capitalisation of c.£107 million is valuing Jolly Ranch at approximately $1.16 per (potential) barrel.
With 15 wells now drilled, including two water disposal wells and one horizontal section, the company says its understanding of the project has "evolved". Hopefully this means lots of quick cheap vertical wells in the future rather than time consuming and uncertain horizontal sections.
In February, we are promised a full project status report encompassing an update on all wells, production profiles and a review of the ongoing 3D seismic programmes. With in-field infrastructure installed, I am hoping to see a real uptick in production during the first half of this year.
Taken together this all suggests to me that management has acknowledged that production and proved reserves are really very important in demonstrating that HAWK has a world class asset in Jolly Ranch.
The cloud on the horizon is HAWK's propensity to raise new funds at a price that institutions cannot resist. If the company needs new money to take the assets forward so be it but production income will at least help reduce HAWK's reliance on further funding.
I may have got my timing wrong again but I am more confident in the Nighthawk story now than back in July so if I have to hold for a while I am (currently) happy to do so. Bumbling
If you’re an active private or institutional investor and want to air your views on why now is a good or bad time to buy or sell shares in a small cap natural resources company, send us your thoughts.
We’ll respect anonymity and probably edit swearing, ramping and other abuses.
To respond to this post or send you views on a new company, email Ben Hobson at ben@smallcapnews.co.uk
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