Oilman Jim's Letter - 17 September 2023
SQZ NTOG BCE 88E PRD and more about making money in these markets
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Please note that commentary on the weekly oil/gas/helium exploration news is over at Exploration News (click on the link to read it and subscribe if you haven’t already). I also list there which of the companies issuing news during the week I’m investing in.
Turning now to something I’ve been wanting to highlight for a while and which isn’t always apparent to many investors, until a public company becomes profitable and stops losing money, which in the small cap markets could be for most or all of its life, the company relies for its “income” on shareholders either buying its shares directly (in placings or subscriptions) or indirectly in the market from the former.
Essentially, the shareholders are the “customers” (who pay the salaries, administrative expenses, professional fees, etc.) and the de facto business of the company prior to profitability, which often is never reached with many small caps, is selling shares to the public. This is the hard reality.
At the bottom end of the stock market it’s not really that much different from crypto. Investors effectively receive a token that hopefully can be sold on to a greater fool. There are no fundamentals, there’s nothing inside the company that ever actually will make any money, just a story.
Like any business, the products (in this case shares) need to be marketed and most of what investors read, whether on investment websites or social media, is marketing, paid for by the company, but one step distant so they’re not responsible for it. Many take this marketing at face value and believe it to be fact, particularly once they’ve bought the shares. You see them every day arguing the marketing as fact on the various message boards, usually more and more voraciously as their losses become larger.
So is there any money in this for investors? Often no, because the funds are being wasted on lifestyle. Some companies exist solely to provide salaries and fees for directors and professional advisors, with profitable and guaranteed trading opportunities from operations such as forward selling placings as a bonus, the notional “business” of the company being simply the excuse to raise money.
However, you can say yes if management has the capability to convince the market to ascribe a large capitalisation to the company and yes if you’re buying in ahead of a potentially transformational event and reducing the risk by selling or de-risking prior to the outcome.
Let’s look at some examples. At one end of the scale of management capability, there are companies like Serica Energy (SQZ), into which a total of £183 million has been invested directly by shareholders and management have delivered a market capitalisation of over £1 billion. At the other end of the scale are companies such as Nostra Terra Oil & Gas (NTOG), into which a total of around £25 million has been invested directly by shareholders, yet management have delivered a market capitalisation of only £1 million. The difference in returns is more than 100 times.
These are the ratios to look at. From an equity investor's point of view, market capitalisation and thus price per share is much more important than the internal financials of the company. If the company is losing money, but the market capitalisation is greater than the sums invested, investors overall are making money. Vice versa, if the company is making money, but the market capitalisation is lower than the sums invested, investors overall are losing money. It's the market capitalisation which management is capable of delivering that actually matters.
There are many of these management effectiveness calculations in Trading Keys, along with details of upcoming potentially transformational events and several other important metrics. It’s published twice a week. Check it out.
Regarding buying ahead of potentially transformational events, this is usually a winner if you get it right. I discuss oil companies in this newsletter, so, in the case of these companies, you want to buy after the placing to finance the drill and sell before the spud, or at the latest, before the well result. If you feel brave and want to hold for the result (possibly after de-risking and running the remaining position for free), it’s invariably better to sell on the discovery, rather than hold for the development. (I discuss two recent situations regarding this - including last week’s events at Beacon Energy (BCE) - in Exploration News today.)
A couple of examples of companies which have provided these type of gains from potentially transformational events (several times each) are 88 Energy (88E) and Predator Oil & Gas (PRD). There are many more and I cover all these types of drills weekly in the Private Letter.
If you want to fully understand everything I’ve mentioned in this newsletter, plus a lot more, you need to read the Core Information section on the website. It was originally a £200 course and you can get it for less than half of that now with just one month’s subscription to the Private Letter.
Here’s what subscribers say about it:
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