Oil firm's new strategy could see stock rise

By Graeme Dickson
Updated: 12:20 EDT, 9 March 2011

On 4 March, Rheochem (RHEP) announced a radical change of strategy by agreeing to sell-off its drilling fluids business for Aussie $45 million (£28 million).

This leaves the company solely focused on near term North Sea oil production and medium to long term exploration:

After the sale of its fluids business, there will be a void in its revenue stream until the last quarter of 2011, when its 10 per cent stake in the Athena field comes into production.

The company forecasts that revenues for the first year net to Rheochem (soon to be renamed Lochard Energy Group) from oil production will be circa Aussie $60 million (£37.4 million), almost matching the company's current market capitalisation of £39 million.

Rheochem will use the expected revenues from the Athena field (22 per cent of the Athena field is owned by Ithaca Energy (IAE) which is capitalised at £486 million) and the proceeds from the disposal of the fluids business to help explore other assets, including the appraisal of 10 North Sea assets it already owns.

Rumour is that Haydn Gardner, the chief executive, is already doing the rounds in the City, which could whet the appetite of investors looking at ways to capitalise on the current strength of oil, in what looks like a seemingly undervalued company.

On a cautionary note, bear in mind that Rheochem's 100 per cent subsidiary Zeus, which owns the 10 per cent stake in Athena, is subject to an Aussie $15 million claim from Senergy Limited.

This is for services carried out by Senergy but not in accordance with the terms of the contract.

Court proceeding are not due until October 2011 so there is plenty of time to enjoy the potential 'ride' in the meantime.

Update

Evolution Group – tipped as a buy at 78.5p the stock closed yesterday at 79p. Hold on as we await its preliminary results on 25 March.

OMG (OMG) – tipped as a buy at 43.75p, the stock closed yesterday at 44p after it won a four year contract with Cheshire East & West and the Merseyside Consortium to carry out visual surveys to assess local road network conditions. Sit tight for now.

ZincOx (ZOX) – tipped as a buy at 60p, the stock closed at 54.25p. Disappointing in the short-term but has held its own in the last somewhat turbulent week. Place a stop based on a close below 47p.

Pendragon (PDG) - tipped as a buy at 23p - it closed at 21.88p. Continue to hold but place a stop based on a close below 20p.

Cyan Holdings (CYAN) – suggested to buy at 1.325p, the stock closed at 1.13p – keep holding for now as we await contract developments.

GB Group (GBG) – suggested to buy at 36.75p, the stock closed yesterday at 37.25p. The stock is starting to perk up a bit after a lacklustre start. Keep the stop based on a close below 32p.

Europa Oil & Gas (EOG) – suggested to buy at 30.25p, the shares closed yesterday at 38p. Place a stop on the stock based on a close below 32.5p.

SocialGo (SGO) – suggested to buy at 3.55p, the shares have drifted to 2.6p. I emailed the chief executive Alex Halliday and asked him to explain the drifting price and he could only put it down to profit taking from its spike originally starting at 1.125p in December. Version Two of its social networking software should kick in this summer plus Bell Pottinger, a leading PR agency, are working closely with SocialGo to get the latter more exposed in the media and other circles.

EMED (EMED) – suggested to buy at 12.25p, the stock closed yesterday at 15.75p. The company has gone quiet on the PR front over the last month, despite bullish rumours of imminent approvals for a transfer of mineral rights to the form. Keep the stop at 14p.

Active Energy (AEG) – suggested to buy at 6.13p, the stock closed yesterday at 3.13p. Three weeks ago I spoke briefly to the PR agent that represents Active and that the best explanation for the fall was that it was more to do with a 'distressed seller' rather than anything more sinister to do with the company. Operationally I am told the company is performing well. Hold for now.

Edenville (EDL) – mentioned as a buy at 1.195p, the stock closed yesterday at 1.57p. Having already suggested to sell one's investment stake out at 2.51p, investors should now be enjoying a 'free ride' for those that followed this course of action. Hold the balance for now.

Weatherly International (WTI) – suggested to buy at 8.1p, the shares closed yesterday at 12.25p. I met the chief executive Rod Webster last week and he highlighted that there could be significant upside not only in its Central Operations which are now producing 4.5-5,000 tonnes of copper in the first year, but as from May there will be a steady stream of newsflow relating to the Tschudi open pit mine and the Tsumeb tailings damn which may generate as much revenue in silver output as it makes from its copper production. Hold for now and use any significant weakness to pick up more.

Toumaz Holdings (TMZ) – tipped as a buy at 8.625p, the stock closed at 7.25p. Last week Quanta Computer Inc. announced it had increased its investment in Toumaz to 2.22 per cent in the enlarged Group. On top of this, last month Toumaz announced that Dr. Patrick Soon-Shiong used his investment vehicle, California Capital Equity LLC to buy a 2.46 per cent stake at a premium to the stock market price of 8.83p a share. Continue to hold.

Renewable Holdings (REH) – tipped as a buy idea at 16.25p, it closed yesterday at 16.75p. The stock is drifting from its recent highs but still trades at a huge discount to its Net Asset Value. Hold for now.

Bowleven (BLVN) – tipped as a buy at 177.25p, the stock closed at 352.75p yesterday. Suggested ten weeks ago to sell half after an initial 102.8 per cent gain, the balance should be retained as we await further progress from its Sapele-1 drilling campaign and the Etinde permit.

Tissue Regenix (TRX) – suggested as a buy at 16p, the stock has picked up from its lows and is now trading at 11.5p. Keep holding as we await trial results from its NHS trials and further product developments.

The material for this report comes from Sharescope. The writer does not hold any shares or derivatives in the above mentioned companies except EMED, SocialGo and Weatherly International. Some clients of Optiva Securities may hold shares in the above named mentioned companies.