This “Tech Breakthrough” piece isn’t a teaser ad like most of the pieces I write about — but several readers have sent in questions about it, so apparently it’s making the rounds. Here’s the quick take for those of you who are interested:
The pitch is not for a newsletter — the article from James Burgess at OilPrice.com isn’t trying to sell you a subscription, it’s trying to get you to buy a stock. The name of the stock is not secret, which makes sense because they really want you to buy it — it is trumpeted pretty aggressively in the text of the article. You can see the piece here if you’re curious, but it’s a paid stock promotion.
That’s not hidden, it’s all laid out in the fine print (and the fine print isn’t all that small on this one, to the credit of Oilprice.com) — if you’re going to take money to promote a stock, which is a Faustian bargain that pretty much anyone with an email list or a newsletter has been offered at one point or another, then anyone with a real business to protect (as OilPrice.com has) will disclose the fact that they’re being paid to endorse or promote or disseminate info about the stock. Otherwise you’re testing all kinds of laws and regulations that aren’t worth testing, and those are the kind of laws that actually get enforced with meaningful penalties — so here’s how they describe it in the disclosures below the article:
“PAID ADVERTISEMENT. This communication is a paid advertisement and is not a recommendation to buy or sell securities. Oilprice.com, it’s owners, managers, employees, and assigns (collectively “The Company”) has been paid $85,000 by a third party to disseminate this communication. This compensation is a major conflict with our ability to be unbiased….”
This kind of thing is very common for small stocks, particularly in the natural resources industries but also in technology, biotech and other growth areas where microcap companies often try to attract individual investors. These kinds of ad campaigns are usually run only about (or by) really small and unlisted stocks — and I break them down into three categories:
1. The Pump and Acquire — this is when a company is trying to “roll up” other small companies, and they use their stock as their currency (meaning, they offer X shares of their stock to acquire all the shares of the company they’re acquiring). In this case, for the numbers to work well they need to be more highly valued relative to fundamentals than the company they acquire and they need to have a pretty high profile in order to be taken seriously and to have the selling company’s management want to get stock in the flashier, larger and more diversified company in exchange for their own stock — that’s how a “roll up” builds value, by having a stock that’s more richly valued and using it to buy assets that are comparatively discount-priced, so they benefit from what is essentially an arbitrage of the difference in valuations between their own stock and the company they’re acquiring.
The easiest example of this is First Mining Finance (FF.V, FFMGF), a risky and speculative “gold bank” company that I own and suggested to the Irregulars back in the Summer of 2015 (I suggested two stocks that month, and the other one ended up being a disaster — so hopefully the huge gains from First Mining balance that out). First Mining is rolling up junior gold mining stocks who are in some financial distress but have reasonably large potential gold deposits, with the idea that when gold takes off again those deposits will be worth mining and First Mining will be able to farm them out to mining companies to do the development work in exchange for equity participation and/or warrants or other upside participation.
But they didn’t really have any cash to get started, so they needed to buy up all these little stocks by using their stock — and in order to make sure the stock didn’t get crushed each time they “diluted” the ownership by issuing new shares for an acquisition, they had to promote themselves and get more investors to buy the shares. This was an easier task than many companies face because First Mining is helmed by Keith Neumeyer, someone who has already built a couple somewhat similar companies and is a celebrity among mining investors and got a lot of “free” media coverage in addition to their paid promotions. So partly they built interest and valuation by chatting up lots of newsletter folks, so there are several newsletters who recommended the stock, and partly they did it by buying coverage from stock promoters — the promos for First Mining that I saw most frequently were run by Daniel Ameduri’s Future Money Trends, which disclosed that it was paid something in the neighborhood of $100,000 and 100,000 stock options for their coverage and marketing of the stock.
That makes a certain amount of business sense — it makes me feel a little queasy because I don’t like the baldly promotional pieces, but mining companies are hugely capital intensive and built on promotion so to a certain extent the ability to self-promote is important… and the industry is filled with “investor relations” firms that exist solely to publicize and “sell” mining stocks to the public, so it’s somewhat normal to have companies promoting themselves aggressively in a way that more established firms in other industries generally (but not always) avoid. It pays to be extra careful with companies like First Mining Finance that are so self-promotional, because you want to keep an eye on their filings and on their real business, not get too complacent and just watch the promotional material, but I don’t necessarily exclude them from consideration — it’s a company business expense to promote itself, and if the company is open about it I can sometimes find it acceptable (as long as I see some appeal in the actual underlying business, of course).
Just to be clear: Stock Gumshoe and yours truly did NOT, of course, take any money from First Mining Finance to write about them — we do not take money from companies (either publicly traded or not, including newsletter publishers) in exchange for any kind of editorial coverage, and we try not to let stock promoters advertise in our newsletter (though their ads may show up as part of the Google-served ad spaces on the site from time to time, since those ads are different for every reader and we don’t even see most of them).
"reveal" emails? If not,
just click here...
2. The Pump and Raise — this is similar to the Pump and Acquire, but instead of needing to get their stock price up so they can use it as a currency to acquire other companies, these Pump and Raise companies are trying to boost their share price because they need to go to the market to get more capital, and it’s worth it to them to spend a bit on promotion if it means that they can sell their stock at a higher price and raise more money for the business.
This also is not necessarily a red flag, though it’s certainly a yellow flag. A micro cap company that’s about to raise equity capital by selling more stock is not necessarily a great investment — it’s often better and safer to wait until after the capital has been raised, the dilution has been felt by investors and the dilution worriers have sold in anger, and then, if you otherwise find the company to be a good investment, you can buy stock after they’ve improved their balance sheet, and at what might quite possibly be a better price.
But conceptually, this is pretty similar to what most pre-IPO companies do — hire investment banks to get them all the attention they can, send out executives on a “road show” to promote the stock and gin up interest in buying shares… it’s just that microcap unlisted (or venture exchange) companies don’t really get to do things that way because they’re not going to appeal to institutional investors: They need to reach individual investors, and they do this by advertising, and sometimes that advertising is in the most direct and least palatable form: the overwrought stock promotion. So in these cases, where the company being promoted clearly needs cash for whatever their business might be, and where the company itself is paying for the promotion, I’d be willing to give them a little bit of benefit of the doubt… but it’s awfully unlikely that such copmanies in that situation would be a compelling investment.
3. The Pump and Dump — these are the ones that I think come down as “always avoid.” “Pump and Dump” is a phrase that you’ll hear bandied about on investment discussion boards all the time, and people often use it to describe any situation where someone is talking up a stock, but I’m using the most narrow definition here: A pump and dump is when a third party investor quietly buys up a lot of stock, usually in a microcap, unfollowed or unlisted company, spends some money to promote that stock in ways that look pretty similar to the other kinds of “pump” operations, but is doing so just because they intend to drive the stock price up and sell their shares.
This is not necessarily legal, even if you disclose it (as most do — there’s little reason not to disclose, because no one ever reads the small print and disclosures), but from what I understand there’s a lot of grey area and there have been large offshore investment pools that have engaged in this kind of behavior for decades, and I expect it’s extremely difficult to completely stop it. And to some degree third-party promotion is legal when all the pertinent info is disclosed in the ads, particularly if the small print says something to the effect of “we’re promoting this stock so we can sell our shares, dummy” — the first amendment protects a lot of commercial speech. There’s a bit of caveat emptor with this stuff, particularly for people who don’t read the disclosures at the end of stock promotions — my take on these legal concepts is the very technical “you can do lots of terrible things to people as long as you tell them in advance” rule.
So the first two kinds of “pumps” are manipulative, but not in terribly different ways than investment banker roadshows are manipulative — as long as it’s the company itself footing the bill and you don’t see the insiders selling at the same time, then you can rationalize the fact that they’re hiring stock promoters to drive interest in the stock as they build their companies… assuming, always, that the company is real and you’re really interested in it from reading their filings, not just from swallowing the line of promotion that the paid flacks at the advertising/investor relations firm feed to you.
Its this third one that’s really dangerous, when a stock is promoted by a “third party” — sometimes that third party is identified, sometimes not… sometimes it might even be secretly from someone affiliated with the company (like an insider sneakily trying to drive up the stock so they can sell, which is a huge red flag for me whether disclosed or not), and that, despite the likely illegal nature of that kind of insider-fueled promotion, is a risk if you can’t figure out who the third party is or if the company is mum on the matter.
Why is it a risk? Well, mostly because, in the vast majority of these cases, the promotion is designed just to get the stock as high as they can in the course of a couple weeks or months so that “third party” can sell all their shares into this new promotion-fueled demand, which can even snowball into something a little bigger if the promotion is really successful and creates the appearance of momentum in the shares and gets people buying and selling in much higher volumes as they try to ride the stock higher… because stocks that are rising are great and you want to be in on them, right?
But then one day the promotion stops, there are no new buyers rolling in, and the “third party” has sold all their shares — what, then, is the “natural” place for this stock to sit if it’s not being put under the nose of thousands of new investors every day? Probably, if we assume that there’s not much “real” to the business and the fundamentals didn’t have anything to do with the big promotion-fueled rise in the stock, it means that the stock falls really, really fast to get back down to at least where it was before the promotion.
There are lots of small investors who see these situations, know with certainty that it is indeed a “pump and dump”, and still try to ride that stock spike and/or sell the stock short after it has climbed (it’s tougher to short microcap stocks, but not always impossible)… if that’s your cup of tea, you’re welcome to it — I suspect that most of those folks end up losing unless they’re extremely conservative and watch the shares extremely closely to try to take profits quickly and keep losses small when they’re wrong… and they are likely to lose for the most obvious reason: The only one who knows when the promotion will start and stop, and how many thousands or millions of people will see the promotion on a given day or week, is the person doing the promotion. Since there’s no fundamental reason to buy the stock (in almost every case), the stock reacts solely to the level of promotion. If you’re trying to take advantage of the spikes caused by promotion and are trading against the person who knows when the promotion starts and stops, who do you think comes out better in the end?
As a general rule, if you’re an individual investor and you’re going to dabble in individual stocks, which means you’re taking on a lot more analytical work and a lot more risk than folks who buy index funds, you want to try to take those risks only if you can see some reward, not as a spin of the wheel while hoping for luck: You want to invest in stocks where you can have an informational advantage (you see the future potential that short-sighted Wall Street analysts might shortchange, or you know the industry very well) or, at least, a mental advantage (you don’t have to answer to investors like a mutual fund manager does, or have to report your results every quarter, so you can stick through fluctuations and be patient). If you’re trying to trade in the shares of a manipulated pump and dump stock, you have no advantage other than whether you think you might be a little smarter or more attentive than the sheep who are falling fully for the stock promotion’s claims and buying into it as a real investment. That might work for some, but for most of us it’s not a sustainable way to build a portfolio… and sometimes when you’re thinking you’re trying to take advantage of the sheep, you find yourself also being herded into the mouth of the wolf.
I don’t often write about these kinds of promotions, since I prefer to dissect the picks that newsletters are really making for their subscribers (even if they overinflate the appeal of those picks in order to entice new subscribers), but we do get a lot of questions about “pump and dump” type ads and it’s probably worth looking at them every now and again, if only to remind ourselves that there are wolves out there.
So what about this specific ad? It’s not nearly as promotional as some, and it’s structured as a “real” article from OilPrice.com, so it can seem fairly compelling… this is a stock I would never buy, if only because it’s being promoted by a third party and the only obvious reason I can see for the promotion is that someone wants to manipulate the stock so they can sell their shares at a higher price, but let’s assume we’re giving it the benefit of the doubt.
To begin with, the name of the company being promoted is MCW Energy Group (MCW on the Venture exchange in Canada, MCWEF on the OTCQX in the US)… and it has been around for several years, though apparently the business focus changed a year or two ago when they sold their fuel distribution business in California (to their Chairman, apparently, which also sounds a bit fishy) to focus fully on their oil sands technology, so there is some real data from corporate filings in Canada (Canadian filings are available at SEDAR, which is the north-of-the-border equivalent of the SEC’s EDGAR database of corporate filings). They’ve also got a glossy website, brochure, and plenty of investor presentations that pitch what they say is their revolutionary technology for extracting oil from oil sands without environmental consequences or high costs.
It’s a tiny company, including their recent acquisition it looks like the market cap should be about C$40 million these days — which seems like it ought to be right in the sweet spot for being manipulated by pump and dump promoters, with a business that has some history and real physical assets that you can take pictures of, and that looks real enough to give some fuel for promotion … but also a stock that’s tiny enough, and with low enough volume, that you can probably drive the price up pretty quickly with a fairly small promotion budget.
So… what is it that MCW says it’s doing? They say they’re buying up leases to possible oil sands production areas in Utah and elsewhere, testing their technology on oil sands from other parts of the world and on remediation sites (like tailings ponds in Alberta, to see if they can extract hydrocarbons from those dirty waste areas), and licensing their technology to others in exchange for royalties on future production.
All of which is essentially based on the one project they’ve actually built, a test plant in Utah that is designed to prove the concept of their oil sands extraction technology and which was apparently being completed right before the oil market crashed — development started in 2011 or 2012, depending on which of their publications you look at, and production started in September of 2015, from what I can tell, and seems to be stopped again now. I’m not going to be able to tell you whether this plant works or not, but we can at least look at the financials.
“The 1,128-acre Asphalt Ridge lease is estimated to hold 20 million barrels of bitumen, according to assessments by Chapman Petroleum. MCW Energy acquired this acreage in 2012, and built a 250-barrel/day plant onsite, which is now in the process of being augmented to handle twice that.
“Then, just this year, MCW acquired the lease from nearby Temple Mountain Energy, adding another estimated 88 million barrels of bitumen to its portfolio, which Chapman values at $81 million. This is where it gets really big: This is the site of a future 2,500-barrel per day plant, for which the design is already nearing completion.”
The leases come with royalties of somewhere in the 7-12% range, and they are paying advanced royalties whether they produce or not… with the extension of the leases past 2018 dependent on them having built a larger scale production plant. So they are under the gun to get a bigger production plant built in the next 18 months or so, which sounds awfully fast.
And the pitch for future gains is built on both this expanded plant and on the potential that they will receive lucrative royalties for the use of their technology by other companies on other oil sands (or remediation) projects around the world. The economics for the plant that are cited in the promotional materials and presentations indicate that it will be very profitable whether oil is at $30 or at $50 or $80 — partly because one of the big input costs for this “closed loop” system is solvents that are used to separate the hydrocarbons from the oilsands, and those solvents themselves, like propane and the like, are themselves oil products. I don’t know if they include the costs of building and operating bitumen mines to feed raw material into the plant or not, I haven’t looked at the 2014 Chapman study that they say validates the economics of the technology.
The filings that are available so far are pretty stale, which is not surprising for a tiny company — their last filing on SEDAR is for the May 31 quarter and it was released in August, so presumably they’ll be filing another quarter fairly soon. That next quarter is going to include a fair amount of info — it will include the impact of the acquisition of Accord GR Energy, which closed in late August and will add another 60 million shares to MCW’s share count (which means the effective cost of the acquisition is about $12 million at 20 cents a share), but it probably won’t include any production or revenue since the plant apparently isn’t operating.
They say that the 250 bbl/day pilot plant started producing in late 2015, with at least 10,000 barrels having been produced by the first quarter of 2016, but that is a tiny, tiny amount of oil and they can’t even get full wholesale prices for selling at that volume. And they didn’t generate a single dollar of revenue in the first quarter, so apparently they just produced some, proved that it worked to some degree (though it sounds like they produced 10,000 barrels last year and only sold 6,000 into the market, so I’m not sure what happened to the rest), and shut it down. Now they’re going to move the plant and their extraction (“mining”) business to a different one of their leases because the costs are a bit lower there, for startup of production in the Spring of 2017.
This, combined with all the press releases about licenses signed and production potential and acquisitions of other tiny companies for their technology and leases, fails to impress very much because it’s all story-based — there’s little in the way of financial information that indicates any imminent changeover to becoming a self-sustaining company, though they do have some outside consultants who have apparently verified some of their calculations (like the projection that they will save $7.60/bbl on freight and transport costs in a press release about their move).
There’s a reason why most profitable oil sands operations are HUUUGE — it’s not just that they have to mine the stuff and crush it, which is much cheaper at large volume, but also that the equipment for processing oil sands and bitumen is expensive and requires lots of people and energy and infrastructure for it to make sense (like that freight cost savings mentioned). It’s very hard to imagine a small-scale oil sands operation being financially viable unless oil becomes scarce and expensive again… but that’s just my initial reaction.
And as to whether their technology is particularly compelling or unique, I am absolutely not an expert on this sector… but I have my doubts — partly because they issued a press release back in May that had them contemplating the outsourcing of the management (and moving) of their pilot plant to another company, Vivakor, which would also operate its own environmentally friendly, no-tailings pollution oil sands production process in a separate plant on the same property. There appear to be lots of ideas for producing oil sands in a more environmentally friendly way, but absent a shortage of oil there’s apparently not a groundswell of interest in mining this bitumen in more places. That may be some editorializing on my part.
Really, all you need to know is this quote from a press release from the company last Friday:
“MCW Energy Group Limited… wishes to make the following statements regarding certain recent promotional activity surrounding the Company’s common stock that it was made aware by OTC Markets on December 5, 2016.
“The activities were promotional newsletter emails encouraging investors to purchase the Company’s common stock. This promotional activity coincided with higher than average trading volume and fluctuations in the Company’s stock price. The Company was unaware of the promotional activity until informed by OTC Markets, and is unaware of the full nature of the promotional activity, the extent of the email newsletters’ dissemination, or the responsible parties.
“Neither the Company, its officers, directors and, to the Company’s knowledge, its controlling shareholders (i.e., shareholders owning 10% or more of the Company’s securities) have, directly or indirectly, authorized or been involved in any way (including payment to a third-party) with the creation or distribution of promotional materials including these email newsletters; and that neither the Company’s officers, directors and, to the knowledge of the Company, any controlling shareholders, sold or purchased shares of Common Stock of the Company within the last 30 days.
“The Company is not affiliated in any way with the authors of these promotional newsletter emails.”
Well, that may not technically be true, given that they’ve also announced in the past that MCW also has other business relationships with OilPrice.com — the two companies recently announced a joint venture focused on recruitment in the energy business.
But there could well be other promotional campaigns being funded by this third party that I haven’ seen, and it sounds like the company is vehemently denying that they or any of the 10% shareholders they’re aware of is behind this promotional campaign, which jibes with the fact that OilPrice.com says it was paid by a “third party.”
And despite my exercise in taking this semi-seriously as a real investment idea for a few moments, that last bit is really ALL YOU NEED TO KNOW. Promotional campaigns paid for by third parties are almost exclusively designed for only one purpose: To get the share price higher so that those third parties can sell their shares. Third parties do not try to drive up the price if they’re thinking about buying more because they’re excited about the fundamentals, and third parties who are not somehow connected to the company (MCW says these promoters are unknown to them and aren’t insiders) are not generally in the habit of “helping out” to try to get the company some publicity for their future fundraising efforts.
The company does need money if they’re really going to proceed with this capital-intensive work of building and expanding and moving plants and mining bitumen, that is certain — they had some $9,000 in cash at the end of May and raised about a million dollars with a convertible debt issue in October, but I haven’t seen any other fundraising they’ve done… and a million dollars won’t get them very far. But they don’t seem to have paid for this promotion as a way to raise their profile for a capital raise. They’ve exchanged a lot of debt for equity in the past to help clear up the balance sheet, but I haven’t looked through to see how much of the debt on their balance sheet has been converted or settled — that info should be in the next filing, whenever it comes.
So that’s your look at “Pump” promotional emails for the day — don’t worry, we’ll be back to looking at real “some newsletter actually likes this stock” pitches tomorrow, but there is alway so much chatter floating around about “pump and dump” stocks that I think it’s worth the occasional look to see what is really behind these promotional articles… hope I didn’t go on too long or bore you with this one. If you’ve got any thoughts on other pump-and-dump techniques to be aware of, or even thoughts about this particular stock on the odd chance that you’ve looked at it before, please feel free to drop them on us with a comment below.