Junior oil exploration stocks that can be major risers for investors
These are the companies that are drilling high-impact wells that can produce thousands of barrels a day – and their success can make shareholders a lot wealthier. As I wrote in my previous article, all these exploration plays are international – and the big winners often come from orphaned stocks that get financed at a very low valuation.
One of my subscribers, Craig in Seattle, rode OGIB stock pick Xcite Energy (XEL-TSXv) and their North Sea heavy oil play from 60 cents to $6/share and sent me this email just before Christmas: “Thank you many times over – this “plucky” investor has just become a millionaire (on paper) due to you bringing it to my attention and of course me doing my own research.” I love those stories.
I’ll share with you how I find these companies, how I invest in them, and at the end I outline my current favourite international oil play, which has a big, short term catalyst.
1. My investment philosophy is to have the biggest “deal flow” I can get; create a big hopper of ideas and keep it full. So that means I have accounts with a lot of smaller, regional brokerage houses that cover the junior international exploration companies. In Canada this means securities firms like (alphabetically), Cormark Securities, Haywood, Jennings Capital, Union Securities and Wellington West among others.
Some of the national firms cover a few international juniors, (Canaccord Capital, GMP Securities, Macquarie Capital) but these junior companies often don’t raise a lot of money before their first big success, so it’s tough for the larger brokerage companies to make any money covering them.
Whatever firm you’re with, have them email you their morning letter and specifically an energy letter if they have it. (I get 8 each day, and get some of my best investment ideas from them.)
In the U.S. the analysts are more myopic and they don’t do near the small cap international coverage that the Canadians do – in fact, it’s not unusual for US based teams with international projects to list on the Toronto Stock Exchange first.
These companies often get orphaned as the investment bankers in Toronto and Calgary don’t know the management that well, and they fall through the cracks – unless management can raise their own money or has a remarkable track record in exploration.
2. Another free and easy way is to sign up for the daily emails from some of the trade magazines – I read the daily email from Rigzone.com – I find that the best one. I also get the daily email fromwww.platts.com andwww.upstreamonline.com, and I also pay for The Daily Oil Bulletin in Canada.
3. I also have Google Alerts to track some very talented energy writers, like Toby Shute from the Motley Fool. (Another great writer — though he doesn’t cover much in the way of international plays — is Allen Brooks’ Musings from the Oil Patchhttp://energy-musings.com/)
4. I also create Alerts for specific areas, like “offshore West Africa” or “North Sea oil”.
5. Every six months there is an investment conference of junior oil and gas companies in Calgary hosted by SEPAC – the Small Explorers and Producers Association of Canada (www.sepac.ca) that is worth attending.
6. And if you do all these things, guess what will happen? You will create the single most important and powerful profit center of your investing career – your network of friends and contacts.
They send you research. They share talks they’ve had with other people. They may know of a junior company that has just assembled a big land package right beside a big new discovery in Timbuktu or Nowhere – and they’re doing a cheap financing.
OK, so now you are slowly building your information flow and have a list of several exploration stocks you’re following. Which ones to buy?
Like any other energy investment, you want to check out management, find out how much production they have, how big their land position is, and whether or not their production is nearby. You want to know the cash balance, and the share structure, and how transparent or corrupt the country is. (Download my Top 20 Questions to Ask Management at the top of my homepage!).
I want to find a big play that is getting financed now, but won’t get spudded for several weeks or months. I want to put my money in when The Big Money comes in. I may have been watching the company for months, or longer, but I wait for The Money to come in. (I also call this the BIBA Machine – Brokers, Investment Bankers and Analysts.)
Getting the timing right is very important to me on these high-risk, high-reward international plays.
One thing I don’t want to do is be too early to the play. Perhaps management is waiting for permits of some kind – the politics and bureaucracy in many countries is very slow. Or maybe the hot property is in a legal dispute. Or there is some negative attribute (“hair on the deal,” it’s called) that is keeping The Money away. Without The Money, the chances are much less that the stock can build a speculative premium close to drilling. The Money promotes the stock with management.
And that is key. I like to make my investment several weeks before results are due on the well. That gives management time to promote the stock to analysts, who can get their reports out to their clients. Hopefully management can spend a lot of time doing investor presentations to institutions and other investors to create some excitement around the play. Who organizes most of those presentations? The Money.
I want this “excitement” to cause the stock to go up so I can choose to sell enough stock to cover the cost of my investment and ride for free on the results. If the timeline from investment to results is too short, I might not get that opportunity.
My good friend John Story , an energy analyst at Nasdaq Advisory Services.Has recently purchased Independent Resources plc LON:IRG a United Kingdom-based oil and gas company focused on acquiring and developing production and low risk exploration opportunities,he now holds 10,000,000 ordinary shares of 1p each representing approximately 5.40% of the issued share capital of the Company.
Given the fact that John has been in the industry a lot of years i wonder if this is a punt or he intends taking an active part in this one time mid tier junior oiler, rumour has it the Italian government is rubber stamping thier asset in Italy that has been on the back burner.
With numerous majors having seen thier data room in Tunisia it is maybe the time is right now to follow my good friends investment leadership.
My favourite international oil play right now has all the attributes I’m looking for .
All is virtually set for Niger to begin exporting oil through Chad and Cameroon in 2015. This follows an agreement reached with Chad on the laying of a pipeline from Niger through its territory as a follow-up to an earlier accord with Cameroon for Niger crude oil to be exported at Kribi on the Atlantic coast through the current Chad-Cameroon pipeline run by COTCO.
Making the announcement recently, President Mohamadou Issoufou, expressed hope that Niger's oil exports would soon reach 80,000 barrels per day to enable the country make more money for its development. The Oil Ministers of the two countries recently reached an understanding on the matter, he revealed. Niger, which is one of Africa's newest oil producers, began pumping oil in 2011 as part of a 5 Billion US Dollar (about FCFA 2,451 Billion) deal with China National Petroleum Corporation, CNPC, to develop the Agadem Block.
With production from Agadem in the north-eastern part of the country, CNPC supplies 20,000 barrels a day to the SORAZ Refinery in Zinder, a joint venture between Niger and China. Given that total national demand is only 7,000 barrels, the remaining 13,000 barrels are available for export. Government last November allocated 59 new oil reserves in Agadem to CNPC. Government Spokesman and Minister of Justice, Marou Amadou, said production could reach 1 billion barrels.
Chad Hopes To Triple Crude Output By 2015.
Chad is ramping up its oil production with an eye to spurring development, and its finance minster said he hopes to see output triple.
"We aim to become the business hub of Francophone central Africa,” Finance Minister Atteib Doutoum said. The extra revenue will be used to fund the construction of a business zone, projected cost more than $500 million, in the capital city of N'djamena.
Chad is Africa's fifth-largest country, and it ranks 10th in terms of the size of its oil reserves: 1.5 billion barrels. Oil production began in 2003, after a pipeline was completed connecting Chad to the Atlantic Ocean via Cameroon.
The government hopes that once new oilfields near Lake Chad begin production, output will hit 300,000 bpd by 2015. Those are ambitions plans for the vast desert country, but it still wouldn't come close to the output from Africa's biggest producers like Nigeria, which boasts about 2 million bpd, or Angola, which peaked at around 1.7 million bpd this spring. Still, oil exports are invaluable to the Chadian government; they bring in about $1.2 billion annually, or 80 percent of revenue.
Chad's use of those funds has been a point of contention. At the beginning of its oil boom, Chad was working closely with the World Bank, which helped build the Cameroon pipeline but set out a key stipulation: 80 percent of all royalties earned via the pipeline would have to be spent on development initiatives. Half of Chad's population lives in poverty, the literacy rate is less than 40 percent, and life expectancy is among the world's lowest at 50.
Chad, however, didn't adhere to the agreement, arguing instead that defense had to take a priority due to ongoing insurgent activities along the border with Sudan. A disappointed World Bank withdrew from the agreement in 2008, at which point China swooped in with investments of its own to spur Chad's growing hydrocarbon industry.
Doutoum is vague about the cause of the recent production slowdown, blaming it on technical difficulties. (There have also been hints that China's involvement hasn't been all smooth sailing; last month, Chad suspended the operations of the China National Petroleum Corporation in a southern field, where it had spilled massive amounts of oil, causing serious environmental damage.) But the finance minister's predictions about increased capacity over the next few years offer some hope for a country where developmental spending is long overdue.
Bedoumra said output would increase from the Mangara and Badila fields, which are operated by mining company Glencore Xstrata, and a new field managed by a China National Petroleum Corporation (CNPC) subsidiary.
When Chad struck oil in 2003, nobody realised just how much money the find would bring. Estimates in the early 2000s placed expected revenue at $2.5billion for the project’s entire duration, but earnings have already passed $10billion, according to Celeste Hicks, a former BBC correspondent based in Chad.
Hicks explores Africa’s latest oil producers in her recent book Africa’s New Oil.
Chad, Uganda, Niger and Kenya are all dealing with new oil discoveries, and are working out the best strategies to manage a resource that has come to be seen as much a curse as it is a blessing.
Hicks says that Chad took a very strong position with foreign oil companies over environmental and social impacts from oil exploitation. China played an important role in Chad’s oil development and while the Chinese are often portrayed as having a sinister role in Africa, Hicks found that in Chad, Chinese companies were the exploited party.
‘It’s much more complicated than simple neo-colonialism,’ she says. ‘The Chinese companies can be naïve and disorganised. It can’t be characterised as a neo-colonial approach.’
In Chad, the government blocked Chinese oil exploitation when schemes deviated from the government’s expectations.
What followed was an ambitious plan to ensure Chad did not fall into the ‘resource curse’ so often seen in oil-rich countries where, despite an abundant natural resource, low economic growth and poor development outcomes prevail.
World Bank loans were offered to Chad to develop the oil industry, on the condition that a law was passed requiring that 80 per cent of oil revenue was spent on health and education. ‘The plan included high environmental standards and stabilisation measures to develop a future savings fund for the next generation,’ says Hicks. Contract transparency for negotiations between the oil company and the government was also included in the plans, she adds.
Mercom Oil Sands(“Mercom”) MMO Maverick Petroleum Ltd has inked a deal with the Chad Government
State has signed an Agreement with the Government of Chad to build an oil pipeline from the Niger-Chad border to connect with the existing Chad-Cameroon export pipeline.
The pipeline will ship oil from oilfields in Eastern Niger close to the Chad-Niger border and from the Lac Chad basin in Chad. The Governments of Chad and Niger signed a protocol agreement for the building of a pipeline from the eastern border of Niger to connect with the Chad-Cameroon export pipeline.
The pipeline will be ± 950 km. long and will pass close to Lac Chad through the Lac Chad basin area. The land along the proposed route is mostly flat with no major geological features. The pipeline will be buried along most of its route.
State through one of its associated companies, Maverick Petroleum Ltd., has signed an Agreement with the Government of Chad to develop Sidigui Oilfield and set up a 10,000 barrels refinery.
Location
Sidigui Oilfield is located in the north-east part of the Lake Chad Basin, which is about 200 miles northwest of the capital city, N’Djamena.
ERHC Energy Inc. reported that following several months of negotiations, the government of Chad formally awarded it three oil blocks – Block BDS 2008, Manga, and Chari-Quest Block 3 – in the country for exploration and development. ERHC said production sharing contracts have been signed with the Chadian government.
Chad has revised its code for oil production to allow for production sharing agreements between foreign companies and the Chadian government rather than requiring foreign investors to bear all exploration costs.
However, for successful oil production in Chad, which has no direct access to the ocean, moving large quantities of crude oil from its territory to the world markets depends largely on the cooperation and support of neighboring Cameroon.
Chad negotiated the construction of a pipeline with Cameroon to export its oil. The 1,070-km (665-mile) underground pipeline runs from the Doba basin through southern Chad to the Cameroon border to carry Chadian crude oil across Cameroon until it reaches the port of Kribi for export. The pipeline’s capacity is estimated at 225,000 b/d.
CNPC’s first production well in Chad came onstream in April 2011. By August of the same year, the new Djarmaya 20,000 b/d refinery became operational near Chad’s capital of N’djamena, which is 40% owned by the Chadian government and 60% by CNPC International. For the first time in its history, Chad was able to produce its own gasoline and diesel. Oil Find In Niger Republic
Efforts to find oil in Niger Republic began in the 1950s, but its hydrocarbon fortune changed in 2008 when CNPC signed a production sharing agreement with the Niger government to prospect for oil in the country’s Agadem area in the Diffa region north of Lake Chad, with a promise to build the Agadem oil field, a pipeline, and a refinery.
Various engineering contracts were concluded, but construction and prospecting work ended abruptly Feb. 8, 2010, following a military coup. In August 2010 the transitional government in Niger granted CNPC its long-awaited exploitation license.
In September 2011 CNPC began pumping oil from the Agadem block, 1,600 km (994 miles) east of Niamey, the Niger capital. The contract for oil prospecting signed by then-President Mamadou Tandja in 2008, two years before he was deposed in the military coup, awarded 40% of production to the Niger government and 60% to CNPC.
Oil from Agadem is transported through a 426.5-km (265-mile) pipeline to the 20,000 b/d Soraz refinery in Zinder. About 60% of the oil refined at the refinery is sold on the local market while the remainder is exported. The refinery, which produced the country’s first barrel of refined oil Nov. 28, 2011, was built to also produce LPG and gas-oil.
Niger President Mahamadou Issoufou announced last August that Niger has discovered additional oil in its eastern Agadem oil fields while oil prospecting in the northern Bilma block had showed positive prospects.
Reserves at Agadem oil field have been estimated at 650 MMbbl, and Niger is expected to begin operating reserves on four fields at its Agadem block by 2014, increasing the country’s production to 80,000 b/d.
Government officials say Niger will send around 60,000 b/d via the Chad-Cameroun pipeline, allowing the country to export its crude onto the international market from the port of Kribi in the Gulf of Guinea. The government last year said it expected its petroleum sector to provide Niger with US $164 million in revenue, eliminating costly fuel imports.
Oil production has brought job opportunities to Chad and Niger as well as training for their nationals in oil E&P, transportation, and marketing. Nationals of both countries who had worked in Nigeria’s oil industry have returned home to work.
Experts add that oil production offers Chad and Niger opportunities to help improve the quality of life of their citizens and bring immense changes to both countries’ economies. The refineries in Chad and Niger have provided fuel to their citizens at lower costs and brought revenues for both countries.
Issoufou has promised compliance with the Extractive Industries Transparency Initiative and backed a constitutional clause in Niger for proper management of natural resources revenues. “Niger has a bright future when it comes to oil,” President Issoufou said.
Winstar Resources (WIX-TSX) is only three weeks away from announcing the results of a high impact oil well in Tunisia, North Africa – the CS SIL #1, targeting to prove up an extension of a prolific oil field. I love this investment, because only a few small firms in western Canada and only one in Toronto have research on it. No other firms were actively supporting Winstar.
The company has a tight market capitalization with only 35 million shares out and no debt. It was trading at 4x cash flow, despite high netbacks of $57/barrel on 2000 bopd production. So there was no speculative premium built in yet for this high-impact CS SIL#1 well.
The fact they missed last November on a $7 million well I’m sure helped create a low valuation.
This well is about 30 km away from the nearest production in south west Tunisia, but other producers in that area have had an 80% success rate with wells having IP rates of 6000 bopd.
IF Winstar hits on this well – and they have said publicly that four zones showed positive signs – what impact could that have on the stock?
In the first week of January there was a sale of Tunisian oil assets which gives an update valuation of Winstar’s assets and what the potential upside could be upon success of its current well.
Pioneer Natural Resources Company (PXD-NYSE) announced that it has agreed to sell its Tunisian assets and production to OMV AG, an Austrian company, for US$866 million. The assets are close to Winstar’s Chouech Essaida and Ech Chouech blocks, as well as several other concessions.
Analyst reports valued the production at $94,000/BOE/d, and $22.80 and $14.65/BOE for the 2P and 3P reserves respectively.
Applying the OMV-Pioneer metrics to Winstar’s production and reserves, analysts suggested it values Winstar at $5/share on a production basis, and $9/share on a reserves (2P) basis, before any new production or reserves from the CS SIL#1 well currently being tested.
So IF this well comes in at 2000 bopd, an increase in market cap of $188 million ($94,000 x 2000) would not be ridiculous. On 35 million shares out that would add $5.37 a share to the current price of $5.50 – making it a short term double. And success would mean there are multiple potential new well locations in the field if this well hits that would enhance shareholder value for a few more years.
BUT if the well misses, I expect the company to halt the stock and see it open later in the $3.50 range – at best.
The good news is that the company has no debt, has (great) positive cash flow, and a miss on this well will not destroy the company. But a lot of speculative money in the stock will leave over the coming weeks, putting constant downward pressure on the stock.
The hard part is gauging how the market may take a result that is a lot less than expected, say 500 bopd. While that would likely be economic, the market might be happy and bid the stock up or disappointed and sell it down.
High risk, high reward. But these are the plays – for the risk-tolerant investor – that can be 10 baggers over short periods of time.
