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….