Gamble of the week: An innovative oil tech

Wildcat drilling is risky typically two out of every three wells are dry and each one can cost millions to drill. So any method that can improve this hit rate will be valuable to the oil and gas sector. ViaLogy's patented seismic QuantumRD system, originally developed at Nasa in the 1990s, offers to do just that.

Conventional seismic methods used by geophysicists aim to filter out noise to 'clean' the wave signals emitted from underground rock formations. But QuantumRD employs super-sensitive technology to search for anomalies in this discarded noise. This lets explorers pinpoint the exact location of deposits, determine rock porosity and gauge the percentage of oil to water.

ViaLogy's biggest challenge has been convincing the industry to adopt its breakthrough science. Despite its advantages, oil companies have been reluctant to deploy an unproven technology. However, attitudes are changing after a series of positive demonstrations and discoveries.

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In April, the chairman, Terry Bond, announced that ViaLogy had won a contract with Chevron to analyse 3D seismic data in the US Delaware Basin. That award comes hot on the heels of its success in mapping complex porosity in the Permian region. Similar agreements have been sealed with the likes of India's national oil company and Atascosa Exploration. Under a deal with Atascosa, ViaLogy will receive a 5% royalty on all the oil lifted from the field after deducting drilling and production expenses.

ViaLogy (Aim: VIY)

I think the firm could now be in the right place at the right time. The oil industry spends tens of billions of dollars each year on exploration and ViaLogy would only need to win a small piece of this action to earn a ton of money. My gut feel is that it should be able to achieve turnover of £30m by 2015. For a software company on a three-times earnings multiple and discounted back at 15%, that generates an intrinsic worth of 6p per share.

ViaLogy is not without risk. Further delays may occur and better technologies could be developed. With little revenue to speak of, the firm burnt through £2.6m of cash in the six months to September. A £1m share placing in January was needed just to cover working capital requirements.

However, if ViaLogy continues to win new work, it will remain an exciting, albeit volatile, investment opportunity.

Rating: SPECULATIVE BUY at 4.1p (market capitalisation £35m)