The company is not currently in profit and there’s none on the cards this year or next, and investors need to balance the risk of it running out of cash against Aminex’s potential resources. But I reckon those resources could well tip the balance in favour of shareholders.

Crucially, as my Foolish colleague Kevin Godbold has pointed out, a farm-out agreement with Zubair Corporation looks like it could be what ‘s needed to get Aminex’s Ravuma prospect to the enviable state of production and positive cash flow.

Turning point?

Estimates of gas reserves have been upgraded several times, and revenues could reach $40m per year, with most of the gas being sold to the local market. The farm-out should provide Aminex with an upfront cash payment of $5m on completion (expected by 30 November) and “any shortfall in the carry to be made up to $35 million in cash from Zubair’s profit share.”

Aminex reported a loss for the six months to 30 June of $2.36m, and net current assets of just $3.39m put it in what could have been a precarious position — though there’s no debt, which reduces the risk. But the farm-out should change the liquidity situation significantly.

As Kevin says, there are still potentially tricky formalities to be completed. But should we shortly hear news of the farm-out completion, I wouldn’t be surprised to see an upwards re-rating in the Aminex share price.

Cash rich

Meanwhile, BowLeven (LSE: BLVN) looks to be in a better liquidity position at the moment, reporting a cash balance of $63m at 30 June, with no debt — though, again, we’re expecting to see further annual losses this year and next.

That cash balance might not sound like a lot for a company that reported a pre-tax loss of $53m in 2017, but the current year has seen a major reduction in losses from continuing operations to just $7m.

The focus now is on the next stages of the investigation of the firm’s Etinde prospect, offshore Cameroon, after BowLeven confirmed the likelihood that its licence for Bomono, onshore Cameroon, will terminate in December 2018.

Etinde

Chief executive Eli Chahin told us: “Our focus in 2019 will be in further progressing Etinde whilst maintaining a robust balance sheet and lean corporate structure to deliver maximum value for shareholders.” For me, the latter part of that really should not need saying — the prime responsibility of a company is always to deliver maximum value for shareholders, and I’m regularly surprised by companies trotting it out as though it’s some sort of new idea.

But, that bit of PR flannel aside, I do see the prospects for BowLeven as positive now.

I won’t be buying any of the shares myself (nor will I be buying Aminex shares), but that’s purely down to my risk profile as I enter my 60s. But if you’re younger and can take the risk, I think both are worth considering.

Where’s the value?

For that reason, you’ll be unlikely to catch me speculating on any currency movements at all, even on ‘real’ ones such as the US dollar or the British pound. I think the pursuit of trying to predict the price movements of such ‘markets’ takes you way over to the gambling end of the investing/gambling spectrum.  But most of all, I won’t touch Bitcoin or any of the other cryptocurrencies, which all strike me as being extreme gambling propositions – you might as well bet on coin-tossing as on Bitcoin, in my view.

I can see how the cryptocurrencies draw people in. When a price moves from a few cents to around $20,000 dollars, as Bitcoin did, some people get rich and the stories spread like wildfire. But the arguments for the worth of cryptocurrencies are very thin and shaky. Some reckon that because only a certain amount of any given cryptocurrency exists, its value is bound to rise as demand for the currency rises. But who needs to use cryptocurrencies to actually pay for things and exchange wealth when there are so many conventional alternatives available, such as sterling? Then there’s the whole problem of competition. New cryptocurrencies are being launched at an alarming rate and competition almost always drives prices down.

To me, cryptocurrencies have got ‘speculative bubble’ written all over them, and the problem with bubbles is that they tend to burst. But we never know when, and sometimes it’s a shock when they do. My bet on cryptocurrencies is that I am far more likely to lose money than to make it if I participate, so I’m avoiding them.

Great potential

I’d rather go for a firm with a business that has lots of potential, such as Tanzania-focused gas and oil production, development and exploration company Aminex (LSE: AEX). The firm’s long-suffering shareholders have seen the stock slide more than 50% over the last year, but I think there are reasons to be optimistic about the immediate future. The farm-out agreement the firm recently signed with The Zubair Corporation is a potential game-changer that looks set to fully-fund development of Aminex’s Ravuma acreage to full field development and “material” cash flow. The firm is finding mostly gas, which is sold to the local market. If it achieves the target rates with the development programme Aminex could see revenue up to $40m per year.

However, the share-price weakness reflects a few uncertainties. The farm-out is due to complete by 30 November but requires approval from the Tanzanian Government. But Aminex is in dispute with the government’s energy arm, the TPDC, over payments for previously supplied gas, which is an uncomfortable situation. On top of that, production from the firm’s current gas producing well has stalled due to technical difficulties. I’m optimistic that the short-term challenges will be solved allowing the long-term potential to bloom and would rather bet on Aminex than on Bitcoin.

Update

The company’s update did not appear to contain any particularly negative news. Flow testing on Icewine-2 restarted on 31 August after a seven week shut-in. The well is currently flowing back frack fluid at a rate of around 70 barrels of oil per day (bopd). Thus far, only minor hydrocarbon indications have been seen via the formation of gas hydrates within the choke manifold. As well as this, pressure data analysis has suggested there is limited connection to the reservoir prior to the last 24 hours.

Reaction

Today’s update does not seem to be particularly positive or negative overall. 88 Energy continues to make progress with its strategy, and today’s share price fall may be due to high expectations from investors. The market may have been anticipating a more positive update than that which was released today. This could explain why the company’s share price has declined dramatically following the update.

This could create a buying opportunity for long-term investors. The company’s prospects have not worsened following the update, and yet it trades on a much lower valuation than it did at the end of the previous trading session. Certainly, the oil price may remain volatile and an oil and gas exploration company such as 88 Energy is highly dependent on news flow in the near term. But for investors looking for a small exploration play, it could prove to be a relatively sound buy after today’s share price fall.

Gaining ground

One stock recording a share price gain today is Aminex (LSE: AEX). The oil and gas exploration company’s stock price is 10% higher after it released an update. There has been a material increase in its management estimate of gas initially in place (GIIP) in its Ntorya appraisal area in the onshore Ruvuma Basin of Tanzania.

The company has upgraded its unrisked resource estimates from 466bn standard cubic feet (BCF) Pmean GIIP, to around 1.3trn standard cubic feet (TCF) Pmean GIIP. Encouragingly for the company’s investors, these estimates relate to the Ntorya appraisal area only, and do not include the potential of the adjoining exploration acreage.

Looking ahead, Aminex is seeking to begin gas production from the licence as quickly as possible. While its share price could remain volatile, it appears to be benefitting from improving investor sentiment. With a sound strategy, it could deliver further share price growth in the long run.

The question is, does it deserve this accolade? The company is still in its early stages of growth and there’s no telling yet if the firm will turn out to be the next big thing like Tullow Oil or flame out like Afren.

NAV growth

Aminex’s key assets are located in Tanzania and City analysts believe existing assets could be worth as much as 3.9p per share. This valuation could be subject to a significant upgrade if the recently drilled Ntorya-2 appraisal well in Tanzania turns out to be as promising as the initial expectations seem to indicate. 

Earlier this month, Aminex reported that the Ntorya-2 well has been successfully drilled to a depth of 2,750 metres and encountered 51 metres of gross gas bearing reservoir, with net pay interpreted to be between 25 and 30 metres. The well is now undergoing petrochemical analysis and flow testing, the results of which are expected to be published in late February. When these figures are released, investors will have more of an indication of what the future holds for the firm. It is expected that the company will apply for a 25-year development licence for the field.

A long way to go

Despite the promising figures from Ntorya-2, there’s still a long way to go before Aminex can claim to be on the road to becoming the oil sector’s next Tullow. 

Nonetheless, City analysts are expecting big things from it over the next three years. Specifically, analysts have pencilled-in a pre-tax profit of £3.7m for 2017 on revenues of £12.8m. Next year, earnings per share are expected to grow 160% to 0.24p as pre-tax profit grows threefold to £10.6m. Revenue is expected to hit £20.3m. 

These forecasts could be subject to substantial revisions higher as they are only based on Aminex’s current production from its Kiliwani North-1 well, which is churning out 30 mmcf/day of gas. 2017 will be the first year of full production from the asset and the company should be able to use cash flows from this production to fund the development of its next well.

The bottom line 

Overall, it looks as if Aminex has a bright future. Unlike most small-cap oil producers, the firm is generating income and this can be used to develop new prospects, which could deliver a substantial increase to net asset value and revenue. 

If the company manages to hit City targets for growth for the next two years the shares could have further to run. And if Ntorya-2 turns out to yield better-than-expected results, Aminex shareholders could be well rewarded. With this being the case, it looks as if it is more likely to be the next Tullow than Afren.

Aminex’s update is positive as the company has received first payment in relation to gas produced from the Kiliwani North-1 well in Tanzania, which was supplied to the Tanzania Petroleum Development Corporation. Investors have reacted positively to the news, with Aminex’s share price up 5%.

Looking ahead, it’s expected to deliver significantly improved financial performance over the next two years. Following several years of losses, the company is forecast to move to profitability in the current year. In 2017, its pre-tax profit is due to rise from £0.3m to £4.3m, which has the potential to positively catalyse investor sentiment.

Despite Aminex’s share price having risen by 30% in the last three months, its upbeat outlook doesn’t seem to have been priced-in by the market. It trades on a forward price-to-earnings (P/E) ratio of 8.4, which indicates that there’s significant upward rerating potential.

Better bet?

However, it’s not the only cheap resources stock. Amec Foster Wheeler has a P/E ratio of 10 and is expected to return to profitable growth in the next financial year. This follows a troubled period for the business that has seen its earnings fall in each of the last two years, largely in response to the falling oil price. But with a new strategy that has improved its efficiency, Amec Foster Wheeler looks set to make a strong comeback.

Similarly, Glencore’s debt reduction strategy is likely to lead to an improved financial outlook for the diversified resources play. It has made asset disposals and has reduced costs so that it’s expected to record a rise in earnings of 57% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of only 0.5, which like Aminex and Amec Foster Wheeler, indicates significant upward rerating potential.

However, where Glencore and Amec Foster Wheeler have a clear advantage over Aminex is with regard to their risk profiles. They’re both much larger, better diversified and have track records of profitable growth. This means they offer lower risks than Aminex and still have significant potential rewards. As such, buying Glencore or Amec Foster Wheeler is a better option for risk-averse investors.

In terms of Amec Foster Wheeler and Glencore, the former has a much stronger balance sheet and doesn’t have to make wholesale changes to its capital structure. Certainly, Glencore is making excellent progress on the debt reduction front, but there’s still a long way to go. And with Amec Foster Wheeler yielding 4% from a dividend that’s covered 2.5 times, it offers superior income prospects to Glencore’s suspended dividend. As such, Amec Foster Wheeler is a superior investment to Glencore.

Investing now could be a good idea. A lower oil price reduces some of the downside risk from fluctuating commodity prices. As long as the firms we select are strong financially and capable of weathering any ongoing weakness in the oil price that could develop.

I’m looking at oil major BP (LSE: BP), mid-cap producer and explorer Soco International (LSE: SIA) and small-cap gas producer and exploration company Aminex (LSE: AEX).

Bearing down on costs

With last Wednesday’s first-quarter results, BP revealed an underlying  replacement cost profit of $532m, which is up from the previous quarter’s $196m, but well down on the $2.6bn the firm earned in the first quarter of 2015. Given that the average price of a barrel of oil came in at $34 during the period, that’s not a bad result, showing that BP is holding its own.

The firm is bearing down on costs to get itself through the current soft patch in the oil price, saying that lower costs more than offset the impact of significantly weaker oil and gas prices and refining margins. Despite such challenges, the firm reckons its next wave of upstream projects is “well on track,” which offers potential for future upside from operations.

BP thinks that market fundamentals, such as robust demand and weak supply growth, will move global oil markets further up by the end of 2016, suggesting potential for investor returns due to a rising oil price. The company underlines its confidence by standing fast behind its dividend. At today’s share price around 382p, the forward dividend yield sits at about 7% for 2017.

BP’s financial gearing runs at around 24% and the firm reckons it has further flexibility to move costs down if need be. BP looks financially sound to me and as such makes a reasonable candidate to play the upside potential of the price of oil.

Potential on several fronts

In many ways, mid-cap Soco International is even better placed than BP to weather the current storm in the oil market. Soco has a cash pile of around $100m, zero debt and well-established oil production from its assets in Vietnam.

The firm has a decent track record of returning cash to shareholders, which it did shrewdly when oil prices were high rather than squandering the cash on over-priced acquisitions. City analysts believe the firm could yield a dividend as high as 4% during 2016, combining ordinary and special payouts. And the firm is in a good position to invest in any decent but distressed assets that might come along now that the oil price is low.

On top of that, Soco continues its organic development-drilling program, so upside for investors could arrive on several fronts.

Not directly exposed to the oil price

Small-cap Aminex is the odd one out here because it’s about to start production of gas rather than oil. The price of the gas Aminex will sell is subject to a pre-negotiated local price in Tanzania, home of the firm’s soon-to-be producing asset. As such, the fluctuating price of oil doesn’t directly affect the firm, but I think sentiment in the oil and gas sector is so low that it dragged down the firm’s shares with the oilers.  

Aminex looks set to benefit from much-needed cash flow as imminent production ramps up. However, the company may need to raise further funds to progress its ongoing drilling operations. Nevertheless, at current levels the firm has plenty of upside potential.

Up until yesterday, shares in Aminex (LSE: AEX) were down 28% over 12 months, echoing the slump among smaller oil and gas explorers. But a morning spike today of 18% has lifted the shares to 1.45p, after the company reported first gas from its Kiliwani North field in Tanzania.

Production from the field, in which Aminex should have a 51.75% stake after a recent partial disposal, is expected to reach a production level of around 4,000 to 5,000 barrels of oil equivalent per day gross over the next 90 to 100 days — and Aminex expects to receive $10m to $15m per year from the Tanzania Petroleum Development Corporation for it.

Cheap assets

I’d hoped I was close to the bottom when I bought Premier Oil (LSE: PMO) shares at 99p back in September, but the subsequent fall to just 19p reinforced the lesson that no matter how far a share has fallen, there’s still another possible 100% to go. But since then, Premier pulled off what I think was a bit of a coup in snapping up E.ON’s North Sea assets for $120m — it should be cash generative, and will surely be seen as a bargain price in a few years’ time.

Premier shares have more than double since that 19p low, to 44p today (I’m only 55% down, whoopee!) and I see it as a risky but good prospect. The big downer is the company’s net debt, which stood at more than $2.2bn at 31 December. But unlike some others, Premier does not seem to be facing any prospect of its lenders pulling the plug — in fact, they have agreed to loosen Premier’s fianancial covenants until mid-2017, while the company is focusing on debt reduction.

My timing stank, but I’m happy to hold.

Pharma prospects

Oxford Biomedica (LSE: OXB) shareholders won’t be too chuffed when they look back on the 57% price drop they’ve suffered over the past 12 months, but they can perhaps take a little heart today from seeing a 5.7% rise to 5.55p — perhaps in anticipation of full-year results due on 28 April.

The company specializes in gene therapy and cell-based medicine, which is surely the future for many of today’s health problems and is likely to be a field which generates lots of tasty profits. But the problem, as with any other new technology still in the startup “blue sky” days (and I’m minded of fuel cell research, which has been touted for years but is still in its infancy) is that we really don’t know when the big commercial breakthroughs will come and who will profit from them.

Oxford Biomedica is still in the cash-burn phase, has no forecasts for profits yet, and launched a new share placing to generate needed working capital as recently as February — and we really don’t know how much further dilution there’ll be before we see those first profits. There are definite possibilities here, but it’s unquantifiable right now and is not one for me.

And, alongside the results, Aminex announced the part disposal and farm-out of its Tanzanian Assets, a landmark transaction, which has drastically improved the company’s financial position. 

Broken down, the terms of the deal are as follows:

• Aminex is selling a 25% interest in the Kiliwani North Development Licence (KNDL) to Bowleven;
• Aminex is farming out/Bowleven is buying 50% of the Ruvuma PSA, including the Ntorya appraisal programme;
• The farm-out terms for Ruvuma PSA will be shared out between Aminex and its existing partner Solo;
• On completion, Aminex will retain an operated 30.575% interest in KNDL and an operated 37.5% interest in the Ruvuma PSA.

Aminex will receive an initial cash payment of $8.5m as part of the deal and $5 million worth of Bowleven shares with a nine-month lock-up period. Aminex will receive a cash bonus of $0.5m on the completion of drilling of the Ntorya-2 well.

Aminex and Solo will also receive net carry of $10m on all Ruvuma PSA activity and a $4m bonus payable on achieving commercial production from the Ruvuma PSA for a minimum of 30 days. Solo will be entitled to 25% of the production bonus and net carry.

In total, the net value of the transaction to Aminex is $24.4m, roughly £16.2m — not bad for a company with a £38.8m market cap. 

Making progress

Today’s deal marks a turning point for Aminex. The company will now be able to pay down debt and consolidate its assets, putting the group on a stable growth trajectory.

What’s more, according to Aminex’s third-quarter results, the Kiliwani North-1 gas well, which tested at 40 million cubic feet per day, is ready to begin production. With Kiliwani operating Aminex will have an income stream to fund further growth. 

Time to buy?

The fundamental question is: is Aminex a ‘buy’ after today’s news?

Well, the company is now certainly in a much better position than it was at the half-year mark when management warned Aminex would struggle to remain a going concern without a cash infusion. 

With an infusion of $8.5m in cash from the Bowleven deal, Aminex will now be able to pay off all of its debt — if shareholders approve the transaction. Aminex’s healthy cash balance will be supplemented with income from a producing Kiliwani shortly, which will put the company on a stable footing and pull the company away from the brink for good. 

However, until Kiliwani begins production, Aminex will remain a risky bet. There’s still plenty that could go wrong for the company, and while today’s transaction has de-risked Aminex as an investment, the company is still an extremely speculative play. 

The price of commodities, including oil, has plunged and taken profits and share prices with it.

Firms in the oil and gas sector are on the back foot, struggling with reduced cash flow, and facing hard decisions about whether or not to continue investing in projects for growth.

Bargains or bewares?

Falling share prices often tempt me. Temporary operational setbacks can throw up the possibility of a better value. However, that doesn’t work if setbacks prove to be more enduring problems for a firm’s operations. In such cases, a lower share price could mean zero change in the value we buy with our shares. A cheaper share price could even represent poorer value than the previous higher share price before operational conditions changed.

That’s why I’m not backing up the truck to fill it with oil company shares right now. All resources firms are cyclical to their cores and their fortunes depend on the fluctuations of the market prices of the commodities they sell. The price of commodities such as oil could swing back up this time in a cyclical move, but it might not. This time, oil could stay down near its historical lows in what could end up looking like a structural shift in the industry.

Drawing a lesson from Richard Farleigh’s book Taming The Lion, oil could fall further still from here, perhaps much further. All markets can move much further than we believe possible, he says. Imagine that — oil halving from here and staying there — if that happens we haven’t even begun to witness the destruction of businesses in the sector that could result. And why shouldn’t it happen? These are, after all, extraordinary economic times.

Now that I’ve cheered you up, let’s look at three potential investments in the oil and gas sector: Royal Dutch Shell (LSE: RDSB), Soco International (LSE: SIA) and Aminex (LSE: AEX).

Out with expensive exploration

Shell’s recent announcement of its intention to withdraw from further exploration activity in offshore Alaska is a good example of the tough choices facing oil companies. The firm discovered indications of oil and gas in its Burger J well, but not enough to warrant further exploration in the Burger prospect. Further exploration activity in Alaska will discontinue because of the Burger J well result, the high costs associated with the project, and the challenging and unpredictable federal regulatory environment in offshore Alaska, the firm says.

With reduced earnings due to the low oil price, Shell no longer enjoys the luxury of being able to throw money at hard-to-get and expensive-to-produce oil and gas, so that potential upside to any investment in Shell’s shares is gone. The firm’s share price is dropping hard, and I’d like to see it stabilise before even thinking about buying.

Strong production and no debt

Soco International produces oil from its assets in Vietnam. Earnings declined as the oil price dropped and the share price is around 65% down from the 448p or so it hit during 2014. However, the firm continues to make operational progress and boasts a strong financial position, with no debt on the balance sheet and low operating costs. The directors reckon attractive Vietnam production economics provide strategic flexibility that should ensure Soco navigates through the current lower oil price environment.

Soon to produce?

Exploration tiddler Aminex currently has no production but expects to produce gas from its discoveries in Tanzania soon. The Tanzanian authorities need to sign the firm’s Gas Sales Agreement and the timetable for that seems ‘flexible’. However, once signed, the subsequent gas sales should help accelerate the company’s other activities in the area. The worry here is that if gas production is put off for too long Aminex could face financial difficulties, which could lead to further fund raising events likely to dilute long-suffering shareholder’s interests. On the other hand, if production starts soon, Aminex’s future looks bright.

I’m more likely to go for the middle ground with any top-up investment and plump for Soco International. The firm’s strong balance sheet and well-established production sits well against upside potential from further exploration and development.

Aminex is desperate for cash, and can barely wait for Kiliwani North to come on stream in the first half of 2015, as is currently planned. Solo’s bung of $3.5million for a 6.5% slice of the project is like fresh air to a suffocating man.

Flowing gas is lifeblood to these minnows

The deal holds the promise of further spondulix for Aminex, as Solo Oil has a 45-day option to increase its interest in the project to 13%, at a cost of a further $3.5million. It’s certainly music to the ears of long-suffering Aminex shareholders, and the ants-panted directors there will surely sit more easily now that the long-time Africa-focused firm is back on a more secure financial footing.

Yet the deal promises lifeblood for Solo, too, which is yet another junior oiler with no income, as the prospect of revenue from Kiliwani North will give the firm the means to carry on with its other projects.

It’s no surprise that the two firms are scratching each other’s backs. Solo is already in bed with Aminex with the larger Ruvuma gas project, which Aminex operates.  

Wheels within wheels

Judging by Solo Oil’s list of major shareholders — mostly institutions on behalf of nominee account holders — the firm has a large private-investor fan base. Yet the company is a different beast to Aminex, which gets down and dirty in the style of Red Adair, with oil on its hands and gas in its windpipe.

Solo Oil describes itself as an investment company. As such, it takes its investors money and splashes it around by buying chunks of projects operated by real oil firms such as Aminex. The latest Kiliwani North deal is typical. As well as interests in Africa, Solo Oil also has a Canadian investment, which it’s thinking of ditching due to lack of progress, and a slice of the Horse Hill prospect and associated licences on shore in the UK Weald basin, where drilling has just started.

Solo Oil’s chairman is serial entrepreneur David Lenigas, and those paying attention will recognise his name as a director of small-caps Leni Gas & Oil (LSE: LENI) and Rare Earth Minerals (LSE: REM), which I’ve written about recently. Both those firms are private-investor favourites too — capable of producing the wild share-price swings so beloved of small-cap investment operators like us. In a further twist, we can buy into the Horse Hill project, and other investments, via another vehicle chaired by David Lenigas, UK Oil & Gas Investments (LSE: UKOG).

I think UK Oil & Gas Investments may be flying under the radar at the moment, not least because it morphed from now-defunct serial disappointer Sarantel, which is a bit off putting to say the least! Right now, UK Oil & Gas Investments has a market cap of about £17 million, which compares to Solo Oil’s £40 million and Aminex’s £36 million. It’s probably worth digging deeper to see which of the three firms has the most bang for its buck — in other words, which company’s assets are most valuable.

What next?

Solo Oil’s strategy carries risk. Recently the firm said of its Canadian investment that the operator has been unable to raise the necessary funds to continue the development of the Ausable gas condensate field and no alternative has been found to unlock the potential. That’s grim, and underlines the fact that Solo has no control over operations because it is a passive partner.

A recent example of how ‘partner drag’ can really stuff a share price exists with Trap Oil (LSE: TRAP). The firm’s multiple investments all looked good on paper, but all came to naught as partner after partner backed out of its commitments to progress particular projects. The risk is that Solo is powerless to resist a similar negative outcome.

Solo Oil is an interesting investment proposition, as is UK Oil & Gas Investments and Aminex. I’m, perhaps, most tempted by Aminex, though,  because of its controlling interests and operator status.