This piece was originally published as part of the Friday File two weeks ago, and we’re re-sharing this excerpt with all of our free readers because the ad is driving so many questions our way. It has not been edited or updated, though to our knowledge neither has the original “interview” ad from mid February.
The latest teaser ad for the Energy Inner Circle newsletter (edited by Dr. Kent Moors) is pitching the next great shale oil area — and it’s in Australia.
The tease tells us that a tiny town called Coober Pedy, which is in an almost uninhabitable part of South Australia, is about to become an immense power center of such influence that it will rival the oil sheikdoms of the Middle East, all because of a $20 trillion find that’s going to make at least a few companies (and you, of course) stinkin’ rich.
Coober Pedy is a mining town, miles from anywhere and unusually dry and hot even for the driest continent on earth, and they’re known for mining opals — it’s also a place where only a couple thousand people live, and much of the revenue comes from tourists who come to see the old opal mines and gawk at the underground houses and churches that have been built to help people survive the desert heat. Other than that, there’s not much reason anyone should have heard of it.
Until recently, apparently — there have been rumors and explorers about the work that Linc Energy and others have done exploring for shale oil in Australia, and particularly of the Arckaringa Basin in this specific area. It’s not too far from other tight oil and gas formations in Australia (200 miles counts as “not too far” in the boonies), but there’s not been enough promise of economic reservoirs of oil to get much investment into the area. Until, perhaps, now.
Linc Energy is the central focus of the ad and of any stories about the Arckaringa Basin, and it’s pretty well known (and revealed in the “interview” teaser ad, this isn’t a secret pick) — they have all the leases in the Arckaringa Basin and have been the ones drilling and exploring there for a few years. And they also released impressive estimates in January that got everyone excited, talking about the potential for 200 billion barrels of oil or more. You can see the chatter that’s been happening over this massive Arckaringa Basin potential and Linc Energy in a Wall Street Journal piece here, and in a CBC piece here. It sounds like most of the experts, and Linc themselves, are talking it down to maybe three or four billion barrels as the more reasonable lowball expectation for possible someday recoverable oil.
So, as you can imagine, Moors says “This is going to be huge” — but it’s going to involve other companies as well.
Linc is going to need lots of funding and help from experienced partners to develop anything. They have bankers advising them now to raise the money, and governments are apparently involved in holding hands and making sure that companies get involved to push the development of this field.
He says in the video that he recommended Linc the same day that the news came out — and that it’s a great long-term play, but it’s already shot up so he has other stocks to suggest.
Interestingly, unlike many newsletter folks who try to look below the billion dollar story (Linc is still small by oil company standards, but has a billion dollar market cap) to find the little unheard of story of some neighboring landholder or unknown partner … Moors pitches two large, international companies that he thinks will be major beneficiaries, he calls them the operators and service providers (“OSPs”). Maybe this is because Arckaringa has no other landowners to speak of (Linc apparently has it all locked up), or because the emerging shale searchers in Australia aren’t particularly related to this headline-gathering story.
We’re told that the operators are those who are going to invest early and help fund the exploratory drilling. The service providers are the experts in this type of huge find and in shale production and pipelines, etc. All of the companies are apparently heavily traded in New York, major stocks and large companies that will play off of this find as it generates profits for years to come.
He says, and I’m paraphrasing because I didn’t have the patience to listen to the video too many times, that “the company I’m hearing consistently as the most likely to benefit most is a huge company, has experience farming in to other major projects, government support, and plenty of financing.”
And Moors suggests that there are huge potential returns for the operator, with 135% or better return within the first year thrown out as a possibility. He also teases a chain of options plays that he thinks you can make on the stock to magnify those gains, but I don’t think anyone’s made an argument that Kent Moors is an expert options trader so we’ll leave that to you to dither with if you’d like.
But what is the stock? Well, frankly, Moors provides no real clues on this one — so I’ll have to guess. If I’m hazarding a guess at the company most likely to get involved with a $200-300 million farm-in deal for the Arckaringa basin and get early access to a potential large shale discovery there, my guess is … Statoil (STO).
They have little net debt, strong government backing (they’re controlled by the government of Norway), plenty of shale and farm-in expertise around the world (including their takeover of Brigham Exploration in the Bakken a couple years ago), and they’re already active in early-stage exploration for shale energy in Australia through their joint venture with PetroFrontier in the Northern Territories.
This is just a guess, there are easily several dozen international oil majors that are big enough to fund an early commitment to this project, and who are desperate for new reserves, I just think Statoil is a likely fit. I do not, however, think that the discovery is likely to cause any $50+ billion oil company to double in share price over the next year — that seems like wide-eyed optimism for a project that may indeed be massive but is years and years (expensive years, too) away from production.
I’m no energy expert, but that seems like a stretch — the biggest beneficiary of lucrative farm-in deals would probably still be Linc Energy, which does trade in the US through a sponsored ADR on the pink sheets (LNCGY is the sponsored 1:10 ADR, LNCYF is the 1:1 pink sheets ticker — both are somewhat tradeable for small investors, there is some volume, but if you buy be careful to price your limit order based on the fair value that’s set on the Australian stock exchange — that ticker is LNC.AX on Yahoo Finance — and do your currency conversion to find a reasonable US$ price). Of course, Linc has also shot up incredibly since they announced the discovery in January — though, in their defense, it’s also a real company beyond this Arckaringa discovery, with real projects that generate revenue now. It wouldn’t be a billion dollar company without the Arckaringa discovery and speculation, but it would be real and be generating revenue.
Who’s the service provider Moors teases? He says that there’s someone who is currently active in Australia, who has set up infrastructure and has projects, and has a close connection to the South Australia provincial government. He also noted that when this teased company announces major service contracts, we might easily see them up 100-400% in the next 18 months. And apparently he thinks there will be a winning option trading strategy to ride these stocks higher too.
And that’s about what we learn in the way of clues — so what’s his big company “service provider” pick for this South Australia field? Well, again the clues are not overwhelming … but if you’re talking South Australia and hydrofracking services I think you almost have to give Halliburton (HAL) the pole position. They’re already very active in oil and gas services in Australia, including the coal bed methane projects in the east of the country and the many projects in the Cooper Basin, which is just a couple hundred miles from Coober Pedy. Halliburton spinoff KBR also has a significant presence in South Australia, though that’s apparently more infrastructure and defense related.
So … I don’t know whether or not Arckaringa will turn out to be the next Bakken (or bigger), but if it even comes close there will be ridiculous billions poured into this sparse corner of the world and it would not be at all surprising if the money flowed most vigorously to the big oil companies — they are, after all, quite expert at turning the tide of cash in their direction over time. Here are a few other pieces on the find if you want to get your head around it:
I’ll confess that I was a little disappointed not to be facing a veiled teaser for Linc Energy, or even for one of the more obscure little shale explorers in other Australian fields … but if my guesses turn out to be where Kent Moors is steering is subscribers I do like Statoil and can’t complain much about the valuation of Halliburton, and there’s plenty of information out there for you to make your own choices about those picks.
I don’t own any of the stocks I’ve mentioned and, frankly, I’m not champing at the bit to buy them because of this discovery … but that’s at least as much because I’m already overexposed to oil exploration in my portfolio as it is due to any reluctance to speculate on a new discovery, so you can go forth and make your own call on Arckaringa and the various possible picks — no matter which large cap companies get involved, I’ll be shocked if they double in a year just because they get a piece of this field.