Angelos Damaskos, manager of the Junior Oils Trust (GB00B01YQF73), tells us why he expects oil and gas exploration company Parkmead Group (PMG) to generate significantly higher value in the medium term. Parkmead Group is the fund's ninth largest holding and accounted for 4.4 per cent of assets at the end of May.
"With the shine coming off defensive equities and bonds, oil shares appear attractive again," he says. "The larger-cap oils have performed well year-to-date and we believe the smaller ones are likely to follow with a rerating soon. Acquisition of quoted oil companies continue to offer a cheaper option to acquire reserves than investing in individual projects, and corporate activity is set to continue.
Meanwhile, with China and other emerging regions requiring ever increasing energy inputs to support their rising middle classes, demand has kept growing. In our view, with demand for oil expected to grow by about one million barrels per day per year, the oil market will require prices to stay well above $100 per barrel.
Last month we saw Parkmead Group, one of the fund's larger holdings, acquire Lochard Energy, which holds interests in areas highly complementary to Parkmead's portfolio. The skills fostered by Tom Cross, Parkmead's chief executive officer, are likely to generate significantly higher value in the medium term. We believe that the second half of this year is likely to see a return of investors' interest in the oil sector and result in a rerating of the fund's portfolio."
Parkmead Group is listed on the Alternative Investment Market (Aim) and has a market cap of about £122m. Investors Chronicle rates it a 'buy'. We said: "The economics of the transaction look good - predictable, given the reputation of Parkmead's executive chairman, Tom Cross of Dana Petroleum fame, as a shrewd deal-maker. Lochard's Athena interest generated operating cash flow of $13.9m (£9m) in the second half of 2012, so the deal could pay for itself in a year."
