High energy prices attract investors back to UK fossil fuel small caps

High energy prices have boosted UK small cap fossil fuel companies, lifting their share prices and allowing some to register rare profits.

Seven of the 10 best performing stocks on London’s junior Aim market are fossil fuel companies, with four focusing on UK oil and gas production, as the market rides the surge in prices since Russia invaded Ukraine.

While they collectively account for only a small portion of UK oil and gas supply, the prospect of a prolonged period of higher gas prices and the renewed focus on energy security have encouraged investors in a sector that had been struggling in the face of the global acceleration towards renewable energy.

“A heightened interest from investors in oil and gas companies naturally follows times of increased oil prices,” said Sophie Lund-Yates, equity analyst at investment platform Hargreaves Lansdown. “The situation in Ukraine and subsequent energy shortages have also brought oil and gas into the public’s mind in a way never seen before,” she said.

Companies like IGas Energy, Egdon Resources, Union Jack Oil and Angus Energy have been among the best performing stocks on Aim in the year to date, with share prices at least doubling — albeit from a low base.

“The energy crisis has led investors to see there is a future for energy in the UK,” said Chris Hopkinson, interim executive chair of IGas.

Mark Abbott, managing director at Egdon Resources, said that a year ago, leading up to the COP26 climate change conference, “there was a narrative that we can switch to renewables tomorrow.” But, he added: “The uncomfortable reality is we are going to be using oil and gas out to 2050 and beyond.”

The UK generates about 40 per cent of its electricity from burning natural gas, leaving it exposed to surging gas prices. The UK wholesale gas price is about 2.5 times higher than a year ago. Meanwhile Brent crude, the international benchmark for oil, is nearly 30 per cent up on the year.

While high energy prices have driven soaring inflation and forced the government into a £150bn support package for consumers, they have allowed the small cap oil and gas companies to make rare profits and their large international peers to report record breaking recent results.

In the six months to the end of June, Union Jack Oil recorded its first profit of £2mn, while IGas reported a net profit of £19.4mn, compared with a £12.2mn loss in the same period last year.

“The point for us is not the staggering gas prices you have seen in the past months, but that long term gas prices are not going back to the 10 year average,” said George Lucan, chief executive of Angus Energy. UK oil and gas companies are “an attractive long term proposition for investors, particularly private investors” he added.

But while the sector might be experiencing a moment in the sun, Lund-Yates said there are reasons to be cautious. There are “plenty” of smaller companies that are “pumping money into unproven oil and gasfields, with no guarantee of success”.


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