This tasty little teaser comes in from Bob Czeschin and Chuck de Castro, who apparently are trying to sell a research report for $500 that’s all about European shale gas — the big story of the pitch is that there are two little US companies who are about to “shatter Vladimir Putin’s dream of a new Russian Empire.”
And that’s a pitch we’ve seen before, though in somewhat different circumstances — whenever there’s a story about a new commodity producer that’s aiming to compete with big Russian suppliers, the story is that these little upstarts will be crushing Putin … makes sense, I’m sure most US investors love the exciting intrigue of undercutting the nasty ol’ Russians, so we’ve seen the pitch for cobalt explorers in Africa, for example, but the stories we’re more likely to hear are about natural gas.
Which is perfectly logical, of course (wouldn’t make much of a selling point if it weren’t) — the stories we hear about Russian hegemony largely revolve around natural gas, mostly because Gazprom happens to supply a huge amount of the natural gas that Europe needs to heat their homes … especially with Norwegian and British production in the North Sea declining. I’ve seen stories over the years that used the Putin angle to advocate for Southeast Asian liquefied natural gas, particularly Interoil’s huge discovery in Papua New Guinea and the various Australian LNG producers, though those mostly are targeted at Japan and South Korea and can’t compete with Russian gas on price. But the more compelling alternative sources for natural gas to supply Europe are in, well, Europe … or at least closer by, as with some North African gas teaser stocks we’ve also seen in recent years.
And this time around, it’s real European gas — shale gas, the same basic kind of hydrofracking-produced natural gas that has the potential to turn Pennsylvania back into a major petro state (in some ways, the first oil boom in the US, in Western PA where the first commercial oil well was drilled, is being replayed in the enthusiasm about the Marcellus Shale gas formation).
And we’re told in this teaser that …
“Europe is still a virgin shale gas market with huge deposits being found across the continent ….
“But as in America 10 years ago, these European deposits have lain dormant. No longer!”
Exciting, right? I think the last time I focused on shale and horizontal drilling in Europe it was well over a year ago, when I sniffed out the very popular “oil under the Eiffel tower” teaser — but that was for the Paris Basin and Toreador Resources (TRGL), which has done very well since (particularly in the last six months or so). The Paris basin is all about shale oil, though, more like the Williston Basin in North Dakota, and everyone likes oil more than gas these days.
Still, gas in Europe is different than gas in the US, where the market glut may stay with us for a while … and natural gas is still a very localized market thanks to the huge cost advantages that pipelines enjoy over liquefying and shipping natural gas (and the limited capacity for LNG in most areas). So let’s at least find out who these euro shale gas plays are that Czeschin and de Castro are touting, shall we?
“These tiny companies own shale gas properties in America and are developing them successfully. One of them, for example, has been doubling reserves and production annually …
“But these two little companies understood the politics of natural gas in Europe, and approached a European country that was dependent on Russian natural gas. The country hates Russia and was desperate to get out from under the Russian thumb.
“They offered to develop the huge, known shale properties they found in the country. The country leapt at the opportunity. They gave them 1.6 million acres of prime shale gas properties for a mere $1 an acre — less than 1% of the cost of comparable US shale gas properties.”
So that’s what I like to call a “clue.” How about some more?
“Right after they nailed down this European shale gas property, George Soros paid a premium to buy 20% of the company”
Ah, an even better clue! Love it. Soros apparently paid for 20% of one of the companies, to be clear, so I guess the two firms must be partners or neighbors or something. How about a few more tidbits to help us narrow this down?
“Within the next few weeks, these two companies — joint-venturing the project — will kick off their first European drilling campaign.”
OK, I don’t know when this letter was written — this one actually came in the regular ol’ snail mail, not in an email, but hopefully it’s at least relatively contemporary.
So who are these joint-venture partners? Well, if you’re talking about a large prospective shale gas area, and about folks who hate Russia (or who are at least very nervous about Russia), you’re probably talking about either Poland or Germany — and in this case, I’m pretty sure it’s Poland, which is widely believed to have the most dramatic potential for significant shale gas production in Europe (and which already has lots of companies, probably upwards of 50, with gas exploration concessions). Toss all that into the Thinkolator, and here’s what comes spitting back out:
The prime company being teased must be BNK Petroleum (BKX in Canada, BNKPF on the pink sheets), which does boast Soros as a roughly 20% owner as of a few months ago. This is a California-headquartered company that does have substantial operations in the US, mostly in Oklahoma, and about 1.6 million acres of shale exploration territory in Poland — much of which they reportedly got access to very cheap, for a tiny fraction of what shale exploration acreage goes for in established US areas.
The Quantum fund bought this large holding in BNK, 26 million shares, at C$2.54, which was indeed a premium of a few cents over the price the shares were trading at before the announcement — though, not surprisingly, the stock hasn’t closed at that low a price since the Soros announcement, and attention has heated up a bit recently so Quantum is sitting on roughly a 50% gain so far with the shares well over $4 (the deal was back in October — so, not a bad three month return, though I don’t know that they’d take profits).
Like I said, I don’t know when the mailing first went out — but it does seem safe to say, at least, that Marin Katusa over at Casey Research at least jumped on this stock before this particular teaser was written, and before Soros took a big stake, I wrote about Katusa’s european shale gas teasers, including BNK, for the Irregulars over the Summer (if you’re one of that group and have your password, you can see that older article here).
At the time I noted that I liked BNK’s approach of joint-venturing their projects to cut risks and costs, but also that there didn’t seem to be much of a rush because of all the capital that BNK would have to raise before they got any real work done in their non-US shale exploration — I didn’t particularly expect that the capital would come, prominently, from George Soros and help the price rise by virtue of the fundraising association with that legendary investor. I don’t know what the status is of any drilling work — last I saw, back in the Fall, BNK had chosen a drilling contractor but I don’t know if the work has begun.
Speaking of joint ventures, the primary partners of BNK on their near-term Polish projects are mostly big diversified groups, including Sorgenia (controlled by the Italian conglomerate CIR), so I’m not sure what might be being teased as the partner company here — it’s quite possible that it’s the junior partner LNG Energy (LNG on the Venture exchange in Canada, LNGYF on the pink sheets), which owns 20% of the project but is primarily focused, coincidentally enough, on exploring for natural gas in Papua New Guinea, not far from the big discovery by InterOil and the proposed liquefaction plant to serve up Liquefied Natural Gas (LNG) to Asia. LNG Energy does also have some US assets, so that might be squeezed to fit that part of the tease, though they’re a Canadian company.
By the way, there is a second (and much smaller) Polish shale gas company that Soros bought 20% of (rounding up a bit, it was actually 19.5%) — that’s Realm Energy (RLM on the Venture exchange in Canada, RLMXF on the pink sheets). His Quantum Fund did this through a private placement back in November, so it does seem like he’s generally lighting a fire under European shale gas exploration. On this private placement he didn’t come close to paying a premium — he paid 60 cents, the day the sale was announced the shares were at 72 cents, and the day it closed they were at 75 cents or so.
The attention of George Soros did undoubtedly help Realm with their next fundraising, though — there was a second private placement shortly after that for more shares. Soros bought 10 million; the second placement, also in November, was announced at 20 million shares. That second placement was announced at a small premium, 75 cents versus the last close of 74 cents … and they didn’t announce who the buyer was for the second one.
Soros’ Quantum Fund has been involved with other European oil and gas companies, they’ve also invested in Aurelian Oil & Gas (AUL in London), for example, though his fund is so big and diversified that it’s hard to say that any one thing is his primary idea or focus — even a 20% stake in BNK is quite puny for the Quantum Fund. And shale gas in Europe, China and elsewhere has become a fairly prominent point of interest for investors and the investing press, which you may have noticed — particularly over the last few months, when several journalists took note of the big investments of the Chinese and Statoil into US shale fields as they try to leverage US shale horizontal drilling and hydrofracking expertise elsewhere around the world.
So that’s a little taste of two companies, BNK and, I guess, probably LNG Energy who are trying to help “shatter Putin’s dream” this time around, with a little help from George Sorors. What do you think? Too pricey now, or is the shale gas opportunity in Eastern Europe so incredible that it’s worth jumping in even after a big runup, just to get in fairly early in the process? Let us know where your head is with a comment below.