Investors are drawn back to small-sized UK fossil fuel small caps by high energy prices

Fossil fuel companies account for seven of the top ten performing stocks on London’s junior Aim Market.

UK small cap fossil fuel companies have seen their share prices rise and some are now able to make rare profits due to high energy prices.

The top performing 10 stocks on London’s junior Aim stock market are all fossil fuel companies. Four of them focus on UK oil production as the market reacts to the rise in prices following the invasion by Russia.

Although they only account for a small percentage of UK oil and natural gas supply, investors have been encouraged by the prospect of longer periods of higher prices and renewed attention to energy security.

This sector has been in decline in the face of the global shift towards renewable energy.

According to Sophie Lund-Yates (equity analyst at Hargreaves Lansdown), “An increase in interest from investors in oil and gas companies naturally occurs during times of higher oil prices.” She said that the situation in Ukraine and subsequent energy scarcity have brought oil and gas to the forefront of people’s minds in a way not seen before.

Companies such as IGas Energy and Union Jack Oil, Angus Energy, and Egdon Resources have been among the top performing stocks on Aim over the past year, with share prices more than doubling, albeit from a low starting point.

Chris Hopkinson, interim executive chairman of IGas stated that the energy crisis has made investors see that there is a future in energy in the UK.

Mark Abbott, Egdon Resources’ managing director, stated that a year ago there was a narrative that renewables could be a reality. But, he said: “The uncomfortable truth is that the UK will continue to use oil and gas until 2050.” This leaves it vulnerable to rising gas prices.

The wholesale gas price in the UK is 2.5 times higher than it was a year ago. Brent crude oil, an international standard for oil, has nearly 30% more than it was last year. The government has implemented a £150bn support package to consumers to combat rising inflation.

However, these packages have allowed small-cap oil and gas companies to earn rare profits while their larger international peers have reported record-breaking results.

Union Jack Oil made its first profit in six months, oil revenues increased by over 1,000% during 2021 and IGas posted a net profit of £19.4mn. This compares to a £12.2mn loss during the same period last year.

George Lucan, chief executive at Angus Energy, stated that the point is not the soaring gas prices we have seen over the past months but the fact that long-term gas prices are not returning to the 10-year average.

He said that UK oil and natural gas companies were “a long-term attractive proposition for investors, especially private investors.” Lund-Yates stated that while there may be a brief moment of sunshine in the sector, there are still reasons to be cautious.

There are many smaller companies that “pump money into unproven oil fields and gasfields with no guarantee of success.”

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