“Tiny Oil Stock, Drilling in the Hottest Region” Penny Oil Speculator

By Travis Johnson, Stock Gumshoe, September 11, 2008

This teaser ad has been around for a while, but I’ve recently been seeing it again, and even got a print copy in the mail recently, so I thought I’d give it a look. It’s from Chuck de Castro, who brought us one rapid riser earlier this year in Eromanga Hydrocarbons, which a few weeks after he wrote about it went from about 15 cents to more than 50 cents (though it eventually fell back down, it’s around 18 cents now).

So will this be lightning in a bottle again? An opportunity for a short term trade, or even a potential long term investment? Well, let’s have a look so you can get started on your research.

Penny Oil Speculator, you’ll be unsurprised to hear, looks for tiny oil exploration companies that generally tend to have big moves when their drilling results are released — though of course those results can be good or bad, and the stock price can also move both directions. These aren’t little companies that are making money, these are little companies that are betting on their drilling acumen.

And this company is no different, though it has made some progress already, and it’s significantly bigger than Eromanga Hydrocarbons.

This is how the tease begins:

“… a tiny penny oil drilling on a large property in the hottest oil region in North America. New technology recently unlocked a huge oil deposit straddling the US-Canadian border.

The U.S. Geological Survey calls it the largest oil discovery ever made in the lower 48 states, and says that there are billions of barrels of oil in the deposit.

Major oil companies are rushing into the region. But this flea-sized company nailed down 76,000 acres in the heart of it. They’ve drilled 14 test wells and all 14 were gushers. They’re bringing those into production and starting to drill another 40 wells.”

Sounds pretty good, eh? And just to let you in on a little secret, the shares are trading today for about 60% less than they were in late May when this one first came to the attention of my readers.

The ad includes lots of examples of great performing picks from the Penny Oil Speculator, of course — including Nido Petroleum, Ultra Petroleum, Hurricane Hydrocarbons, etc. Most of those also rode a big wave of investor enthusiasm for the Bakken formation over the course of this past Spring and early Summer, but are now down to near their 52-week lows.

If you’re not familiar with the Bakken Shale Formation or the Williston Basin, then you’ve been missing out on a lot of hyperbole. This is the large oil reservoir that’s trapped between layers of shale, deep beneath North Dakota, Saskatchewan, and Montana, and in recent years new drilling techniques — mostly hydrofracture and horizontal drilling, have opened this oil to production, leading to a land rush and an investor frenzy.

If you’re interested in the Bakken generally, and want to know the language and some of the players, I think a good place to start is an article that appeared originally in Bloomberg Magazine — you can read it here online if you like.

But what about this specific penny oil company?

More from deCastro:

“Tucked in among the giants, is a tiny, little penny oil which nailed down a large property right in the heart of the Bakken Formation. This little penny oil was started by five oil men who had worked for the big oil companies — and helped develop the techniques that cracked the region open to commercial exploitation.”

He shares some other stuff, too — that this is light, sweet crude oil, which is what the refineries really want. That five investment banks “just invested $38.2 million in the company.”

They’re going to drill 40 test wells this year, and plan another 60 next year, all from just a tiny portion of their big 76,000 acre holdings.

And he thinks that this company will turn your $4,000 into $84,000 (so far, it would have turned your $4,000 into about $1,500 … but perhaps we can give him some more time).

OK — so, if you want the name of the company, you can send Chuck deCastro a check for $5,000 … or, after joining the Gumshoe Irregulars with a small contribution out of the goodness of your heart, you can find out right here what this company is.

No? Ok, then I’ll tell you for free … this is …

Painted Pony Petroleum (PPY.A and PPY.B on the Venture exchange in Canada, PDPYF on the pink sheets)

If you’re one of those who likes confirmation, those specific numbers are from a March press release, so you can check that out if you like. There was also some discussion of this stock back when the teaser initially started circulating in May, when womanwithportfolio unmasked the company for a few interested folks, so you can always visit that thread at the Stock Gumshoe forum, too.

The facts have changed since then — at the end of March Painted Pony also bought a big tract of natural gas sites in Northeast British Columbia, so that serves to effectively diversify their holdings a bit and give them exposure to two different markets. Hasn’t helped the share price so far, of course, but they are producing some gas there. Their headquarters are in Calgary, in between those BC holdings and their Bakken drilling sites in Saskatchewan.

So what are we to think of a company that went from $4 to $9 and back down to $3 and change? Well, we can start out by being fair — it’s not specific Painted Pony information that has done most of that damage to the stock price, as far as I can tell, it’s the falling oil price and the deflation of the Bakken Bubble. If you compare their price chart to Northern Oil and Gas, or Ultra Petroleum, or any of the other Bakken plays, you’ll find it’s pretty similar to the chart of Painted Pony.

If you want to assess their project on your own, you can start with their latest earnings release, from the end of August — it’s linked from their news site here. They raised a lot of money in April, and they appear to be pulling in some positive cash flow from their producing wells, so while they’re not profitable they do appear to have the funding to keep going with their exploration program for at least the next six months or a year at the current rate. Their production is growing quickly from a very low base, and they are continuing to drill exploratory wells. I don’t know enough to tell you whether their drilling results have been extremely positive or extremely negative, but nothing jumps out at me in that regard.

I know many of my readers have been following the story of these Bakken stocks religiously, so they may want to jump in with some opinions — I’m not an expert on the area or on penny oil stocks, but Painted Pony does at least have some promise. If I were to invest in this one I’d want to dig a little deeper.

RBC had a positive analyst note out on them back in May with some interesting potential points, among them that their big acreage makes them a tempting takeover target, and that their BC gas exposure is a positive, that their reserves should be climbing throughout the year, and that the land value alone of their holdings should be worth about $5 a share. They had a target price of $7.50 and said that a potential takeover price might drive it to $10.50.

Of course, that was back when the share price was above $6, and when optimism was much higher for all of the oil, gas, and Bakken players … though takeover speculation has been out there more recently, too, as noted in this blog from the Globe and Mail last month, when a big chunk of Painted Pony shares changed hands. It seems to me that with the relatively high cost of their advanced drilling techniques, they do depend on fairly high oil prices for good future profits — but they had net returns that were extremely high per barrel as of last quarter, so it seems they should be fine on that front even with oil at $100 or $80, should it continue to fall. Of course, if they’re planning on $150 oil for their capital investment drilling program, which is where all of their cash flow and most of their cash are going, they’ll probably need to raise more money sooner than we might think.

If that initial Bakken enthusiasm was right, and the recent pessimism is wrong or overstated, then perhaps this is an interesting opportunity if you’re looking for an oil and gas speculation. I don’t have a strong feeling on this one either way, but I’d be happy to hear yours….

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14 Comments on "“Tiny Oil Stock, Drilling in the Hottest Region” Penny Oil Speculator"

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boband
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boband
September 11, 2008 11:13 am
Some of these companies (Bakken plays and other tight oil/gas plays) will be still making lots of money at $100 oil and $8 gas. The new technology for for doing the horizontal fracing is much cheaper (potentially) than what was available even a year ago. But that’s as far as my info/knowledge goes. I don’t have any of this stock, but have a couple of others in this play, so I think there is potential in the story (though I know nothing about Painted Pony). These companies are getting beat up right now, and with oil/gas prices understandably so. Of… Read more »
Alec Purcell
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Alec Purcell
September 11, 2008 11:33 am

I haven’t read where the Chinese are making any serious plays into Bakken. If they are that would paint a more positive picture for me.

stockcrazy10
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stockcrazy10
September 11, 2008 11:50 am

Does anyone know why there are A and B shares?

Bruce
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September 11, 2008 1:07 pm
Hi Folks — I decided to take small positions in four petro companies that are working the Bakken field. Specifically, they are Whiting Petroleum (WLL), Brigham Exploration (BEXP), Continental Resources (CLR) and Northern Oil and Gas (NOG). I made some money shortly after we acquired these stocks, but they have taken a tumble since July. I’m inclined to agree with “boband” regarding the profitability of Bakken oil when it can be sold for $100 per barrel. And we in USA haven’t shaken our addiction to oil. Alaska is too far away, even if Washington decides to drill in ANWR. I… Read more »
farley 5
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farley 5
September 11, 2008 1:20 pm
Jim
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Jim
September 11, 2008 4:10 pm

I wish you could explain to me like I’m a two year old how to understand those charts Farley.

stockcrazy10
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stockcrazy10
September 11, 2008 6:35 pm

Can BEXP be rehabilitated if it breaks through resistance and hits 14? (I don’t own this one. I’m just curious.)

Big Mo
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Big Mo
September 11, 2008 8:34 pm

Gumshoe, you state, “If I were to invest in this one I’d want to dig a little deeper.”
Actually, if I were to invest in this one, I’d want Painted Pony to dig a little deeper, too…

The Pilgrim
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The Pilgrim
September 12, 2008 12:22 pm

BEXP is the only Bakken stock that appears to have a current “bottom” – and I’m not sure I’d trust that one. Naked shorting of these thinly traded stocks is completely out of hand. Made a bunch with BEXP and NOG – lost it all on ROYL which should be the target of an SEC investigation but I guess ROYL shareholders aren’t in the SEC’s rolodex like favored financials BOD’s.

stockcrazy10
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stockcrazy10
September 12, 2008 12:34 pm

Thanks, Pilgrim!

ponce
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ponce
September 13, 2008 2:20 am

A few months back there were blogs trying to identify Painted Pony as the small company being teased doing exploration in the Bakken. I commented then being amazed why small investors were paying $8 for a $4 stock. At the time, the 5 investment bankers paid only $4.32/share. Now that the stock is less than $4, those small investors lost more than half of their money. There was too much hype and too many suckers. Be more cautious next time! Good luck.

cdchi1
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cdchi1
September 13, 2008 7:53 am
I suggest the penny oil speculator should stick with pushing Eromanga Hydrocarbons…as you mention in the article, ERH is well off its highs (As are most juniors) but it is entering a very exciting period. Initial flowtesting results from their 430 project (40% ownership) last week are very promising, and Im expecting a positive flow test announcement on Monday…could be upward of 400bpd (you do the sums). OK Ill do the sums for you…if 400BPD (and thats the fluid they recovered in initial test based on 5.7 barrels over 20 mnutes), thats around $14M per annum, or $6M for ERH… Read more »
@TVI_PowerBoard
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March 26, 2010 5:26 pm

Great stock to own for sure, great article thanks…
http://www.tviexpresstvi.com/

farley 5
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farley 5
September 11, 2008 5:49 pm

Simply go to the Forum, search Charts, read the thread, take the FREE class from Dorseywright.com and this will all be clear.

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