Gamble of the week: A punt on British shale gas

published 31 January 2014

Investing in smaller companies can be fun as long as you are aware that the risks are usually very high. For years the Alternative Investment Market (Aim) has been home to oil and mining companies that have promised great riches, but have often ended up burning investors with big losses.

If you are going to buy the shares of these companies, then you must be prepared to lose a large chunk if not all of your money. However, while there's a large speculative element at play here, not all Aim-quoted oil companies are akin to spinning the roulette wheel.

Take IGas Energy (Aim: IGAS), Britain's largest onshore producer of oil, for example. With reserves of around 20 million barrels, the company is producing and selling oil (and some gas) and is actually profitable, which gives some underpinning to the share price.

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The prospects here are very reasonable, as production rates are being boosted by better drilling techniques. The company also has the potential to make money from untapped conventional gas reserves.

Whether shares will see a spike or not depends on the potential of IGas to find and extract lots of shale gas and coal-based methane also known as coal-bed methane, a form of natural gas extracted from coal beds. IGas has exploration licences for shale gas in northwest England, which could transform the value of the company.

Local communitiestend not to want this kind of thing going on in their back yards and so put up stiff resistance.

The government, though, is beginning to put its weight behind the shale gas industry as a way of sorting out Britain's energy problems, and this could help the likes of IGas. The company itself is making an effort to reassure local communities.

It's also positive that big gas companies such as Centrica, GDF Suez and Total are putting money into British shale gas. These companies will be very important to developing shale gas fields if meaningful amounts of it are found.

The fact that IGas is generating its own cash means that it's unlikely to need fresh money any time soon. The shares have already had a strong run, but if you are looking for a punt on shale gas being developed in Britain, then IGas is probably your best bet.

Verdict: a speculative buy

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.