Picking stocks in the small-cap oil & gas sector is not for the faint-hearted. Youre more likely to lose your shirt than become the nextJohn Rockefeller.
But there are opportunities out there. Its all about balancing risk with reward.
You want to try and pick the companies with the best chance of success with plenty ofupsideif everything goes to plan.
San Leon Energy(LSE: SLE)could be one such opportunity.
San Leon announced today that it has discovered itsfirst bookable Polish reserves, following thesuccess of the Rawicz-12 appraisal well drilled earlier this year.
The competent persons reporthas identified more than 50bn cubic feet of proved and probable (2P) gas reserves at the Rawicz project. The Rawicz prospect is located within Poland and reserve figures assumes a five-well development plan.San Leon has a 35% stake in the prospect.
Andgasproduction at the Rawicz project could start as early as 2016. There are several field development plans already being considered by San Leon and its project partner,Palomar Natural Resources.San Leon has no upfront drilling costs for its share of the first two wells.
Plenty to do
San Leon may be celebrating the discovery of its first bookable Polishreserves, but the company still has plenty of work to do before it can claim to be a success story.
Still, the group believes that it can generate enough cash from asset sales going forward to fund operations for the foreseeable future, which to some extent de-risks the company.
Assets held for sale totalled around15m for the six monthsended 30 June 2014while cash and cash equivalents including restricted cash at 30 June 2014 amounted to 20.9m. Whats more, at the end of June San Leon reported total assets of320m and liabilities of just under40m.
Shareholder equity was reported at280m, which implies that the company is severely undervalued at present levels. Attimeof writing, San Leons market cap stands at only33m.
An interesting case
San Leon is an interesting company. Unlike other oil & gas minnows the group already has producing assets and it is aiming to generate a profit from its core assets within three to four years.
Alongside theRawicz project, other core assets include 3m net acres of exploration potential on and offshore Morroco, and 4m acres of onshore potential across France and Spain. San Leon is one of Europes largest unconventional oil & gas companies in terms of acreage.
Not a sure thing
All in all then, San Leon is an interesting company with plenty ofpotential. But like all early-stageoil minnows, until the company can bring its assets on stream and start generating cash, it is a risky bet.
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