I’ve been getting questions about Keith Kohl’s pitch for his (secret) favorite “Petroplex” stock for almost three weeks now, so I guess it’s time to dig in and see if your friendly neighborhood Stock Gumshoe can throw a few answers your way.
The pitch is for Kohl’s pricier newsletter, Oil & Gas Trader, which they say has a capped readership at 3,000 people and is looking for “fast money” trades in the energy space — so probably, like most “premium” letters that carry a heftier price tag, they’re looking at a lot of smaller capitalization stocks where you simply couldn’t get 20,000 investors in and out of the stock without throwing the price into a tizzy.
And, of course, they’re not going to be hurting if they can get 3,000 people to shell out $799 (or $999, if you’re not getting the “special discount”) for a subscription — that’s close to $2.4 million, in case you don’t feel like doing the math. For what it’s worth, they do also throw in Kohl’s “entry level” newsletter Energy Investor for free when you subscribe.
Kohl has been banging the table for Bakken stocks for several years now, and claims some pretty good picks as that rising tide lifted a lot of boats — but now he’s pitching an oil field far larger than the Bakken.
He calls this new field the “Petroplex”, but it’s a pretty thinly veiled pitch for the big unconventional shale discoveries in the Permian Basin, particularly the Wolfcamp and Spraberry shales, sometimes called the “Wolfberry” (though there are other large potential shales and areas nearby, and a zillion different names still floating around for these thick shale areas in West Texas). There’s a decent piece on the emergence of these fields as “world class” here, one that tries to distinguish between the Wolfcamp, Cline, and Penn shales in the Permian basin, and another here if you just want a quick backgrounder — but yes, there’s a freakishly huge amount of oil in these very, very thick shales, and it could well amount to the second biggest oil field in the world and produce far more than the Eagle Ford or the Bakken in time.
And I’m no geologist, so I’m not even sure I understand which shale is which (they’re different ages, at different depths), but yes, we can stipulate that thought the Wolfcamp and even the Cline get less mainstream media attention than the Bakken, they are now widely considered the next “hot” areas among oil investors. Or at least, among the folks who write about investing in oil.
The “Petroplex” is indeed the heart of the region where this new wave of shale development and drilling is happening now — Kohl didn’t make up the term, it was coined years ago for the Midland-Odessa metropolitan area, which is the population center in the region and home to a lot of new West Texas millionaires these days.
Here’s a taste of Kohl’s tease before we get into looking for the specific company he’s pitching:
“The Petroplex peaked in production between 1973 and 1974, as predicted by Shell geologist M. King Hubbert.
“At its height, it was pumping out over 1.7 million barrels per day.
“When it peaked, it marked the end of American oil domination and ushered in OPEC… and for the next 40 years, OPEC would have a stranglehold on the world’s energy economy….
“Thanks to the American revolution in hydraulic fracturing (or fracking, as it is popularly called), the Petroplex is about to regain its stature in the global oil market.
“To the point, drillers using state-of-the-art technology can now access and extract oil from the actual massive source rock that was feeding the Santa Rita well 90 years ago….
“And the early results from these new wells are already a game-changer.
“According to an October 16, 2013 Forbes report:
‘… the region [Petroplex] is producing more oil than the pipelines can handle…’ and ‘New infrastructure is being laid to send oil from the Petroplex straight to the refinery center in Houston… ‘
“And on October 21, CNBC reported:
‘Oil flows like water in the Petroplex.’
“And it’s all because of the technological revolution in hydraulic fracturing developed in the United States.”
So that’s the basic background — Midland, Texas is getting re-heated because companies are figuring out how to get at the “source rock” shales that created the easy, near-surface oil fields that spurred the first West Texas oil rush. And Kohl argues that the best companies to buy are those that have just started production, before investor interest really heats up.
Then, of course, he finally gets into hinting about this little $8 stock that he says is already producing and is looking to expand in the Permian basin shales. So who is it?
Well, here are the clues:
“In fact, as you read this, the Petroplex has over 400 drill rigs currently moving into it or operating. To give you an idea of how much that is, it accounts for 10% of all drilling rigs currently in operation on the planet.
“That’s why the play is the hottest in the world right now.
“But even though it’s hot, the mainstream investing public knows nothing about it.
“I can assure you that will change in the months and years to come…
“And that’s why I want to tell you about one company that has been there since the beginning — and is already selling its Petroplex oil to the market.
“They control over 52 square miles of the Petroplex — enough land to blanket the entire city of San Francisco and then some.
“Their wells are pumping out 2,350 barrels of Petroplex oil per day.
“That’s $227,950 worth of Petroplex oil every single day, or $83 million every year.
“And it keeps growing…
“The company is cash rich, too — with over $100 million ready to buy more oil-saturated acres.
“Let me be very clear about one fact: This isn’t some wildcatter exploring for oil. They’ve already found it — to the tune of more than $100 million in annual oil revenues per year.
“As you read this, the company is selling their oil into the market.
“No wonder insiders have been buying the company’s stock all year.
“And here’s the best part…
“You Can Buy the Company’s Stock — Right Now — for Under $8 a Share!”
So who is it?
Well, we can’t be 100% certain on this one, but I’d say we’re up there in the 98% range given those clues … the Mighty, Mighty Thinkolator, cold as it was when I started it up this morning, chugged away for a few minutes in the garage and spit out a solid answer for us: This is almost surely Callon Petroleum (CPE — free instant trend analysis here)
Callon did have revenues of about $100 million over the last four quarters, and the share price is under $8 (it’s in the $6.50 neighborhood at the moment). It’s also very small, with a market cap of about $250 million.
And perhaps the slightly sneaky bit is that they don’t really have $100 million in cash to invest in more Permian basis projects according to the last quarterly report … but since that quarterly report, they sold their Gulf of Mexico assets to WTI for, yes, $100 million (the purchase closed in December for $88 million in actual cash, since it was backdated to Summer). They also paid down some debt, so we’ll have to wait and see what their balance sheet looks like when they report next, but they do also have a credit facility available so I suspect they have the ability to invest $100 million or slightly more in these shale projects if they want to.
Incidentally, Callon also has preferred stock trading — and there was, as teased, a small spurt of insider buying in both the stock and the preferred shares earlier in the year… though much of it took the form of options exercises, and most of the buying was in the common stock when it was down below $4 in the Spring and Summer, before the Gulf of Mexico sale and the positive chatter about the Permian projects started to bump the shares up (they did get close to $8 in late October).
The preferreds, if you’re interested, carry a high yield but have no maturity and no convertible feature — they were offered at $50 with a 10% yield, so at $47 or so the yield is a bit better, and the sale of their Gulf of Mexico assets means they might be a bit of a better credit risk with a better balance sheet, but there’s no real upside beyond the 10% coupon. The ticker for those preferreds is CPE-PA on Yahoo Finance, though preferreds often get different tickers from different brokers and quote services. No convertible feature, so if the shares go up by several hundred percent the preferreds won’t get any piece of that — they might go up a little bit, since investors might be willing to take, say, a 6% yield from a larger and more successful company (that would mean the preferreds could trade up to possibly $75 or so if you’re very optimistic, but they can also be called by the company at $50 in 2018 so that’s a stretch), but they could also go down if we get substantial inflation or interest rate hikes and the 10% yield starts to look less delightful.
Just to dot the i’s of our clue unraveling they also do have “over 52 square miles” of interest in the Permian shales, the Wolfcamp or whatever else you want to call it — though they use the more conventional measurement of acres in their literature (35,000 acres, which is what they claim, is about 54 square miles). That’s big relative to the size of the city of San Francisco, as they tease, but not so big for a West Texas oil company, the much larger Devon Energy (DVN) claims 1.3 million net acres in the Permian (though on a “Permian acres per dollar of market cap” basis CPE would come out ahead of Devon … probably an irrelevant metric, since DVN has lots of non-Permian operations and CPE does not).
And they are ending the year with an average of close to 2,350 barrels of oil per day of Permian production, though they downgraded that number slightly a few weeks ago thanks to some storm delays.
Probably the biggest immediate on CPE shares right now, with the sale of their Gulf of Mexico assets done, is the fight they’re having with activist investors Lone Star Value — Lone Star is looking for some way to “unlock value” at CPE, probably by selling the company because they consider it cheap relative to their assets, and they’re looking to get some seats on the board at Callon; Callon, meanwhile, believes this is short-sighted and that they’re just at the beginning of creating great value in their West Texas projects. I haven’t looked at the argument, and don’t know much else about the company, but they’ve been engaged in a Press Release showdown and you can see the latest from Callon here and from Lone Star here.
As I said, don’t know them particularly well and just started looking into the stock when I uncovered it this morning — you can check out their latest Investor Presentation if you want to see how the company would like you to understand them. I’ve only mentioned them once before, when Porter Stansberry was pitching Devon as his “secret shale play” back in 2012 (was a good story, but DVN is flat since then), but given the positioning as a “pure play” on a hot exploration area there’s certainly potential for Callon to do well if the production matches the hype, and the fact that they do have enough financial flexibility to start sinking money into increasing production (planning 25 new horizontal wells this year, I think) means there is certainly the possibility that the stock could be an interesting speculation with a bit of meat behind the hype.
Is that wishy-washy enough for you? If we’re going to see a hype-cycle for these Wolfcamp-focused stocks the way we did for the Bakken stocks five years ago, this is the kind of pick that could get a lot of attention and spike as production increases… or, of course, they could hit a lousy drilling patch or oil prices could fall 20% and the shares could stink up the joint.
So that’s about all I can tell you — go forth, researchify, cogitate, and let us know what you think with a comment below.