be wary of shorting small oilers

Over the past 3 months I have been fortunate to make significant gains from trades on the ASX. The bulk of these derived from short positions with a focus on energy related stks including WOR. But I nearly came unstuck and use this example to caution others

I looked to short companies in the energy sector as I felt the share price had not fallen nearly enough compared with the massive fall in revenue/earnings from a collapse in energy prices i.e. oil and gas. I screened for overvalued stks and firms with massive debts. Those on list included OSH, STO, ORG, WPL, LNG plus those dependent on wk in energy eg WOR.

I opened positions, SPs fell and i took profits with one (fortunately small) exception. I opened 3 shorts at $7.25av on 29/06 (see HC post 'short as possible'). The SP continued falling and i cashed out. But got over confident and opened another 2 shorts at $6.20av. Fortunately i took a 25c profit on half leaving one still in the mkt. A day or so later OSH SP started climbing. I wasn't over concerned as LNG price was mild. Then a couple of posts appeared on HC cautioning short sellers a TO by WPL was being talked about in the AFR. I was slack/lazy and didn't read them all.... then BANG WPL announces a TO and SP leapt hitting $7.90! I held on as (very fortunately) it was a low ball script bid by WPL and OSH board/shareholders paid no attention to it. SP then slid back to around $7.40 mark and i extracted myself taking a loss.

Current situation in sector.

a) We have a macro situation where low energy price will separate weak from strong. Margins are the smallest in yrs and some producers make a loss on every barrel sold.
b) Companies with high debt esp if designated in USD are facing massive problems and some will go bust.
c) Expect mergers/takeovers/consolidation to increase.

So what is relevance for DLS? In no particular order:

1) DLS has positive cash balance of aprox $90m.
2) Production is being maintained.
3) Some (not all FY16) production is hedged at about $70/barrel avaerage.
4) New wells close to entering production.
5) FY16 capex reduced massively for NO loss in production.
6) DLS has huge tenants in best zones of Cooper basin both sides of state border.
7) Every exploration well is close to established pipelines.
8) Each successful well is quickly converted into production.
9) drilling costs are falling.
10) Unconventional energy set to become a big part of DLS future.
11) 41 wells drilled with 74% success rate.
12) Of 8 recent wells 7 will enter production!! Very high indeed.
13) 22 wells planned including 15 exploration weels.

So what does this have to do with shorting?
Yrs ago i read: 'never short a gold or oil stk as you never know when they will hit a reef or gusher'. The energy stks i shorted were huge and chance of a new discovery so big to materially shift SP was low. Plus most companies has substantial debts in the Billions.

I am not saying 'don't short DLS' but be aware:
A) DLS can hit a biggish (for small cap) discovery at anytime esp considering their high strike rate.
B) DLS is cashed-up, has huge quality acreage and only has mktcap of 235m. i.e. a small mouthful for some of its potential suitors.

Will a TO eventuate? Will DLS hit a gusher in FY16? Who knows but don't be caught short should it happen. Read every bit of news you can.

disclosure: have long positions in DLS.
excuse typos. Tried to dash sometime off before open but haven't made it.