A high-risk small-cap oil company to watch

published 8 July 2010

BP shareholders may be suffering from gloom and anxiety. But elsewhere in the oil sector there is no shortage of excitement.

Last week, shares in Encore Oil (ticker: EO.) jumped by 50% after it reported a major oil discovery in the North Sea. It's up 227% in a month great news for investors who own these penny shares. A move like that would turn a small £500 stake into £1,635.

Another good mover was Dana Petroleum (ticker: DNX), which focuses on what it calls "high impact opportunities" in Europe and Africa. This one-time penny share has jumped 32% to £14.50 in a week on a bid approach from the Korean National Oil Corporation.

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And shares in Falkland Oil & Gas (ticker: FOGL) added 22% last week in anticipation of drilling results from its Toroa prospect. Yesterday, the company said results are being delayed until next week. So the waiting game continues and the excitement builds

How this oil junior could transform the economy of Nevada

Apart from some successful silver mining, Nevada is renowned for easy marriage and divorce, legalised gambling, and legalised brothels. But if McDonnell is right its economy could be transformed by oil.

Nevada lies on the Sevier fold-and-thrust belt. This is part of the continuous ribbon of mountains running from Alaska, via the Rockies, down through the US and all the way to the tip of South America. This is the type of geology that typically holds oil, but so far little effort has been made to explore Nevada. And there's a good reason for that: it's difficult to find.

The problem is that the oil-bearing sedimentary strata have first been covered with volcanic debris and then shattered by tectonic eruptions. Traditional seismic surveys deliver little except white noise, and few of the oil seeps provide any decisive evidence for prospectors.

That Nevada has oil is undisputed. Just ten miles away from US Oil's Hot Creek licence area, oil was found through wildcat drilling at Railroad Valley. By 'wildcat', I mean drilling in a hitherto unexplored area. It's high risk, but with potentially huge rewards if a strike is made.

At Hot Creek, 50 million barrels have so far been produced. Just a little further to the east, the privately owned Wolverine Oil & Gas discovered the one billion-barrel Covenant field in 2004.

Industry experts believe that these discoveries are being fed by a vast, deep oil reservoir and that Nevada could be sitting on at least 30 billion barrels of recoverable oil. The problem, though, is locating it.

How US Oil aims to tap the Silver State's vast reservoir of black gold

What US Oil has done is to conduct an intense programme of geochemical tests on just one small area, while also employing a technique called 'passive seismic'.

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Passive seismic has emerged from Russia, where it was developed as means of detecting submarines. It is now marketed by the Italian firm Geodynamics which describes it as "the next global standard for direct hydrocarbon detection in exploration and in oil field monitoring".

Let me just explain the jargon. 'Active seismic' is a technique which bounces signals off sub-surface rock faces and then measures the rebound. 'Passive seismic', though, listens to the low-frequency sound generated by the earth itself. It's a technique that has already been used successfully in the Middle East as well as by AIM-quoted Victoria Oil & Gas (ticker: VOG).

The idea is that different types of underground materials and structures produce different sounds. Oil has a unique 'signature'. And, according to US Oil, when you detect this signature there is an 80% probability that you have found oil.

McDonnell calls this "listening for oil". But while the technique can discover the existence of sub-surface oil, it cannot detect its exact depth. So US Oil has been combining the results of its passive seismic surveys with well-log data and gravity gradiometry (which measures anomalies in the earth's subsurface and is useful in targeting mineral deposits). The results are so consistent that McDonnell is confident that drilling later this year will find oil.

Last week, at the same time as raising £280,000 through a placing of new shares at 5.5p, US Oil made three very interesting claims about its Eblana project in Hot Creek:

its source rock is five times richer in hydrocarbons than the Covenant field;

its site has a porous and permeable reservoir rock, through which oil should flow;

the potential oil in situ is of a low viscosity.

McDonnell described the signs the company has seen so far as 'encouraging'. All that is left is for US Oil to position the drill rig, start it up and keep all fingers tightly crossed. A drilling campaign is likely to start in September.

US Oil has identified three drilling targets any one of which, according to McDonnell, could be a "bonanza". Well, it's too early for anyone but the most risk-tolerant speculator to get too excited about this one. But it's certainly a very interesting story and one to watch!

This article is taken from Tom Bulford's free twice-weekly email The Penny Sleuth

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Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.