August 2011’s Penny Shares to Watch…

This month’s penny shares to watch:

• Six oil stocks drilling for explosive returns...

Dominion Petroleum (DPL), Borders & Southern (BOR), Chariot Oil & Gas (CHAR), Green Dragon (GDG), Cove Energy (COV), Bankers Petroleum (BNK)

• These obscure stocks could alter the face of medicine...

Valirx (VAL), ASOS (ASC), SDL (SDL)

Looking to invest in penny shares? Keep reading to discover my ideas for the coming month...

Six oil stocks drilling for explosive returns

(This article first appeared in Penny Sleuth in July 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

You’d have to be brave to invest in oil explorers right now. Most investors are running scared, and in the rush, many oil stocks have fallen hard.

But this might surprise you – I think this is a great time to invest in penny oil explorers.

Not only are penny oil stocks benefiting from high oil prices. But they are also making the kind of discoveries that have eluded the oil majors. As some oil drillers seek to unlock vast deep sea reserves, there is the potential for pretty remarkable returns.

Take Dominion Petroleum (DPL). Dominion has exploration licenses in Tanzania, Kenya, Uganda and the Democratic Republic of the Congo and the immediate excitement is provided by its 100% interest in license off-shore Tanzania. One prospect alone contains an estimated seven trillion cubic feet of gas (equivalent to 1.1 billion barrels of oil) and Dominion is now acquiring and assessing data prior to a drilling campaign.

If their efforts are successful, its investors could enjoy a return of 1,389%! That is one of the calculations found in Goldman Sachs’ latest review of the exploration and production sector. And is just one example of the type of gains that are possible for those brave enough to invest in small oil explorers.

This is similar to the sort of high reward play that I like to find for Red Hot Penny Shares. True, the risks are high, and in the event of failure Goldman Sachs sees Dominion’s shares falling by over 80%. But Dominion is by no means the only share with this sort of risk/reward ratio.

Why penny oil stocks are making the big discoveries

Aside from Dominion, five other oil plays have a potential upside of 1400% or above, in the opinion of Goldman Sachs. Borders & Southern (BOR), which will be drilling in early 2012 in the south Falklands basin and Chariot Oil & Gas (CHAR) which expects to drill offshore Namibia later this year, also look very promising.

As Goldman Sachs points out, the environment for frontier drilling is improving. The world’s major oil companies have been struggling to replenish their reserves from established hydrocarbon basins. In response, and buoyed by the income they are receiving from today’s high oil price, they are upping their exploration budgets and increasingly willing to farm in to frontier developments.

Over the last five years the most significant new discoveries have been made in deep waters off-shore, notably off the coast of Brazil and Ghana and in the Gulf of Mexico. On-shore discoveries of significant size have been limited to Kurdistan and Uganda. Looking ahead the potential new basins lie off-shore Namibian and the Bahamas and in the South Falklands Basin.

As well as independent oil majors, national oil companies are also looking for reserves. The Chinese National Offshore Oil Corporation, the Korean National Oil Company, Malaysia’s Petronas, India’s Reliance and Russia’s Rosneft have all bought into energy projects. These government owned players are keen to acquire strategic oil supplies and have lower target financial returns than are typical in the private sector. So they are willing to pay good prices for confirmed reserves. This presents Goldman Sachs with a second theme. Where else could these national behemoths strike next?

The huge promise of “unconventional” energy

Consistent with their strategic role of securing energy supplies for the future, national oil companies tend to look at discovered resources of a good size. In recent years they have been ready to buy more complex assets and on this basis, Goldman Sachs picks out three possible take-over targets – the coal bed methane play Green Dragon (GDG), Cove Energy (COV), which has a deepwater LNG (liquefied natural gas) scheme and Bankers Petroleum (BNK), which is developing heavy oil fields in Albania.

Finally, Goldman Sachs highlights the trend towards ‘unconventional’ energy plays. Unconventional liquids are sourced from shale or tar sands, or else converted from coal or gas. Unconventional gas could be coal bed methane, ‘deep gas’ sourced from at least 15,000 feet below the surface, shale gas and tight gas, the latter exploited through the use of ‘fraccing’.

With Japan likely to increase its demand for gas, Goldman Sachs sees the price of LNG, which essentially sets the world market for gas, heading upwards. Furthermore, it believes that investors generally apply an unreasonably large discount to unconventional gas assets, pointing out that techniques for recovering gas from these difficult sources is improving all the time. Its favorite shares in the ‘unconventional’ space include Igas (IGAS), Great Eastern Energy (GEEC), and Nighthawk Energy (HAWK).

Completing the picture with a selection of shares that have good upside potential from exploration programs, but in the event of failure are otherwise well supported by the value of existing assets, Goldman Sachs picks out Rockhopper (RKH), Bowleven (BLVN) and Aminex (AEX). Overall Goldman is bullish on the sector – and its research shows that there are many ways to play the world’s persistent thirst for energy.

My favourite oil stocks

Readers of my Red Hot Penny Shares letter will recognise a few names here. We’ve been prepared for resurgence in penny oil stocks for some time.

In fact these are just like the kind of high risk/high reward plays that Red Hot readers enjoy. And without giving anything away, I believe that a number have the potential to make huge returns over the next 18 months, as they look to drill some very promising new oil basins.

I’ll be discussing my four favourite oil stocks in detail in the coming issue of Red Hot Penny Shares.

These obscure stocks could alter the face of medicine

(This article first appeared in Penny Sleuth in July 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

When I was a fund manager back in 2000 the dotcom bull market blazed in all its glory. Each day analysts and brokers would visit our office to push their latest idea. By the time they left the room our heads were spinning. These technology experts might have known the difference between bytes, middleware and dongles, but we certainly didn’t – although no doubt we nodded our heads sagely as if it was all crystal clear.

It was all too easy to dismiss these fancy new companies with their high tech dreams and fresh-out-of-college directors. The dotcoms duly crashed in 2001. Those who followed the rule of ‘never invest in anything that you do not understand’ felt smug.

But, the real winners were not those who looked down their noses at these young business upstarts, but those who made the effort to understand them. For sure, many of the dotcoms were never heard of again, but many of the best performing shares of the last decade – ASOS (ASC) and SDL (SDL) for example – were born in those crazy times. Those who understood these new businesses got in early and profited. Those who never made the effort missed out.

Investment is not meant to be easy. You have to make a real effort to understand new ideas because that is the only way to get ahead of the crowd.

Today I want to talk about the very exciting prospects in a poorly understood industry – epigenetics. The word may mean nothing to you now. But in ten years it could alter the face of medicine – creating a few more of the likes of ASOS and SDL along the way.

A journey to the source of hereditary disease

All of the cells in your body are capable of forming any type of tissue or organ. The actual type of tissue or organ that they form depends upon the DNA recipe and the action of the genes. If the cells are to form a liver, for instance, then liver genes will be active but others will not be.

The problem is that not all cells do what they are supposed to because genes that should be ‘switched on’ are ‘switched off’ or vice versa. What epigenetics seeks to establish is why this happens.

Epigenetics is the study of changes in gene activity that do not involve alterations to the genetic code but still get passed down to at least one successive generation. These patterns of gene expression are governed by cellular material – the epigenome – telling your genes to switch on or off. It is through the epigenome that factors like diet, stress and prenatal nutrition can make an imprint on your genes.

These changes may remain through cell divisions for the remainder of the cell’s life and may also last for multiple generations. However, there is no change in the underlying DNA sequence of the organism; instead, non-genetic factors cause the organism’s genes to behave (or ‘express themselves’) differently.

Is that clear? It may not be! So let’s go back to the human genome. You probably know that it is now possible to map the entire human genome – that is all the genetic material within us – in a matter of days and at a cost of a few thousand dollars.

By comparing the genes, and their activity, of healthy people with those suffering from disease scientists are starting to identify the genetic variations that increase our susceptibility to diseases such as cancers, diabetes, coronary heart disease and inflammatory bowel disease amongst others.

However, it is one thing to identify genes and relate gene expression to disease. Ideally we need to go one further step back in the process and ask why some genes express themselves and others do not.

Genes and their actions are programmed by DNA (short for deoxyribonucleic acid). DNA is a blueprint carried by genes that determines the construction of cells and organisms. By reading and altering this blueprint, epigenetics could allow us to kill diseases before they ever manifest themselves.

A tiny stock at the frontier of epigenetics

A penny share company working to make this a reality is Valirx (VAL). It has developed a hypergenomics platform that characterises disease by detecting genes that are active when they should not be. It also has ‘GeneICE’ technology that ‘silences’ (switches off) aberrant genes.

Chief executive Dr Satu Vainikka expects epigenetics, and its related discipline epigenomics, to become a cornerstone of new pharmaceutical and biotech research with cancer a prime target. Valirx has over one billion shares in issue – and the directors have been buying some of them only this week.

But at today’s price of 0.65p Valirx is still only valued at a tiddly £6.7m. I don’t pretend to know everything about epigenetics. But I think I get the basic idea – and I think it will pay to find out as much as I can. I’ll be watching the progress of this penny share very closely in the months ahead.

- If you give it a try, you'll get access to my definitive list of the 34 companies in our portfolio...

Good investing,
 

Tom Bulford Editor, Red Hot Penny Shares

Leo from Kintore, Scotland says… “I took the plunge and subscribed and, to be honest, have not looked back since. I have invested in a number of recommended companies and the result has been to see my portfolio rise 150% thus far (in about 18 months). I would simply say that if you are looking to invest in something a little different, have a little cash you can afford to lose and like to take risks in order to achieve greater returns, then this is for you.”

To see more feedback from our readers click here

(This article first appeared in Penny Sleuth in July 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)