Most of the oil/gas plays in the small cap universe have a strong bent towards exploration

Most of the oil/gas plays in the small cap universe have a strong bent towards exploration. Given our predisposition to free cash flow and return based valuations, this precludes many of these stocks from investment. Nevertheless, we will maintain a watching brief on this space as the oil price is intrinsically self-correcting in that reserves deplete and the marginal cost of replenishment and extraction is rising which ultimately determines the price absent changes to the demand profile. Instinctively, our short term concern is that consensus is very much trying to catch a falling knife premised on a $100 oil price that the investment community was conditioned to and is now psychologically anchored to. Until the investment world divorces itself form this anchor and the last vestige of optimism is extinguished there is a significant risk of investing prematurely, a common sin that we have experienced too numerous times in the past to repeat again. (Source: Matthew Booker, Senior Portfolio Manager, Australian Smaller Companies)