Oil smallcaps are better bet than rangebound oil

Small oil companies are a better investment than the commodity itself, which is likely to remain confined to a trading range because of a weak economy, the manager of a London-based fund said.

Angelos Damaskos of Junior Oils Trust, a 35-million-pound (USD 54 million) fund investing in small oil companies, sees energy as being in a "supercycle" of long-run gains but expects the oil price to remain within a range of USD 65 to USD 85 a barrel for the next year.

"We believe the prices are on a firm uptrend," Damaskos said. "It is probably a more rewarding way to benefit from this upward trend by investing in companies that focus in developing and extracting oil reserves and selling them to the market at these gradually inflating prices, rather than investing in the commodity itself."

In the year to Aug. 31, the Junior Oils Trust has produced a return of more than 23 percent. In that time, U.S. crude futures have gained almost 6 percent.

Damaskos said in a statement last week the fund had benefitted from the hostile USD 2.6 billion takeover bid made for Dana Petroleum by Korea National Oil Corp. and had taken its profits at just below the offer price.

That leaves Premier Oil and EnCore Oil as prominent holdings of the fund, which is part of the Sector Investment Managers group.

"Premier Oil is our biggest holding at the moment. We have long held the view that it's a prime takeover target," said Damaskos, who is also the chief executive of Sector Investments.

"It is in a similar position to Dana with a rapidly growing production profile and an active exploration programme."

"EnCore is becoming one of our biggest holdings because it has grown so quickly in the last couple of months on the back of exploration success."

AVOIDING FALKLANDS

The fund tends to steer clear of companies offering only the prospect of finding reserves and has not invested in explorers drilling offshore the Falkland Islands.

"We have avoided the Falkland Islands and the reason for that is because we generally avoid pure exploration risk. There has been some success in that sector but there have been also huge disappointments," said Damaskos.

For example, British explorer Desire Petroleum said in March it found poor quality oil in the first well to be drilled in the Falklands for a decade, which sent shares of explorers in the islands lower.

The oil price has traded largely within a range of USD 70 and USD 80 a barrel for the past year. Economic problems are likely to weigh on the market for a while yet.

"We think we will probably be rangebound for the next year or so, somewhere between USD 65 and USD 85, because the global economy has enormous problems and we don't see significant growth returning in oil demand."

"It is difficult to predict USD 100-a-barrel prices without this pickup in demand."