The world has become a more difficult place for the small, intrepid Canadian oil explorers that roam the globe hunting for the next big petroleum discovery.

Like the big-game hunters that once ranged Africa, these small-cap explorers and producers (E&Ps) call their quest for billion barrel-plus oil deposits "elephant-hunting", and for many the thrill of the chase is a big part of why they are in business.

"A guy can invest in the Alberta oil sands or a Bakken shale-type company and they are going to make a little bit of money, but they are not going to hit that grand-slam home run we are looking for in elephant country," said Mark Sommer, spokesman at Simba Energy.

But Ebola, Islamic State and the Ukraine conflict have made an already tough market tougher for these companies, while potential investors are finding the North American shale boom a more comfortable place for their money.

Some of the E&Ps are trying to diversify and bring production back home to Canada's more stable environment. For most, however, that is not an option. Their expertise lies in finding and proving oil deposits, not asset development.
At Simba Energy, the bulk of its operations are in Kenya but it also has assets in Ebola-stricken Liberia and in Mali, where Tuareg rebels are demanding greater autonomy.

The company is trying to exit Mali and will re-evaluate its Liberian operations if the Ebola outbreak lasts more than another six months, Sommer said.


The E&Ps have always faced some challenges operating in risky areas but only recently has the sector also had to compete with North American shale plays for capital.

E&Ps operating internationally have raised about $6 billion in capital this year, about 10 percent of global issues in the sector, according to RBC Capital Markets. The other 90 percent went to North America.

Merger and acquisition activity in the sector is at a six-year low. On Canada's TSX Venture Exchange, which has a long history of pairing risk-tolerant investors with companies drilling in distant and dangerous places, initial public offerings have been down two years in a row.

Chris Beltgens, corporate development manager at East West Petroleum, said he has been frustrated by the way the conflict in Ukraine has soured investor attitudes toward East-West' activities in neighboring Romania.

And a tough market for E&Ps bodes ill for exploration worldwide as small caps are often first to drill in a new region.

If drilling is successful, larger companies take note and follow or buy the E&P outright as commodity trading house Glencore did with Caracal Energy and its Chad assets earlier this year.

"They (E&Ps) start off with prospectivity and follow with exploration success," said Sonny Mottahed, chief executive at Black Spruce Merchant Capital. "We have gone through three years in the international E&P space where this has been a fairly challenging outcome."


Some E&Ps are trying to make the switch from international to domestic.

When new management took over Groundstar Resources Ltd two years ago it decided to shift operations back to Canada, and it now has production in Saskatchewan. The company left Iraqi Kurdistan in 2013 but still has operations in Egypt.

"When we took over we basically said let's come back closer to home and develop assets over here and get ourselves to a much more stable cash flow company," said chief financial officer Shabir Premji.

Calvalley Petroleum is trying to diversify assets so production is not solely concentrated in Yemen, where sectarian warfare is a danger.

Others are hanging on. Mena Hydrocarbons halted drilling in Syria two years ago but CEO Magdy Bassaly said it will return if the country stabilizes as the company's well is a good prospect.
Source: Reuters

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