A recovery in oil prices supported a big advance in small cap oil and gas companies in 2016. The average gain for the year in the AIM oil and gas universe was more
than 60%.

Not everything went up; some for good reason, others because the market failed to recognise interesting opportunities. We believe Pantheon Resources (PANR:AIM) falls into the latter camp, meaning its current price weakness is a great time to buy.

What will move the share price?

Imminent results from flow testing on Pantheon’s two latest wells on its acreage, which spans neighbouring Tyler and Polk Counties onshore East Texas, could move the company closer to first production. That could act as a catalyst for the stock to return to the 180p levels seen last summer.

Pantheon has been a victim of its own success. After years in hibernation the stock exploded into life in October 2015 when the results from testing on its VOBM#1 well revealed a better-than-expected flow rate of 1,500 barrels of oil equivalent per day (boepd). Subsequent drilling proved equally encouraging.

Having raised $30m in an oversubscribed placing in March 2016, this winning streak came to an abrupt halt in September when the VOBM#2 well, an effort to increase recovery rates through horizontal drilling, had to be abandoned.

This failure was compounded in November as the company revealed inconclusive results from its vertical VOBM-3 well.

Not all bad news 

It wasn’t all bad news in 2016. On 30 December the company announced it had made a discovery in the Wilcox sand – separate to the deeper Eagleford sandstone formation which had accounted for all of its previous success.

The company had developed a deep understanding of the geology through a three-year study with the independent State of Texas Bureau of Economic Geology in Austin.

Pantheon believes it has identified geological similarities in its acreage to the prolific Double A Wells field located nearby.

House broker Stifel says despite the mixed drilling results of the last 18 months this hypothesis remains intact. It sees the first well (VOBM#1) as a top quartile performer but says the other wells are within the expected range.

‘As such, we think the data remains compatible with the hypothesis that a Double A wells analogue has been discovered and our view on the acreage and thus the stock is broadly unchanged,’ it adds.

We like the clear strategy to drill sufficient wells to prove up the potential of the assets ahead of a sale to industry. (TS)

Pantheon Resources (PANR:AIM) 92.7p

Stop loss: 60p

Market value: £199m

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