This article from John Snowden published in The IRS Report in September 2010 discusses EnCore Oil...

Black gold at Catcher and Cladhan

In such uncertain times, I find it difficult to add to the portfolio every month. So this time I am going to give you a few thoughts on a company where I have put my own money. Although I remain bearish, I am a firm believer that one can make money by buying stocks in a sideways market or even a bear market.

I have mentioned several times over the last year that I have generally avoided equity markets. Since last March I have put likely money-making companies into my portfolio rebuilding programme with declared holdings in Centamin Egypt and EnQuest. I have now added a third company with a holding in EnCore Oil.

If you spot an attractive topical share in bad times, you can bet that hot money is queuing up to buy in. The problem is when to get out - ideally before the hot money moves on to the next target. I must admit that hot money started to move in to EnCore Oil long before I bought in the 50s. The shares have moved up from 15p earlier this year to a very recent high of 69p.

When hot money moves on, a share price will obviously fall butnew investors who have considered the facts on new data may well take up the slack. A prime example of this is an old favourite ASOS, a share recommended here in the past, whose share price has moved from 1p territory to a recent high of 989p, recently 934p. There have been many pauses along the way as existing shareholders took their profits but new ones came in to replace them.

The last big North Sea discovery was the Buzzard project in May 2001. It contains more than a billion barrels of oil and is operated by Nexen Petroleum UK, a subsidiary of Nexen Inc (NXY.TO). Located 100km North East of Aberdeen in the outer Moray Firth, straddling blocks 19/10 and 20/6, it is designed at peak production to gush more than 200,000 barrels a day. Problems earlier in the year cut production down to 50,000 bpd but production has recently been restored.

EnCore has found what looks to be an excellent commercial proposition in the North Sea in the Catcher prospect, which is likely to be one of the largest oil discoveries in the area for years.

Many oil explorers are on constant watch to raise exploration funds, sometimes using the vaguest piece of good news to tap the market for funds. EnCore's recently announced preliminary results for the year to 30th June show a spectacular set of figures. A £22.9m gain on the sale of the Breagh prospect has swelled cash coffers to £41.9m leaving the company debt free. A profit of £11.4m for the year adds further comfort.

The 15% interest in the Breagh gas discovery was sold to RWE Dea for a consideration of US$68.8m. Also an agreement was signed with Egdon Resources to dispose of EnCore's interests in nine onshore UK licences and an interest in the Ceres gas field in the southern North Sea. In exchange EnCore has received £100,000 cash and 39.2m Egdon shares, recent price 15p. The deal was completed in July and makes EnCore the largest shareholder in Egdon with just under 30% of the shares.

The reserve estimates for oil discoveries sometimes take ages to evaluate. On Catcher, Premier Oil pencilled in reserves between 25 and 50 million barrels. After the EnCore success in the Catcher East sidetrack (block 28/9-1Y) where quality oil-bearing sandstones were encountered, Premier raised estimates to between 50 and 80 million barrels of oil. Plans were then made to drill a third well in the south-west of the block and in a separate statement an EnCore spokesman said Catcher could contain up to 300 million barrels of oil.

Whilst EnCore remains speculative, the company prospered under the chairmanship of Mike Lynch, who was with EnCore since its inceptionand stepped down for personal reasons nearly a year ago. He departed leaving the company in great shape with cash in the bank and no debt. His replacement as chairman, Christine Wheeler, has worked in the oil industry for more than 35 years and in 1994 was awarded the OBE for services to the oil industry.

She chairs an experienced team with CEO Alan Booth, a co-founder of EnCore who was previously chairman and managing director of EnCana (UK) and an executive of the parent company EnCana Corp. EnCana (UK) changed its name to Nexen Petroleum (UK), a late entry into the North Sea. Alan Eugene Whyms, another EnCore co-founder, was also at EnCana (UK) as finance director and has more than 20 years experience in the oil industry including several senior posts at Enterprise Oil. Exploration director Graham Dore, another member of Nexen as chief geologist, was heavily involved in the Buzzard field and has a similar number of years in the industry, gaining experience as a geologist with Amerada Hess.

On August 31st, the company announced that the side-track well approximately 1000 metres south of the original Cladhan discovery has encountered excellent quality oil bearing sandstones with no oil water contact observed. The result is at the upper end of board expectations and they hope to drill again this year to determine the overall size of the discovery.

The share price surged 22% to 80p on the news, but there may be a pull-back. This is well worth monitoring closely as more results are due from the Catcher discovery later this year.

Small oil explorer stocks are highly volatile and responsive to news and rumours. So this may well prove a rollercoaster ride, but I believe it will prove rewarding.

You can see all of John Snowden's articles at www.TheIRSReport.com

John Snowden is a regular contributor to The IRS Report.

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