Larger oil and gas player Helios Energy (ASX:HE8) is upping its stake in the much smaller Winchester Energy (ASX:WEL), a move that could potentially signal there are good times ahead for the sector.

Helios has handed Winchester a signed agreement promising to sink a further $500,000 into the company to pick up another 20 million shares at 2.5c each.

That increases Helios’ stake to 5.45 per cent, making it a substantial shareholder.

Winchester released a notice of general meeting to the ASX this morning outlining its plans to seek shareholder approval for the share issue.

Helios, which was once coal explorer New Horizon Coal, obviously sees the potential in the oil sector, and the increased investment looks to be well timed given prices last week started heading back up.

So could the move to up its stake in Winchester be an indicator of a potential takeover?

OPEC supply cuts are having a big impact on the US oil market and stocks are depleting much faster than expected.

According to the latest data from the US Energy Information Administration (EIA), crude oil inventories had been drawn down by 10 million barrels more than expected.

Over the course of last week crude oil prices rallied 2 per cent to $US55.25.

Helios’ switch to oil and gas has done wonders for its value. It re-joined the ASX under its new persona in August 2017 and since then its share price has risen a whopping 1289 per cent to 25c, giving it a market value of just over $300m.

The company is also well funded with around $8.4m in the bank at the end of June.

Winchester has 17,402 net acres in the highly productive Eastern Shelf of the Permian Basin in Texas and is already in production.

Oil output in the Permian Basin totals about 4 million barrels of oil per day (bopd).

Helios also has projects – Trinity and Presidio – in Texas.

The Presidio project is located about 402km, or five hours by truck, from Midland, Texas which is the epicentre of the Permian Basin oil industry.

EIA stats show that in 2018, about 68 per cent of total US crude oil production came from five states and Texas is the largest producer, accounting for 40.5 per cent.

Last year the US surpassed Russia and Saudi Arabia to become the largest crude oil producing country at 10.95 billion bopd.

Helios has already drilled two vertical wildcat wells into the Presidio oil project and one was a major new discovery.

Last week the company reported that the Presidio 141#2 well was flowing at a rate of about 1,295 barrels of fluid per day.

Over a period of 72 hours, roughly 438 barrels of oil had been produced, averaging a rate of about 146 bopd, while gas was being produced at a rate of 566 million cubic feet of gas per day.

Helios said oil and gas volumes were steadily increasing.

Even if a takeover is not what Helios has in mind, the fact it is now a substantial shareholder means Winchester has a solid financial backer on its register that could help fund it well into the future.

Winchester plans to use the new funds on its development drilling program to increase oil production in particular at the Mustang oil field, and for general working capital purposes.