”They Stole $267 billion of King Saud’s Oil”

By Travis Johnson, Stock Gumshoe, August 18, 2011

Your friendly neighborhood Gumshoe is still working feverishly on the new and improved StockGumshoe.com that we hope to be introducing in the weeks to come, so today we’re sharing an older article that originally appeared in the Irregulars-only Friday File. I’ve shortened the article to remove some of my blather, but it has not been updated or substantively revised since it was first published on June 24, except to update our disclosure at the bottom (I now own the stock, I didn’t then).

By way of limited update, the same ad is still being heavily circulated, the share price has fallen substantially over the last few months, and some of the catalysts teased by DeHaemer have been delayed a bit — recent versions of the ad have pitched September 22 as the drilling catalyst date, revised from August 11, which seems to largely be due to minor rig delivery delays for Tullow. And FYI, Recent versions of the ad have increased my certainty of the match from 95% to 100%.

From the June 24 Friday File:

Christian DeHaemer has made quite a career out of picking somewhat controversial resource companies with tiny market caps in war-torn or politically unstable or distasteful areas of the world — and since two of them that he has teased in the past, Petro Matad in Mongolia and Dragon Oil in Turkmenistan, have done very very well, It always gets my attention when he teases a new one for his $995 Crisis and Opportunity newsletter.

And, as you may have guessed from that paragraph, that’s what he’s doing today — he’s been talking up his visit to Kenya and his interest in East African oil for a couple weeks now in free articles, hinting around about finding that next high-potential oil stock for a while now, and apparently he found it. The teaser started circulating with more details a day or two ago, and it builds off of his basic premise that East Africa is the next global oil hotbed to start hinting at his favorite investment in the area. So let’s look at the teaser.

The pitch is, like some we’ve seen before, about how some folks are going to “steal” some of the oil from the huge Middle Eastern oil kingdoms — but like the last similar pitch we saw (from Chris Mayer for his idea that a Turkish company is siphoning off oil from Iran’s fields), it’s a very prehistoric, geological-shift kind of “stealing,” the basic idea is that there are huge oil formations in the area, and that when the earth shifted to open the Gulf of Aden and the Red Sea, moving Somalia and Ethiopia away from Yemen and the Arabian Peninsula, some of what were continuous oil-bearing formations under that land moved with the African land mass and should still be there and ready to be discovered and exploited.

Which is logical enough, and seems to be borne out by at least the preliminary assessments of geologists and explorers who continue to push eastward across Africa in the search for more big oil fields — especially after Tullow Oil found its really shockingly huge fields in Uganda, which is just inland from Kenya. Dehaemer describes the oil formations as a “mega-system” of oil-bearing rock formations that extend down through Somalia, Ethiopia, the Sudan (mostly what will be Southern Sudan, to Al Bashir’s consternation), Kenya, and Uganda in a variety of potential fields that are in a few cases producing oil but in most cases still being explored and defined. Here’s how Dehaemer puts it:

“And it’s this part — the part that nobody’s heard about yet — that’s so critical…

“With the U.S. Geological Survey estimating 71.1 billion barrels locked in East Africa (the most significant deposits occurring in Northern Kenya), the lower half of this massive intercontinental resource has yet to make any impact at all on the region’s economy.

“Remember, these aren’t similar or comparable to the oil formations that made the Saudis the richest people in the world…

“These are the same formations!”

So why aren’t these all wealthy oil states now? Here’s Dehaemer’s explanation:

“But why would such unimaginable wealth remain untouched, while the rest of the African continent is teeming with new oil wells?

“The answer, unfortunately, has nothing to do with the wealth available to be had — but with the political stability of the region.

“Wracked with violence and anarchy for years, Kenya’s northern neighbor, Somalia, continues to make headlines today with stories of roving death squads, kidnappings, and piracy on the high seas.

“It’s a reputation that, up until now, has kept companies and investors at a distance… and not just from Somalia, but from the entire region.

“Which means that East Africa, one of the world’s richest oil regions, remains the world’s least developed.

“This, however, is already rapidly changing.

“Kenya — the jewel of this energy-rich geology — is now in its third straight decade of political and economic stability.”

And we’re told that although Tullow has obviously caught a lot of attention for its Uganda finds of a couple billion barrels of oil, which continue to be in some dispute over licensing, taxation, and export (Uganda’s landlocked, so they’re talking about export by train until a pipeline can be built), but that even Tullow is focusing on Kenya for future exploration, securing some blocks and resisting a sale to the Chinese giant CNOOC. So Kenya is the heart of the action, per Dehaemer, helping to send the stocks of both Tullow Oil and Afren soaring in the last couple years. But it gets more interesting, of course …

“These two examples are big, established companies with thousands of employees, multi-million-dollar monthly overhead, and infrastructures that would rival small nations.

“But the most important player in this game, the one you haven’t heard of yet, isn’t a multi-billion-dollar international conglomerate like Tullow… or even a $500-million outfit like Afren…

“And it’s not a name-brand oil producer that takes the crude and processes it right into the gasoline you put into your car every week.

“This is a much more aggressive brand of company.

“And what it does in the months and years to follow will literally mold the Kenyan oil revolution — and its entire economy — for the remainder of the 21st century.”

So that’s our teaser target — this “more aggressive” company what will “mold the Kenyan oil revolution” … sounds pretty sexy, no? The clues are not as substantive as I’d like, but we do get some — here’s a taste:

“Sometime in early January of this year, another real estate deal went down….

“It was for a 7,300-square-mile chunk of property located in north central Kenya.

“The acquisition was the last in a series of purchases that secured a grand total of 32,000 square miles of Kenyan territory…

“All of it dead center in the heart of this vast, untapped oil-rich region…

“… All of it now held by this young upstart energy company.

“By the estimates quoted in the company’s own website, their overall land holdings in Kenya alone add up to a chunk of land about the size of South Carolina.”

And it’s not just Kenya:

“… an additional 101,000 square miles — equivalent to the state of Nevada — held in surrounding countries, the total resource wealth possessed by this company is enormous.”

And how much oil do they have?

“… with inferred reserves already totaling over 2 billion barrels, the total value of what’s already been measured is in the hundreds of billions of dollars.

“However, taking into account the massive size of this company’s East African holdings, the actual wealth buried in this land is far, far greater.”

We’ll leave aside the notion that “measured” and “inferred” shouldn’t be used quite so interchangeably when talking about oil companies, and that “inferred” doesn’t mean “reserves,” a word which connotes much more certainty about a prospect, but that does still sound intriguing. Dehaemer then goes on to make a mathematical comparison, saying that the 133,000 square miles this company owns should be similar to Saudi Arabia’s 1.5 million square miles in geology, and therefore …

“We can conservatively estimate a total reserve of 29.04 billion barrels getting ready to be tapped, for the very first time.”

That sounds like the biggest stretch of all, of course, since the idea that this company’s holdings are, acre for acre, as potentially valuable as Saudi Aramco’s is, well, let’s say “optimistic.”

But it does make the company sound dirt cheap if you describe it that way, of course — which is what Dehaemer does next:

“… the company which owns all this land, in a region that is a virtual geological photocopy of the same land which made the built the biggest oil dynasty…

“Today trades for only $1.80.

“And has a market cap of just $320 million…

“Even when viewed most conservatively — and assuming these properties are less than one-fifth as fertile as the properties of Saudi Aramco…

“A $1.80 stock price is, technically, a 99.4% discount!”

After that projection of massive potential, we get back to talking about the actual numbers that the company has apparently released, which ought to be another useful clue for the Thinkolator:

“… this company’s latest inferred reserves analysis state a total resource of 2.24 billion barrels.

“At today’s oil prices, this oil reserve would be valued at $222 billion — more than 740 times what the company trades for today!

“That’s theoretically bigger than Conoco, BP or Chevron!

“And remember, that’s if no more oil is found anywhere within these vast holdings.”

As with any good teaser, we also have a catalyst — though in this case, the catalyst is not necessarily their own drilling, but Tullow’s:

“Tullow, the global oil explorer and one of the region’s biggest operators, has recently announced an extensive survey project to begin towards the end of this summer.

“Through a good deal of research and analysis, our best approximation is that this will commence on or around Thursday, August 11, of this year.

“Once that happens, new data will flood the marketplace starting the very next business day.

“And we expect this to send junior oil mining prices up immediately — not just for Tullow’s own projects, but for everything sharing this common geology.

“So when I say that this company is explosive, I mean it very directly.

“Right now, as I write this, the stock’s trading at 76% below where it was two and a half years ago.”

So his prediction is that …

“The stock will rise as we head into the summer, and never come back to where it is.”

And of course there’s one final enticement in the P.S.:

“Awaiting crucial news, a group of major insiders have just bought into this stock at $1.88. As of this moment, it’s trading at $1.80. Don’t wait another second.”

So who is it? Well, when we toss all that info into the Thinkolator is does quite a bit more chugging than usual … and even with the steadfast cooperation of the Mighty, Mighty Thinkolator your friendly neighborhood Gumshoe has been unable to make a 100% certain match here … but I’m now 95% sure that this is Africa Oil (AOI in Canada, AOIFF on the pink sheets).

And no, it’s not at $1.80 … the shares have been trending down in recent weeks, partly due to the decline in oil prices, but it was at $1.80 recently, and that did put it close to (though not exactly) at $320 million market cap. Trading in Canada at about C$1.50 right now, the stock carries a C$275 million market cap. And the stock is down about 76% in roughly two and a half years, though you have to go back a couple months further than that, to the fall 2008 financial crisis — Africa Oil was trading around $6 a share before the world fell apart, and collapsed to about a buck when oil was crashing and the economy was melting down. In the intervening years they’ve had a couple jaunts up to $2 or so, but have mostly traded between $1 and $2, a range they’re right in the middle of right now.

Africa Oil is actually related to a company we wrote about, with some derision, about four years ago — that was when Range Resources of Australia was teased (also by Christian Dehaemer, though he was connected to a different publisher at the time) for its Somalia oil exploration. That stock almost disappeared, due to the further decline of Somalia and their inability to even convince a drilling contractor to move a rig there, but they ended up farming out much of their stake in those Somali fields, which probably do have oil, given their location, to a company called Canmex … which is one of the companies in the vast Lundin-affiliated scheme of natural resources stocks. Canmex later renamed itself, you guessed it, Africa Oil.

And now the talk of those potential Somali resources is picking up again, too — and is a substantial part of Africa Oil’s future planning, though their large holdings in Kenya are certainly the headline-grabbers right now. The oil exploration areas are in the northern part of the country, in what are becoming the more independent areas of Puntland and Somaliland, but I have no idea what the political future is like for that region … so oil or no, I can’t blame Africa Oil for focusing on Kenya.

Now, about those matches being inexact — I’m pretty certain that Dehaemer is talking about Africa Oil, but the numbers he pitches are not an exact match, even beyond that slight disconnect with the share price and market cap, which are pretty close. He throws out that “inferred reserve” number (though “inferred resources” and “reserves” are different classifications under Canadian standards, which is what AOI is using) of 2.24 billion barrels of oil. That number is pretty close to what you get if you add up all the prospective resources (which also is different from “inferred,” I think) from their latest press release that has Kenya resource estimates, back in March. And if you look at their three most valuable Kenyan concessions, shares of Block 10BB, Block 10A (both partnered with Tullow, which is the operator) and Block 9, which they operate, then Africa Oil’s share of the “net best estimate” of the oil in those blocks is right around 2.5 billion barrels. And most of those numbers are not “unrisked” numbers (if you “risk” a number you multiply it by the probability that you’ll be able to find and extract the oil — and the probabilities are often in the 10% range for what I’ve seen from Africa Oil, so the “risked” numbers are a lot lower).

So we’re in the right ballpark, at least — but I can’t tally up the numbers to match the 2.24 billion given in the tease, which holds out a small amount of room for error. In their defense, those numbers might match up better if you take into account the recent acquisition by Africa Oil of Lion Energy, which gives them more of the production sharing contracts in a couple of those blocks and may move the numbers from the March press release that I used in my matching.

The somewhat squishy language about recent “real estate deals” is also not a precise match, at least not according to the commonly accepted numbers I’m using — Dehaemer says that they made a deal “sometime in early January” for a 7,300 square mile chunk in North Central Kenya. Africa did initiate a deal with Centric Energy late last year, and close it early this year, for their interest in block 10BA, which is indeed in north central Kenya, though that territory covers 16,205 square kilometers … which is 6,256 square miles. Still, the Kenyan oil production sharing contract zones are pretty big, and Africa Oil seems to me, from a look at the maps, to have at least a share in all of the ones that I would classify as being in “north central” Kenya.

The bigger numbers also don’t necessarily match perfectly — when I add up all of their East African holdings I get about 90,000 square miles of concessions (that’s not their working portion, they have partners on essentially all of those blocks, so probably about half of that applies to them) … so again, it’s close to the 101,000 square miles, and it’s hard to picture two companies who have roughly similar huge land holdings in this specific area (and yes, even 90,000 square miles is larger than South Carolina).

More confidently, I can say that the images that Dehaemer uses in his presentation, including those showing the geologic separation of Yemen from Somalia and the matching oil formation “bands” of those two countries, look like they were lifted straight from the presentation materials of Africa Oil … which is usually a pretty sure sign that we’re on track with a match. And, of course, it’s hard to come up with small companies that have real prospects and large land tracts in Kenya and their neighbors, there just aren’t all that many.

Africa Oil has been acquisitive and dilutive in building up their East African portfolio of assets, most of which are quite early stage prospects that have seen a limited amount of drilling, reliant largely on seismic surveys or on older exploration programs from the oil majors 20 or 30 years ago. I like very much that they are partnering with Tullow, which will operate most of their blocks and definitely has the expertise in this part of the world, and that Tullow is carrying a large part of the initial exploration costs in some cases, and there are definitely some potential catalysts later this year. Not only is Tullow pretty actively drilling in several areas in East Africa, which helps to keep the attention of investors, but Africa Oil has two rigs working in the third quarter to drill in Kenya, Ethiopia and possibly in Puntland and Somalia, and they have the cash to do the work.

I also think that, assuming I’m right about this one (only 95% sure, you remember), Christian DeHaemer may well be pounding the table on it for a while — which can supportive of a stock in itself (he’s definitely not right all the time, he’s touted several stocks that failed to perform, but he has a big mailing list and has gotten folks excited with Petro Matad in particular over the past year). Add in the fact that the shares have come down substantially from when this tease was written, and I like it more. That’s not to say it’s guaranteed at all, of course, even if we assume the Thinkolator is right … and I’m not recommending you rush out and buy the shares and I haven’t bought shares myself. But the associations with the Lundins is compelling given their history of backing some huge resource stock winners over the years, the exposure to what really is an up-and-coming oil exploration area offers some real potential, and the fact that they’re drilling later this year provides some potential catalysts.

Of course, catalysts can be negative as well as positive, so we could see them drilling dry wells. And there have been plenty of companies in recent decades that gave up and pulled out of East African exploration projects either because of dry wells or political drama, but the stock is small enough given its large holdings and good Tullow partnerships to offer some interesting potential as a bet on Kenyan oil, along with what I would consider a call option on Puntland and Somaliland on the off chance that exploring and developing oil in that part of the world becomes genuinely feasible, along with some sweeteners in smaller holdings in Ethiopia and, way over on the other side of the continent, in Mali.

There have been a lot of transactions over the last year as they’ve built up these operations, particularly in Kenya, and I’d want to look more closely at their financials before jumping in, but if I weren’t writing about these shares today I’d probably be taking a small nibble for my accounts and digging in for more research.

Full disclosure: as noted in the intro, I did later buy shares of Africa Oil and still hold those shares. I will not trade in any stock mentioned above for at least three days.

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27 Comments on "”They Stole $267 billion of King Saud’s Oil”"

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MJC613
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MJC613
August 18, 2011 11:55 am
I buy most of my stocks through Sharebuilder, so I checked to see if they carry this stock. Here is what they had to say: "AOIFF is not available through ShareBuilder. Due to a lack of market transparency, this company is designated as a "Grey Market" stock by OTC Markets (the primary quotation service for over-the-counter trading). There are no market makers in this security. It is not listed, traded or quoted on any U.S. stock exchange or the OTC Markets. Because of this, investor's bids and offers are not collected in a central spot so it’s nearly impossible to… Read more »
Mark
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Mark
August 18, 2011 12:23 pm
It's AOI.V on the Canadian Exchange and AOIFF.PK. I owned this about a year ago . . . didn't do much . . . they're a ways off from producing. Now, Tullow Oil I purchased recently because it is about at a 52 week low, and they're starting to pump oil off of Africa. They have a very good track record with their drilling. They are On Sale right now! Check them out,; they are on pink sheets in the US, but I buy them on the London Exchange. They are an English company and have much more trading volume… Read more »
clifton22
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clifton22
August 18, 2011 12:25 pm

I purchased AOIFF recently thru Scotttrade.

Adrian
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Adrian
August 18, 2011 12:41 pm

It's going to be deleted tomorrow from the S&P Venture 30 Index. A couple of good companies like Hathor and Kaminak are also being deleted so it's probably not anything to worry about.

Myron Martin
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August 18, 2011 1:14 pm
I own stock in Africa Oil, and yes it has not done much so far, sorry i missed out on Tullow a couple years ago when I first heard about it, should maybe consider it now that the price has pulled back. Considering Kenya specifically, the company that holds the biggest acreage, and right at the confluence of 3 faults. Blocks 2 and 3 (from memory) is Vanoil Energy which I also own, and trading was suspended a few weeks ago for some big announcement which I have not yet had time to check out. but the stock price was… Read more »
Brian
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Brian
August 18, 2011 4:44 pm

I own the stock, and believe it will be a big winner. Don't forget the Lundins are behind this, so "money" is not a problem.

john
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john
August 18, 2011 7:00 pm

Petro Matad has been falling steadily since I bought in a couple months ago. Read about Dragon several places but didn't bite – but it is among the holdings of my Guinness energy fund.

Bowmanave
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August 22, 2011 12:49 am

It's also likely to be Sasol, which is the leading coal-to-fuel co. They have deals everywhere.

Ian Mackey
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Ian Mackey
October 31, 2011 3:04 pm

DeHaemer’s promotion of Petro Matad (MATD in the UK) isn’t looking so farsighted now, with the share price now in the 90% club ie down to 20 pence from its high of 220 pence. But Lundin and Tullow are smart cookies so maybe there’s something to be said for Africa Oil
Good luck

tecnica1
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tecnica1
October 31, 2011 9:07 pm

hey travis, have you looked at horn petroleum, trades on toronto venture exchange, v.hrn, and is a spin out of two of africa oil’s assets – two blocks in Puntland, Somalia: the Nugaal Block and the Dharoor Block. It has only been public for about a month. My guess is this co.’s share price will either shoot to the moon or sink like a stone. Thoughts??

Brian
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Brian
October 31, 2011 10:03 pm

Travis has revisited africa oil with perfect timing, here in Vancouver there is a lot of chatter about AOI, look for news in November…

David
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David
November 12, 2011 6:17 pm

does anyone know the small Canadian exploration oil company in Kenya and perhaps Uganda that may have leases inside of Tullow oil locations? this may be a potential rocket pps in the future.

BHM
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BHM
December 2, 2011 3:30 pm

Travis,
In the original report you said did not own any shares of Africa Oil but in the heading of this report you said you did own some shares.
What was the primary reason for changing your view?

tecnica1
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0
tecnica1
December 6, 2011 12:22 pm
Travis, have you ever heard about Mart Resources (v.mmt), a light sweet oil producer in Nigeria? They produce about 8,000 barrels a day and are (hopefully) nearing the end of negotiations with a pipeline company to ramp up production to approx. 18,000 barrels per day. Just recently posted awesome Q3 results : http://tmx.quotemedia.com/article.php?newsid=46466019&qm_symbol=MMT . There is also talk of instituting a dividend next year. There is some risk of course, but this is really undervalued. I know you like some of the junior oil exploratory plays like REL and AOI, figure you might want to take a look at this… Read more »
Frank R. Shaffer
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Frank R. Shaffer
December 6, 2011 12:58 pm

In what was the former Italian Somaliland the old Sinclair Co. ran lots of seismic and drilled a goodly number of wells. In what was British Somaliland Conorada (a consortium of Conoco, Ohio and Amerada) and also Mobil drilled a number of wells. All dusters. Good luck.

wadave1953
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0
May 16, 2012 6:15 pm

Would someone please tell me how to buy AIO, or AIOFF? I cannot get recognition of either on my Fidelity account.

Lexx
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Lexx
July 31, 2012 4:29 pm

Hey Travis Any news on Vanoil as of late?

StockGumshoe
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StockGumshoe
August 18, 2011 12:02 pm
I can't tell you whether or not Africa Oil is an appropriate idea for you, but Sharebuilder is a very limited brokerage that intentionally stays away from stocks without major US listings (ie, NYSE, Nasdaq, AMEX). In this case, Africa Oil is a reporting company on the Venture exchange in Canada, where most junior (smaller, exploratory) resource (energy and mining) stocks are listed — most US brokers can trade in Canada pretty easily, sometimes by calling the broker and sometimes online through either the Canadian ticker or the pink sheets ticker, though all brokers have varying policies and commissions for… Read more »
Gravity Switch
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11
August 18, 2011 12:42 pm

Tullow has indeed been a great Africa oil company — I think part of their price weakness has been the dispute over exports and licenses/taxation in Uganda, not sure where that now stands. And yes, Tullow is the key partner and operator for most of AOI's key exploration blocks. Definitely a much larger and probably more stable play on developing oil in E Africa.

Gravity Switch
Admin
11
August 18, 2011 2:21 pm
I think Vanoil is blocks 3A and 3B, right along the Somali border in E. Kenya. It's out of date because of several acquisitions and mergers in the past year or so, but this older map of the concessions gives an idea of where things are: http://www.vanoil.ca/i/maps/East-Africa-Explorati… You can see that the shape of the exploration parcels for all of this more or less conforms to the expected underground basins, often based on not that much recent data so far, though there have been plenty of wells drilled historically and activity has picked up this year. FYI: General article here:… Read more »
Mark
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Mark
August 22, 2011 5:56 pm
Hi Myron. Tullow has been pounded down along with everything. I'll give it to you in $ in the pink sheets; I own it on the London exchange but pence might not make much sense . . . Tullow's high was about $24.50 in early March '11. They now are at $15.73. You have to go way back to mid 2009 to find them so low. Also, they are now trading on the Ghana exchange! I'm not sure how impressed to be! Ok, back to reality. Here's a brief update: In Ghana, the Jubilee field was discovered in 2007 and… Read more »
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