Derek Pain: Once bitten, twice shy: why I'm not returning to Nighthawk

No Pain, No Gain

Should the no pain, no gain portfolio return to one of its past disasters – Nighthawk Energy? A reader raised such a possibility, following the US- focused oil and gas group's rejuvenation after new management assumed control.

Portfolio followers will possibly recall that I descended on the stock, floated in January 2007, at 44p in the summer of that year. My little stock-market exercise subsequently experienced a lucrative but then parlous ride. At first the shares soared to 107p; then came a long, relentless decline. Nighthawk desperately raised cash by issuing shares as exploration returns fell below expectations. After hanging on grimly and for far too long, the portfolio called it a day, selling at a mere 14p. The shares subsequently fell to around 2p.

Many energy companies, particularly explorers, suffer losses as they struggle to find what can be richly rewarding black gold. Getting the stuff out of the ground is often a problem; then such essentials as transportation come into play. Some explorers and their hopeful investors end up with absolutely nothing to show for their labours. Nighthawk found oil but not enough. Consequently it excelled itself on the losses front, suffering deficits of well over $150m (£94m) in its brief history. Although it has nearly 950,000,000 shares, as I write around their year's high of 12p, the capitalisation is only £112.4m –pretty small in stock-market terms.

Still, current management, headed by Stephen Gutteridge, is transforming the group. Although in its earlier incarnation Nighthawk had been adept at raising cash through spreading shares around, it had relied on private placings with most shareholders left in the cold. But last year came a £2.9m cash call for all, at 2.5p a share.

Latest figures, covering the first six months of this year, indicate Nighthawk could have a profitable future. There was another pre-tax loss – this time amounting to $820,000 – but that masked a $1.3m operating profit.

Floated on Aim at 25p a share, Nighthawk had high hopes that its Cisco Springs area in the US midwest would provide its jackpot. Now it concentrates on 300,000 acres embracing two areas known as Smoky Hill and Jolly Ranch. It has even made a significant discovery in land not explored for 25 years. And there must be a chance it could start to produce the sort of returns early investors anticipated. In the third quarter of the year output averaged 1,528 barrels a day, a 142 per cent increase. In addition, Nighthawk continues to hunt for additional production sites.

A dramatic turnaround, then. But I am resisting the temptation to rejoin the Nighthawk flypath. Although the group has been given a new lease of life, I feel it is, at the moment, a recruit too far.

The portfolio has a mixed record when returning to former constituents. Mears, the support-services group, was a highly successful investment in the early days of this century. Re-recruited, it is showing a reasonable gain at around 426p against a 272p buying price.

On the other hand, Myhome International, a franchise group that was revisited, hit the portfolio's coffers. The shares, acquired at 15.5p, were sold at 50p – a handsome return although the price had once been more than 100p. A meeting with the management tempted me back into the stock only for Myhome to then go belly up. Not only was the original profit sharply reduced but I had to contend with the humiliation of failing to spot looming disaster.