Gamble of the week: A punt on oil exploration

If you fancy a punt on the stock market, there’s no shortage of places to put your money. These days you’ll find a lot of shares in the oil and gas and mining sectors. Most of these companies are looking for commodities in the hope that they will make them and their investors rich. Some will succeed, but most of them will wither on the vine if history is any guide.

This Aim-listed energy stock could be among the winners. What makes this company interesting is that it is the latest venture of Peter Levine – a man who has hit the oil jackpot once before and is hoping to do so again.

Levine founded Imperial Energy in 2004 with the aim of making lots of money from old Siberian oil fields. The shares floated at 25p and soared to 1,250p when the company was taken over in 2008.

Now Levine is chancing his arm in Paraguay with President Energy (Aim: PPC), in which he has a stake of 19.2% (around £24m). The company has exploration rights in the Chaco area in the north of the country. This area is home to a potentially large source of oil and sits next to adjacent oil fields in Bolivia and Argentina.

Consultancy company RPS has undertaken a detailed study of President’s eight oil fields there. Based on a probability of hitting oil of between 13.4% and 26.8% (which seems quite conservative), RPS reckons that President Energy’s share of the potential reserves could be equivalent to 130 million barrels of oil.

If these fields were successfully developed at the same time, then they could be worth $2.4bn (£1.4bn) today compared with President’s current valuation of £126m.

President Energy share price chartOf course, President may not find any oil at all. There’s also the risk of investing in Paraguay. Investors might worry that there is a risk of the government nationalising the company’s assets, as the Argentinian government did with Repsol’s in 2012.

That said, Paraguay seems quite friendly to foreign companies at the moment, offering low tax rates, and is keen to develop its own energy sources.

There’s also the risk that President will keep asking shareholders for more money. It did so twice in 2012 and has recently tapped them for a further £31m in order to finance its drilling projects. This has caused the share price to fall by nearly a third in recent weeks.

Drilling in Paraguay is scheduled to begin in May. It will be a while before we know whether Levine’s gamble has paid off. At 32p the shares look to be a very risky punt.

Verdict: a speculative buy

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

MoneyWeek magazine

Latest issue:

Magazine cover
Why you should worry about Greece

...and how to protect your wealth

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

From ADRs to Z scores – all the terms you wish you understood, but were too embarrassed to ask about.

Gervais Williams: if you want real dividend growth, buy small-cap stocks

Merryn Somerset Webb interviews small-cap stock expert Gervais Williams about how penny shares outperform blue chips 'again and again'.


Which investment platform is the right one for you?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from, with varying fees and charges. Find out which is best for you.


7 July 1753: The British Museum is established by Act of Parliament

On this day in 1753, Parliament passed the British Museum Act, providing for a public lottery to raise £300,000 to build a home for the nation's treasures.


Anatomy of a Grexit: how Greece would go about leaving the euro

Jonathan Loynes and Jennifer McKeown, economists at Capital Economics, look at the key issues and challenges of a Grexit, how it might be best managed, and set out a timetable for change.