“Beware the Oil Pirates of Somalia” (Christian DeHaemer)

By Travis Johnson, Stock Gumshoe, January 24, 2011

I can’t tell you that Christian DeHaemer, who’s now one of the editors of Energy and Capital and runs the Crisis and Opportunity newsletter for those same publishers, is pushing Somali oil right now — but I can say that an offhand aside he threw into a recent free article had lots of my readers sending me questions, and there’s an interesting history so I thought I’d follow up.

Here’s what he said in the end of an article that came out on Friday (you can read the whole thing here if you like):

“A few years ago, I was following a small Australian company that had talked some tribal elders into letting them search from oil in Northern Somalia, or what is called Puntland.

“Make no mistake; Somalia has the same geography as the Arabian Peninsula, and is thought to hold a mother lode of oil — some six billion barrels.

“As you might expect, this small wildcatter ran into deadly troubles. Hand grenades were tossed into the back of their exploration vehicles.

“That’s why I was surprised when I came across this little bit of info from the PR wires:

‘Africa Oil, together with its joint venture partners, has entered into amending agreements with the Government of Puntland, represented by the Puntland Petroleum and Mineral Agency, in respect of the production sharing agreements (“PSAs”) for the Dharoor Valley Exploration Area and the Nugaal Valley Exploration Area.’

“This stock is already up 300% to 12 cents. That’s right — a Somalia penny stock.

“That’s what I’m talking about.”

You’d have to be a very long-time reader of Stock Gumshoe to have that ring a bell, but there are a few of you who’ve been with us that long (and for that, I can’t thank you enough).

At the time DeHaemer was “following” this small Australian company he was working for Taipan, a different one of the many offshoots of the mighty newsletter-spewing Agoraplex, writing a few different newsletters — and when he was getting ready to launch a new letter called Crisis Trader (which is no longer around), he used this same “small Australian company” as a teaser pitch for a “Special Report” that he thought could make you wealthy in a matter of months.

And yes, I don’t mean to rub it in when someone gets a stock wrong or overhypes it (OK, maybe I mean to rub it in a little — but we all make mistakes) — but saying that he was “following” this stock is being, shall we say, modest. What he said at the time was:

“… this tiny 50-cent oil exploration company is, hands down, the most lucrative investment opportunity I’ve seen in my entire life.”

And of course, given the huge push behind this teaser and the rosy valuations he pitched at us — he said the shares were probably worth $30, but should be at least up to $8 by October (this was back in mid-May of 2007) — it should come as no surprise that the shares went bonkers and doubled in a matter of days before they spent the next couple of years gradually returning to the earth from whence they came. This was one of the more talked-about teasers in Gumshoedom that year, and I issued a couple updates about it — you can see the basics here if you’re wondering whether your favorite Gumshoe sounded the same four years ago. And most of the original promo from Taipan is still up online, you can still see it here if they don’t take it down now that they’re being reminded of it.

In fact, one reason that this stock stands out for me (and therefore, I remembered it when these questions poured in over the weekend) is that I used it as an example of the impact of teaser ads on stock prices when I was presenting at a conference the following year (I actually featured two teaser ad campaigns in that presentation — the other one from another well-known newsletter guy with big mailing lists, Byron King, pitching what he called the “oil vacuum” … and to be honest, though both stocks were good examples of the craziness of microcap teaser ad pitches … the “oil vacuum” got better laughs when I talked about it).

So … it seems unlikely that DeHaemer is actively recommending this stock, again, though you never know — his shtick is that he seeks out tiny natural resources companies (mostly) that are in areas where there is, or nearly, “blood in the streets” … war zones, places timid western investors are afraid of, etc. In my time following some of his teaser picks there have been both huge winners and huge losers, as you might expect from such a strategy. Past picks like Dragon Oil and his Mongolian ideas have done quite well, others like his Israeli oil company and this Somali idea have been much less profitable (FYI: he had another idea based on fighting Somali pirates back in 2009, that one has done much better and, depending on your buy price, might actually be up from when DeHaemer touted it).

But still, I was curious since I hadn’t thought about this Somali-connected oil company, which is called Range Resources (RRS in Australia, RGRLF on the pink sheets — don’t get ’em confused, this is an Australian microcap stock, not the big Marcellus Shale play that’s listed in NY … though folks like Yahoo Finance get confused all the time, most of the articles linked to the RRS.AX ticker are actually articles about the large, mainstream Range Resources and their gas projects. The two companies are completely unrelated). So I thought I’d take a few minutes and see just what on earth is going on with them — frankly, when I saw this little note from DeHaemer and the questions from my readers my initial reaction was, “those guys are still around?”

And yes, they are still around. The share price is right around 15 cents, which is a huge improvement from where they languished for a couple years after their teaser top, the stock traded for just a few cents from late 2008 to early 2010, so many traders have probably been pretty happy about the recent price (I assume that DeHaemer’s first crowd of Somalia speculators probably mostly gave up long ago).

And though the company is still touting its deal with the Puntland government, they are pretty passive participants at this point, having farmed out 80% of their ownership rights in the main exploration zones of Puntland to a partner and operator, Africa Oil (AOI in Canada and AOIFF on the pink sheets). Africa Oil, which used to be called Canmex, in turn has brought in a third partner to own up to 20% — the third partner is Red Emperor, another Australian natural resources investment/exploration company. (In case you’re keeping track of the dance cards.) If you want the story of the early days of Range Resources and the Puntland deal that they bought from the original operators, this article does a better job of explaining the details than I could.

Africa Oil’s stock has had a great year — but that’s largely because they are working elsewhere, too, they are partnered with Tullow Oil (who you might know from their big discovery in Uganda, not far away) and others in Kenya on a number of potentially interesting and very large blocks, and they’re also exploring in Ethiopia. I would guess that their prospective work in Kenya is what’s mostly driving the share price at this point.

Their recent announcement about an extension of their Puntland exploration permit (for another year, until next January) indicates that they have to drill and spud at least two exploratory wells in Puntland by next Fall (one in each of their two exploration zones), so they are a bit under the gun at this point — they have been planning to drill their initial exploratory wells at least since late 2009 and had plans in place to drill at least one well by the end of 2010, but it doesn’t appear that they’ve done anything yet other than acquire old 2D seismic data from previous exploration projects in Somalia and continue to focus on preliminary drilling targets.

Reading between the lines, it seems likely that what’s holding them up right now is that no one wants to go to Puntland and drill, and they don’t want to lease a mobile rig to Africa Oil if that’s where they’re going to use it — and as an outside observer, it’s hard to blame them (the actual language that shows up in Africa Oil’s updates is, “The Company continues its efforts to identify international drilling and drilling related contractors willing to participate in operations in Puntland (Somalia) on commercially acceptable terms.”)

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...

And Range Resources is apparently not holding their breath that Somalia (sorry, Puntland) will make them rich anytime soon — what money they have has been spent on buying into exploration projects and junior shares of drilling projects in Texas, Trinidad, and Georgia (the former Soviet republic, not the Peach State). They are still apparently spending their required share for developing the Puntland projects (or developing the data, really, at this point), but from reviewing their website they seem to be more focused on Texas production and Georgia exploration. They are still a tiny company — they’ve sold so many shares over the years that there are now over a billion shares outstanding, and about a half billion options at strike prices near or below the current price, but since the stock changes hands at about 15 cents that’s still just about $200 million in market cap.

So if you are clicking your ruby red slippers and believing really, really hard maybe you think $200 million is a bargain for a company that has a 20% slice of what might be the next big African oil find (or you find value in their Texas or Georgia projects).

On the other hand, you might be somewhat more pessimistic and think about a few things: the fact that it’s been about four years since the initial deal was made with the Puntland government (Puntland declared “autonomy” about 12 years ago, but not “independence” like neighboring Somaliland) and about 18 years since the Battle of Mogadishu, but they still can’t convince anyone to bring a drill into the country for a reasonable price; that despite this, the government is clearly anxious for them to make progress, thus the one year deadline on the latest extension; that as far as I can tell they’ve yet to make a hole in the ground and oil hasn’t actually been discovered yet, and one of the two major prospective oil blocks that is being explored is at least partly in disputed territory with Somaliland; and that no one is really sure if there will be a unified Somalia or a real central government someday.

Just a few things to think about on a chilly, chilly Monday morning — I know no one has been dying to throw their money into Somalia lately, but folks were asking about this stock and I think the story of Range Resources in Somalia probably has some good lessons for us to remember whenever we’re considering the daydreams of globetrotting oil explorers. Sometimes they work out, of course, but it’s probably more important to remember that drilling for oil is hard even if you’re doing it someplace friendly, like Texas, and it’s hard for us to even conceive of the complications of exploration in frontier countries with extremely unstable politics, neighbors, and even borders.

P.S. It’s easy, of course, to say that these kinds of exploration stories are ridiculous — and I’ve been harder on this particular Somali idea than many others … but the winners in this sector (and DeHaemer has pointed us at a few) are so exciting that it makes you forget that you were ever duped or disappointed. So just remember, if it works out it was all my idea and I’ll take my finder’s fee in Ferraris, please!