by Travis Johnson, Stock Gumshoe | November 14, 2014 8:27 pm
A couple things to check in on before I get to the “meat” of today’s note for you.
First… it turns out that Medical Properties Trust (MPW) is not a dividend grower. I thought they were signaling dividend growth with their increased guidance a couple weeks ago, and thought that they would hike the dividend this month as they did a year ago (that was their first dividend hike in a long time). Didn’t happen, they declared the same $0.21 dividend they’ve paid for the past four quarters.
So what do we do? They still have the capacity to increase the dividend, the way I read things, but they either want the money for something else (they are growing and do need capital) or they intend to wait until cash flow supports the dividend more comfortably to increase it, or they simply don’t want to be a “dividend growth” REIT. I think growth is still very solid at MPW, given their large deals in Germany that they’ll be digesting over the next couple quarters, and that the business is on a good trend operationally and in a good spot strategically (hospitals are doing well and want to expand, doing a sale/leaseback is a great way for some of them to get financing for expansion or modernization), so I will continue to hold it at this price and be content with a 6%+ yield.
But if it’s not a dividend growth stock, I don’t want to think of it as a “core” stock that I can hold without a tight hand on the reins. So we’ll keep it as it stands, MPW is still a speculative REIT because they haven’t established a dividend growth pattern — and it should yield more than their “near peers” who are consistent dividend growers like Ventas (VTR), HCP (HCP) or Health Care REIT (HCN), most of which have yields about 25% lower (in the 4-5% range). So ROIC and COR stay as my “core” REITS, MPW is still a bit more speculative — not what I expected to be writing this week, but there you have it. And we’ll also have to keep an eye on the increasing German exposure for MPW — it’s good to be diversified, but if the euro gets really hammered (as some folks expect, as the ECB tries to talk down and maybe do some real QE to spur growth) then MPW’s German hospital rents are going to look less impressive when they’re brought back to this side of the pond as dollars.
And on the speculation front, I should let you know that I “averaged down” (some people say you should never, ever do this) on my relatively small position in Mongolia Growth Group (YAK in Canada, MNGGF on the pink sheets). This is a Mongolian real estate company in the middle of a very focused transition at the hands of an experienced emerging-market real estate manager (they were started by a hedge fund guy, Harris Kupperman, and his friends, who were just looking for a local way to invest in Mongolia and moved there for a few years and bought up all kinds of stuff).
The stock has fallen substantially this year, in large part because of investor uncertainty about Mongolia — Mongolia Growth Group is essentially the only non-mining company in Mongolia that North American retail investors can easily buy, so it carries a great weight of levered expectations considering the fact that it’s a teensy weensy little $50 million company.
Mongolia Growth Group is now trading below book value for the first time in its (admittedly short) history. That’s not necessarily an indication that it will bounce back, book value is very subjective and uncertain, particularly for companies who primarily own real estate (and in this case, real estate in an unsettled real estate market). Their reported income, when they have reported income, has come entirely from the revaluation of their property assets — rental income is still less than expenses, though that gap seems to be closing a bit.
They own a portfolio of property in Ulanbator that includes some condos, several store fronts, a couple small office buildings, and a substantial land bank, and it’s never been entirely clear what those assets should be worth. Now they’re making a substantial effort to streamline and build the company around a few “trophy” assets in the central shopping district, particularly retail properties, based on the long-term assumption that growing wealth in Mongolia will lead to rising real estate values and more downtown development in the only city in the country, and on the geographic fact that the city itself is geographically constrained (by mountains) and has a very small downtown core.
They’re going to sell off their non-core properties, including all the residential properties, and use that and their cash flow to build and/or renovate some core properties (this isn’t new, they’ve been selling off the non-core stuff all year). The real focus of the company is now on renovating two sites they bought in the center of downtown to create a new shopping center that should create much stronger cash flow by sometime next year (construction has started), and that has potential — after this relatively inexpensive renovation that will keep it generating cash for several years — to eventually become a core development site for a large tower or other “trophy” building (probably with a deep-pocketed partner).
So… cash flow should be improving over the next year at Mongolia Growth Group as they rationalize and sell off non-core assets and focus on a few properties that easily pay for themselves with rents and that have substantial future potential. Does that mean it’s cheap or an exciting buy right now? Not necessarily — it’s just that the price has fallen with Mongolia sentiment. This is a highly speculative real estate investment in a high-inflation, high-uncertainty economy that’s levered to natural resources, and investor sentiment about Mongolia will probably be the primary driver for the shares over at least the next couple years.
Part of the reason I was willing to double down a bit on this investment is that Mongolia has just had a substantial shakeup in the government, ousting the Prime Minister and sending everything into limbo — and I think a large reason for that is impatience among the voters for the jobs and investment that have been promised over the last decade, largely from the Oyu Tolgoi mine run by Turquoise Hill (TRQ), which is controlled by Rio Tinto (RIO). The political back and forth over taxes and mine development priorities has been ruinous for the economy as foreign investment has largely dried up, and it doesn’t help that the last several months of bickering have come about when slowing demand in China has dropped the prices of many commodities — China is Mongolia’s only real customer for copper and coal.
I don’t think Mongolia will step backward, though things could obviously be weak for a while if copper and coal demand is weak, and I think the Oyu Tolgoi mine will be expanded (though it might be another five years before that happens), and better agreements will likely be made at some point — soon, I would guess — to allow TRQ to invest in that expansion with some certainty. Mongolia can’t afford to lose Turquoise/Rio Tinto, not if they want to continue developing rapidly (if they want to resume being nomadic, they can keep on selling a little coal and cashmere and shutting down the economy for six months a year, and that would pull some of the emphasis from urban Ulanbator, but that seems unlikely).
Oyu Tolgoi is not a marginal project that should shut down if copper prices fall for a while, it has the potential to be among the richest and largest mines in the world and if that happens — even with substantially lower commodity prices — Mongolia’s economy will grow and continue to modernize, and that means real estate prices will rise and consumer demand will rise, and retail rents will climb as well. It’s not going to happen next year, and something crazy could happen with the next Prime Minister — but I think that odds are good that the government’s stance will move to something more aggressively business-friendly and expansive, and I think Mongolia Growth Group is an interesting — and highly speculative — way to invest in that. But it is definitely NOT a “forever” stock or a “set it and forget it” investment. I could lose all of this money, and the fact that management would also be losing a lot (they have a large ownership stake) would be little solace in that event.
Now… on to that Christian DeHaemer teaser pitch that everyone’s asking about. Here’s what DeHaemer teased this morning in his article that ran in Energy and Capital:
“One Small Company
“There’s one tiny company that has its hands on the lion’s share of the oil in this profit-rich region of Iraq.
“And if that’s not enough, it also has the rights to three other prime chunks of oil-rich land in addition to the one I’ve been telling you about — and ALL of them have the very same oil-promising geography as the first.
“This company is already pumping 40,000 barrels of oil out of the ground on a daily basis, and that number is expected to more than quadruple within 18 months.
“All told, these guys are sitting on a whopping 13.7 billion barrels of oil — a true game changer for such a small company.
“To put that in perspective, Pioneer Natural Resources (NYSE: PXD), a company with rights in the Eagle Ford, is sitting on 11 billion barrels of oil. Pioneer has a market capitalization of $23.87 billion.
“For those who don’t know, “market capitalization” is the value you get when you multiply the number of shares outstanding by the price per share. It gives you the total market value of a stock.
“Another well-known company, Marathon Oil (NYSE: MRO), has claimed 4.3 billion barrels of oil and has a market capitalization of $21.86 billion….
“The company I’m talking about has a market capitalization of less than $1 billion”
And though the actual ad for Crisis and Opportunity hasn’t circulated as widely, I imagine it will be everywhere over the next few days (unless it doesn’t work or bring in subscribers, I guess) — and I have seen it at least once (you can check it out here).
In that ad he gets more aggressive and calls this “Saddam’s Lost Oil” … here’s how that ad grabs us:
“This tiny company just found out it’s sitting on 14 billion barrels of Saddam’s lost crude
“Note: The last time I found a small company like this, it exploded for 759% gains in less than a year.”
DeHaemer’s teasers have led us to some interesting oil picks in the past, mostly stocks that made big jumps on discoveries — I think he touted Africa Oil before that one drilled its first well (which was a barnburner), as well as older picks Petro Matad in Mongolia (that one did not work out well in the end, though it went up dramatically for months) and Dragon Oil in Turkmenistan. Lots of his picks have gone down too, of course, teased or not, but he has pointed us at a few interesting ones in the past.
So which one is this? A few more clues from the long form ad, just to keep you on the edge of your seat:
“As Iraqi oil fields once again became available to outsiders, the path was paved for one tiny company to get its hands on one of the most incredible oil properties in the world today.
“You see, as the oil giants moved in and put their names all over any oil field they could find, they ended up making the very same mistake Saddam had made years earlier…
“They failed to realize that one of the biggest oil fields on earth was sitting right next to them in northern Iraq.
“But one company wasn’t fooled — the company I’m telling you about today.
“Instead of trying to play with the ‘big boys,’ these guys took a different tack… and ended up sitting on top of 13.7 billion barrels of crude oil as a result.
“Even better, the oil is proven, easily accessible, and extremely profitable.”
More details? I thought you’d never ask!
“The first exploration well on this property was drilled in 2009 with resounding success.
“In fact, the results were so positive that field experts officially declared this a “world-class discovery.”
“Over the next three years, four more wells were mapped, drilled, and analyzed… and all of them provided the same incredible results as the first….
“You see, there’s one tiny company that has its hands on the lion’s share of the oil in this profit-rich region of Iraq.
“And if that’s not enough, it also has the rights to three other prime chunks of land in addition to the one I’ve been telling you about — and ALL of them have the very same oil-promising geography as the first.
“This is not a play based on speculation, either.
“These guys are already pumping 40,000 barrels of oil out of the ground on a daily basis.
And he goes on about the 759% gains he expects — not because of the specifics of this teased company, but because one of the other small oil stocks he teased back in 2010 (turns out that’s Petro Matad again) had a 759% gain after he recommended it. Which is true. It also had a 99.9% loss in the months and years after those peak gains (my recollection is that the drilling results stunk, among other things) — it peaked around $3.50 a share in the Spring of 2011 but fell 90% over the following six months (and has kept falling ever since).
Not only that, he also teases the possibility of 18,000% gains — based on the fact that during some undisclosed time period, Smith International rose by 18,000%, and it’s also in the oil business (Smith was an oil services/equipment company that merged with Schlumberger in 2010. I assume it really did rise by 18,000% from some point, he says it went from 44 cents to $80 and it was indeed a great growth company for many years, but it might have taken 20 years or more… and it’s got essentially nothing to do with the stock we’re being teased with today.
And DeHaemer’s company is almost certainly a better company than Petro Matad — they’re already producing and have reserves, so it’s not just a speculation on drilling and a breathless Mongolia/China play during the heat of that mania. Though Petro Matad back when we first covered DeHaemer’s teaser in 2010 was a $100 million junior explorer, not a $1 billion stock.
What else do we know about them from Mr. DeHaemer’s ad?
Well, not a lot in the way of clues… but we do get some more hyperbole:
“Your chance to retire on the spot is staring you right in the face. All you have to do is seize the opportunity and run with it.
“It’s like something out of a storybook. If I were dreaming up a perfect environment for banking the biggest profits most of us have ever seen…
“The current opportunity in Iraq is damn close to what that dream would look like.”
Seriously. “Your chance to retire on the spot.”
I know most Gumshoe readers are too cynical to fall for a pitch like that without questioning it, and most of you are too experienced to make big bets on stocks that a pundit says could rise 180X in value — but think about people who are in their 50s and 60s and only have $20,000 saved in their 401(k) and are wondering how they can ever retire. What will they do when they read this kind of pitch? It sounds compelling, there’s some logic in the argument that the company should do well, the company is in fact a real company (as far as I can tell)… but where the hell do you get off calling it a “retire now” stock and hinting at 18,000% returns?
I hate the spiels that give people the “retire now” false hope about a huge overnight profit from a tiny company.
So no, you can’t retire on this stock. Because you’re not crazy enough to bet enough on this one stock to give yourself those kinds of returns, and putting just a 1% position or a 0.5% position in a stock like this means you would “only” increase your overall portfolio by 7% if it has a huge and spectacular run like Petro Matad did, assuming you catch it near the top to sell. If getting a 7% return on your portfolio (or even a 20% return, if all else works well and you make it a much more aggressive 3% position) is enough for you to “retire now”, well, then you can dream. As long as you realize that 700% returns don’t come along nearly as often as they’re hoped for.
Everyone else, relax for a minute and let’s talk about the actual company.
Gulf Keystone Petroleum (GKP in London, GUKYF on the pink sheets or GFKSY for the 1:20 pink sheets ADR) is the stock DeHaemer is teasing and recommending. They’ve been producing oil through all the craziness in Kurdistan and trucking it out through Turkey, though they haven’t necessarily been getting paid for it all and there’s obviously huge uncertainty — and they do say they’re aiming to boost production to 40,000 bopd by the end of the year (saying that’s what their production is now is an exaggeration, though perhaps not a wild one).
News about some political settlement between Kurdistan and the central Iraqi government regarding oil exports and revenue share has helped to drive the price up substantially today (perhaps helped a little bit by DeHaemer’s enthusiasm, though presumably the “real” news had a much larger impact), you can see the company’s announcement here (that announcement does say they’re “on track” for 40,000 barrels by the end of the year — but current production is averaging just a bit more than half that amount).
Interestingly, for those who are into junk bonds, Gulf Keystone also has some recent debt on the market that hits maturity in three years — coupon is 13% and it’s trading at $82 (per $100 principal), so that would be roughly 20% annual returns from here if they don’t default, the CUSIP is G4209GAB4 if you’re interested in checking it out — it’s small and strange, so it might well be that there isn’t much of it available for trade. Whether that causes your ears to perk up with interest, or whether the 20% implied cost of capital causes you to quake at the huge risk, will probably largely depend on how you feel about oil and about the political situation in Northern Iraq/Kurdistan.
You can see the company’s latest investor presentation here — it’s a couple months out of date now, in that it doesn’t include the recent agreement to get some money flowing from the Kurdistan government for past oil sales, but it gives a good overview of their two main projects and the timeline. They raised over $200 million back in the Spring, when oil prices were much higher (that helped to bring the share price down sharply, it appears), so they are in fine shape as regards their ability to fund their continued ramp-up in production from the Shaikan field — particularly if they’re able to get more of the cash from the Kurdistan government for those exports being trucked through Turkey.
They do have some interest in other blocks in the area that they’re evaluating, and a discovery called Sheikh Adi that they’re appraising now. There’s a presentation that’s much more technical on the Shaikan field here from this past Spring, which is where that “14 billion barrels” number comes from — that’s the gross original oil in place estimate and includes both discovered and proven and probable oil, as well as undiscovered oil that’s expected to be there. It’s also a gross number — Gulf Keystone’s working interest in Shaikan is just over 50%, so you can cut that number in half. And, though they are producing, these big are not reserves. They’re estimates. The “2P” reserves number, adjusted for Gulf Keystone’s working interest, is only 163 million barrels — that’s from just a few wells, and based in just a portion of the oilfield that they think is there, but no one should be using the big numbers and saying they are really sitting on that much oil… that’s the blue sky potential at this point (interestingly, there was a story about the inflated “reserves” numbers that are mentioned by the big shale oil guys, like Pioneer and Marathon… and that seems to be where DeHaemer got his numbers for those two comparisons).
It’s early, and from what I’ve read this really is a big oil field in Northern Iraq/Kurdistan and they will probably increase the reserves considerably at some point — but right now, it seems they’re more focused on producing and expanding production than on booking reserves. The goal is, once they have a reliable source of revenue from selling their production (which they’re a step closer to now as of Thursday’s announcement, though one is cautioned to be wary of these agreements in a very fluid region), to invest that revenue into increasing to a 100,000bopd production rate from the Shaikan field… and then decide what to do with their other blocks and working interests. So unlike a huge discovery that might drive a stock up several hundred percent, what’s really being talked about here is a large existing oil field — what will drive the stock up is if they’re able to actually prove out those reserves, get production doubled by the end of the year (which is very aggressive — that’s less than two months away), and actually get paid for the oil they’re producing. And, of course, avoid any massive outbreaks of violence or political unrest that could shut in production.
Their financials are almost unintelligible, by the way — I don’t see how to even guess at what their margins would be if they hit 40,000 barrels a day, we know very little about what their “steady state” operating costs might end up being, as far as I can tell from skimming through their filings, and the price of oil is obviously falling… and they only report twice a year, since their primarily listing is in London.
So… some food for thought over the weekend. I will probably spend a little more time looking at it to see if I can come up with any financials or forecasts that make sense — I’ll let you know if anything jumps out as interesting.
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