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Two very different oil & gas plays Anglo African and Touchstone Exploration AAOG TXP

Yesterday’s market reaction to announcements from Anglo African Oil & Gas (LSE:AAOG) and Touchstone Exploration (LSE:TXP) could not have been more different. Anglo African managed to deliver yet another operational delay and its share price got a damn good kicking, finishing down 27%. Meanwhile, Touchstone gave a cracking production update and no one seemed to care. It finished unchanged, on miniscule volume. There is so much to be learned about the nature of AIM from this, but how much opportunity does either stock now present?

Anglo African – operational shambles with massive speculative potential

The last thing anyone involved in Anglo African wanted to see was yesterday morning’s RNS. Having announced on 04 August that the rig for the much-anticipated TLP 103 exploration well was expected to be on site by 30 September, Anglo African’s board then gave itself a good kick in the face. It now turns out that negotiations for the same rig are ongoing and the company expects it to be available by mid-December. Miserable.

Since it listed in March, Anglo African has managed to report operational disappointment after operational disappointment. The workovers at Tilapia delivered nothing like the production increase hoped for, TLP 103 is months behind schedule and market communications have been poor (to put it very, very kindly).

Despite the board’s every effort to alienate as many retail investors as possible, this story (surprisingly) is far from over.

The 27% drop in Anglo African’s share price, to 18.3p at the close, looks panicky. No doubt the collapse was accentuated by T-traders being forced to close positions, but from an operational point of view things aren’t anywhere near as disastrous as the market would have us believe.

Anglo African should still be fully funded for TLP 103 and the company is truly hunting an elephant with the targets it is going for there. Yes, a 3-month delay is frustrating, but the telephone book numbers attached to TLP 103 still stand a strong chance of triggering a buying frenzy. There were growing signs of this over the last few weeks, as buying momentum built in the stock.

This has now been dashed in the short term, but the sell-off (which has continued today) emphasises two points about Anglo African. First, it clearly attracts a lot of speculative money. Second, it has caught the attention of a lot of retail investors.

In the absence of newsflow in the coming months, there doesn’t seem to be much reason to rush in and try to catch this falling knife. However, once the dust settles I am planning to increase my position. As ever, the time to buy is when no one wants the stock. The narrative for TLP 103 remains the same, although there is an obvious risk of what further self-inflicted wound the board might cause next. Assuming the directors have this time got their acts together and announced a more conservative, realistic timeframe there is plenty of speculative potential left in this stock.

Touchstone Exploration – solid progress, but needs to sort out its market comms

I’ve got to admit Touchstone Exploration is one of my favourite stocks at the moment. The growth story looks compelling.

Touchstone is a company which is making solid progress, but has been overlooked by investors. When I look around the oil & gas sector on AIM and some of the ludicrous valuations being applied to high-risk (total fantasy) exploration plays, Touchstone is a real gem. Oil production averaged 1,470bopd in July and August. The company is still targeting 2,000bopd in 2018. By any measure it certainly looks undervalued when compared to its direct peers on AIM.

The major problem holding Touchstone back is surely its (lack of) engagement with the market. There just isn’t the awareness among retail investors about this stock and Touchstone hasn’t exactly done enough to put itself on the map. This is reflected in the low trading volume in the stock.

ValueTheMarkets interviewed Touchstone’s CEO, Paul Baay a few months ago. What came across loud and clear was Baay’s intense focus on building a fundamentally sound company, with an ambitious plan to deliver genuine value to shareholders.

As commendable as this is, perhaps now is the time for Baay to consider spending some more time engaging with British investors.

When Touchstone took a dual listing on AIM, the rationale was for the company to take advantage of a more liquid market. However, what Touchstone needs to understand is how competitive this market is when it comes to attracting investor interest. A foreign-listed company can’t simply expect for a listing on AIM to cause an immediate rerate in its market-cap. It requires more effort than that.

It takes time to educate investors about a company’s plan and its potential. Thanks to its listing in Canada there is a lot of publicly available information about Touchstone’s history. However, the company can’t expect that British investors will necessarily go and read all that. We get bombarded with information every day. It is a noisy space to be in, with companies clamouring for our attention.

Baay’s primary focus should, quite rightly, be on growing Touchstone’s business. However, this doesn’t just mean increasing oil production. It also includes helping the company gain traction in the market.

Perhaps a first area for Touchstone to look at would be its use of RNSs. Since listing in June Touchstone has only issued three announcements about its operations. It has said very little about its reserves, plans and future targets. Targets can rapidly become a millstone around a company’s neck, but three ops RNSs in 3 months is not enough. Even if it uses RNS Reach to draw investor attention to specific areas of its business, this would help.

Hopefully yesterday’s lack of response to good news will serve as a wakeup call to Touchstone’s board that it needs to increase its market visibility. The company’s fundamental story is a good one and should ultimately drive value in the share price, but greasing the wheels with more regular market updates would be an obvious improvement to make. If Touchstone is able to gain more market awareness, the shares should head one way. Up.

 

Disclosure

The author owns shares in the above two companies.

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