Junior Oil Companies

Why Invest in Smaller Companies?

For a number of reasons, on average, smaller companies outperform larger companies in the long term. Research by Dimson and Marsh with reference to the Hoare Govett Smaller Companies Index and the London Business School MicroCap Index shows that, in the U.K., in the period 1955-2000, the average smallcap company beat the market by a factor of 2.83 while the average microcap stock outperformed the market by a factor of 10.1. Subsequent declines in global equity markets and reversal of the size-effect have brought these multiples down but, over a long period, small and micro caps have considerably outperformed the market.

Reduce Risk by a Spread

Investing in one junior oil company can be risky, especially if it encounters a series of dry holes or if there are other disappointments of a similar nature. A spread of investments across the oil and gas sector excluding the majors and companies with interests in the Middle East should provide a buffer against unexpected setbacks. In addition, the fund will spread its investments to cover some of the most promising areas for further substantial discoveries in the world today. The Canadian shallow oil fields, West African Atlantic margin, the Indian Ocean, South China Seas, Latin America and the Gulf of Mexico are prime areas of interest as it is believed that they contain a very high proportion of the world’s undiscovered oil and gas. A spread of investments helps to ensure that if any of these areas are particularly successful the fund should benefit.