Investment Column: Hardy's gas find lights the gloom

Hardy Oil & Gas lit up an otherwise gloomy sector yesterday with news of its bumper gas find in Pakistan. Investors, who have been watching share prices fall across the board as a result of the plunging oil price, reacted with predictable enthusiasm, pushing Hardy's share price up 37p, or almost 15 per cent, to 285p.

Is this rise justified? Well, perhaps. Hardy reckons its share of the field, which will fall to about 24 per cent once negotiations with the Pakistani government are completed, adds the equivalent of 40-80 million barrels of oil to its reserves. Even at the bottom end of the range, that's an increase of 24 per cent. Demand for the gas in Pakistan is strong, and long term there's even the possibility - politics permitting - of exporting it to India. Hardy should be able to finance the cost of developing the well without loading up its balance sheet with debt.

But oil exploration companies are valued as much by sentiment as by hard analysis. Because Hardy has managed one big find, investors will be more willing to bet on it repeating the trick. The other unanswered question is just how large a field Hardy is sitting on. Until it does more tests, no one will really be sure. But the chances are that the current estimates are conservative.

Of course, there are plenty of risks. The tests may prove to be bogus, while the political sands could always shift against Hardy. But yesterday's share price move only begins to reverse six months of dramatic share price underperformance.

Investors will still remember the example of Cairn Energy, which watched its share price rise almost sevenfold in 1996 on a series of oil discoveries in the same part of the world. The shares remain a punt, but at 285p the downside is probably protected while the potential upside is huge.