OK, OK — the most asked-about teaser ad this week has been Karim Rahemtulla’s pitch about Cypriot natural gas for his newly launched newsletter … so although the clues are thin and the presentation was tiresome to listen to, your friendly neighborhood Gumshoe is digging in.
But it’s only because I love you.
The new letter being launched here is Oil & Energy Confidential, and it is pitched by Rahemtulla as his way to play his insider connections in the Middle East, including friends and relatives. He has apparently been a world traveler, including “boots on the ground” trips to Egypt as Mubarak was falling and a boat ride in the Strait of Hormuz, one of the potential energy choke points that everyone worries about in the event of a shooting war or more severe standoff with Iran.
I don’t know if he’s actually the “only known Western civilian” to have ventured into the Strait of Hormuz, but that strains credulity a little bit given the massive amount of commercial traffic in the area. Apparently his visit to the Strait was enough to convince him that Iran would not try to shut down traffic there, though plenty of folks feel differently and it’s been tried before — they don’t have to close the waterway (which is mostly on the Oman side) to stop oil tankers, they just have to mine it or threaten to attack commercial traffic, which would certainly inspire a vigorous NATO response and escalate tensions and drive oil prices up, particularly in Asia. Whether they’ll try this again is a question I can’t answer, the latest real chatter and fear about this was about a year ago … but Karim says no.
What I can do is look into his first specific teaser stock pick for this new newsletter.
I won’t quote much, because it’s not really in a print presentation or transcript, I just had to get the sense from the video ad. Basically, what Rahemtulla is saying is that there is a substantial natural gas resource in Cyprus, one that they’ve just begun to discover over the last couple years, and that this gas resource is going to be a lifeline for the Cypriots.
That’s because Cyprus needs substantial rescue funds, as we’ve all seen, from the European Union, and they need to build some sort of real economy that’s based on more than just being a tax haven for wealthy Russians … and, coincidentally, as they’ve started to discover these big offshore gas fields, they also find themselves with their closest neighbors in the EU being desperately in need of natural gas, partly because Europe’s gas is overwhelmingly supplied by Russia, often at a high cost in both political and financial terms.
So Rahemtulla believes they’re going to ramp up the typical long discovery/appraisal/evaluation/development/production timeline in the Cyprus gas fields, start pushing for more and faster drilling, and make his recommendation rich in the process.
We get no clues about the stock he’s teasing other than that he has a “secondary strategy” for profiting from it, which almost certainly means it has options trading available … and that it’s a NYSE listed stock and he’s plunking a $300 price target on the shares.
So who’s our bogey? Given those clues, this almost certainly has to be Noble Energy (NBL — Not NE, which is the offshore drilling contractor Noble Corp.). Noble has been very active in the Eastern Mediterranean for years, being part operator of the huge Leviathan natural gas discoveries offshore Israel that are close to the Cyprus exploration blocks, and they are indeed drilling more this year in Cyprus to appraise the gas discovery they made there in 2011. The Cypriot government has asked Noble to step up drilling so they can prove up their national reserves more quickly, but given the long scheduling timeframe of most deepwater drillships and rigs I don’t imagine they’ll be that much more aggressive than they’re already trying to be — the Israeli fields are a significantly higher priority right now because they’re closer to real production and (so far, at least) appear to be considerably larger.
And yes, Noble does have options trading if you’re interested — and a share price of about $110, so the $300 target is perhaps within the realm of possibility someday. I don’t know what kind of options strategy Rahemtulla might be using, but the most actively traded and widely-held options contracts are the January 2014 call options with strikes of $120, $130 and $140, so odds are pretty good his strategy has something to do with those contracts (I’d guess that he’s probably recommending some upside leverage to his anticipated spike in the price by buying the $130 calls, which trade around $2.50-$3 or so, but that’s just a guess).
They’re also a pretty well diversified “small major” in the oil and gas space, with significant production or exploration assets in the US (including the Niobrara and the deepwater Gulf of Mexico), West Africa, Nicaragua, the Falkland Islands and elsewhere. The market cap is about $20 billion, and they trade at a forward PE of about 13 with a 1% dividend yield — so they’re substantially more expensive than the real mega-majors, many of which trade with PE ratios around 8 and much more substantial dividends, but they do have real exploration upside and they’re small enough to add significantly to their reserves and future production with each new or expanded discovery.
Noble has been teased before a few times, mostly because of the Israeli Leviathan discovery and the other gas fields in the Levant Basin area — which itself might end up benefitting Cyprus if, as the Cypriots hope, some of that gas production can be exported through pipelines to Cyprus on its way to Europe. Major production from these fields is several years off, though the Tamar field offshore Israel (which is roughly similar in size to the preliminary estimates from the Cypriot Aphrodite field) is producing gas now, and production from the fields off Cyprus is probably close to a decade away unless it can be speeded up quite dramatically — there isn’t much infrastructure available, so they’ll also have to get some major investment to build out pipelines and processing plants once the discoveries are more fully fleshed out.
The importance of natural gas to Cyprus’ future is not a new thought — that’s been a big part of the background of all of the financial rescue chatter, and before that has been a point of contention with Turkey, which is pushing for their part of the disputed country to also benefit from gas discoveries. There’s a pretty good article here that goes over the geopolitical and development wrangling that’s still under way. So there’s certainly room for lots of different developments — including more discoveries, political disputes, infrastructure partnerships, etc. — that could impact the value of Noble’s exploration blocks (and others — Total and ENI also hold some blocks that are less explored).
So does it sound like an exciting opportunity to you? Sniff around and let us know what you think with a comment below. Thanks!