Three great reasons to buy oil explorers now

published 29 May 2012

On Friday there was some remarkable news for one penny share oil explorer: for years, US Oil & Gas has been prospecting for oil beneath the Nevada desert - and they just hit their payload.

The company reported that the Eblana No1 exploration well being drilled in Nevada reached a depth of 7,474 feet. The samples that they collected indicated "multiple potential hydrocarbon pay zones".

In fact, "an estimated gross section of up to one thousand feet of hydrocarbon shows (with possible gas/oil net pay zones ranging from 100 to 300 feet) has been encountered".

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And so the share price has surged from 65p to £2. In fact, over the last few years, US Oil & Gas has risen from a low of 9.75p. It's a remarkable oil story. And one that demonstrates just how powerful the returns can be for penny investors even as the stock market sinks into turmoil.

In fact, US Oil & Gas isn't the only really exciting penny share explorer out there. I think there are three very compelling reasons to invest in oil exploration this year.

1. Penny stocks are unlocking huge new reserves

The problem with being a big oil and gas producer is that each day takes you closer to going out of business unless you can find new reserves to replace those sent to market.

In the last five years the oil majors have been exploring the proven shallow waters of the Gulf of Mexico, Nigeria and Angola, but their efforts to find new reserves here have not been especially successful. Meanwhile, their smaller and bolder rivals have made significant new discoveries in deepwater locations off the coast of Brazil, Ghana and the Gulf of Mexico, as well as significant onshore discoveries in Kurdistan and Uganda.

With their coffers filled from selling oil at $120 a barrel, the majors are increasing their exploration budgets and are keen to look at new frontiers. This has important implications for pioneering exploration companies.

The terms of any 'farm-in' deal are very important. The junior explorer has the rights to the licence and a package of data, while the oil major has cash and expertise. Both need each other and the exact terms of any deal depend upon whose need is greater.

The oil majors today are making good money and need to get involved in new frontiers, so the junior explorers should be able to drive a hard bargain. Over the next few months we could see industry majors farming in to projects off the coast of Namibia and the Bahamas, and in the South Falklands Basin especially. One Namibian prospect that I have been tracking could help unlock a 40 billion-barrel basin of oil! Click here to find out about that remarkable story.

2. Technology has transformed oil exploration

Scientific advancements in oil technology over the last ten years have transformed exploration.

In its early years, the oil industry relied upon visualisation techniques, the most basic of which was simply finding oil seeps on the surface. In the mid-nineteenth century, when lamps were lit with whale oil, the black oil that could be found lying in small puddles on the ground offered a convenient alternative.

Seismic reflection, originally used to locate submarines in World War One, was another key breakthrough in oil discovery. In the 1920s, experts started to measure gravity and magnetic resonance. Oil and rock samples were taken away for analysis in laboratories. In 1927, the Schlumberger brothers (a physicist and an engineer) developed a way to use electrical resistivity to identify rock layers containing oil and water from within the borehole.

After 1955, seismic measurement became even more sophisticated. Wireline logging, geochemistry and laboratory equipment and satellites came to be used to map the surface and the gravitational field. The process known as 3D seismic was followed by 4D, which tracks changes in 3D images over time.

Today deepwater oil exploration begins with a fleet of seismic vessels dragging sonar equipment thousands of feet below the ocean surface to bounce sound waves beneath the bedrock. Each layer of sedimentary rock reflects different parts of the waves back to shipboard receptors. Huge amounts of seismic data will be collated into detailed 3D maps of the oil-filled caverns so oil experts can pinpoint the best place to sink a drill. For an explorer it is often a case of how best to place an $80m-$100m well the size of a dinner plate on the seafloor.

That is allowing oil explorers to seek out ever more remote basins. Big Oil has to go where the big resources are. So the majors are forced into hostile territory where finding oil is a huge challenge. That's why they are leaving the job to small explorers. The attitude is "let them take the risk". With new equipment at their disposal, these small explorers are on the cusp of some remarkable oil discoveries.

3. Small explorers are cheap

And yet many of these stocks are trading at remarkably low prices. As the stock market has run into some headwinds in the last two months, investors have retreated from the higher-risk exploration plays and headed back towards the producers.

But good oil exploration assets, especially in major new basins, are likely to remain in demand. And the oil price isaround the $100/bl upon which most analysts and industry executives make their forecasts.

The success of US Oil & Gas in Nevada shows how rewarding penny explorers can be despite the market turmoil.

In fact I think there are two oil explorers in particular that could follow in the footsteps of US Oil & Gas. This is such an urgent story that I've written a report on the subject I don't want my readers to miss out on this truly massive investment opportunity.

One oil explorer is operating in the Bahamas. There is estimated to be four billion barrels of untapped oil in this basin -that could amount to as much as a $480bn payoff for the oil explorer preparing to drill there. A mind-bendingly exciting story.

The other oil story I'm really excited about is off the coast of Namibia. Here geologists reckon they have discovered a basin that is the geological twin to the giant oil fields of Brazil. As with all oil exploration investment, it's a risky venture. But I reckon this oil play could bank you a six-fold return on your cash!

So I truly hope you are invested in this penny oil hunt. If not - well I wouldn't waste too much time worrying about it. Get your hands on a copy of my oil report here.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.

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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.