”They Stole $267 billion of King Saud’s Oil”

By Travis Johnson, Stock Gumshoe, August 18, 2011

Your friendly neighborhood Gumshoe is still working feverishly on the new and improved StockGumshoe.com that we hope to be introducing in the weeks to come, so today we’re sharing an older article that originally appeared in the Irregulars-only Friday File. I’ve shortened the article to remove some of my blather, but it has not been updated or substantively revised since it was first published on June 24, except to update our disclosure at the bottom (I now own the stock, I didn’t then).

By way of limited update, the same ad is still being heavily circulated, the share price has fallen substantially over the last few months, and some of the catalysts teased by DeHaemer have been delayed a bit — recent versions of the ad have pitched September 22 as the drilling catalyst date, revised from August 11, which seems to largely be due to minor rig delivery delays for Tullow. And FYI, Recent versions of the ad have increased my certainty of the match from 95% to 100%.

From the June 24 Friday File:

Christian DeHaemer has made quite a career out of picking somewhat controversial resource companies with tiny market caps in war-torn or politically unstable or distasteful areas of the world — and since two of them that he has teased in the past, Petro Matad in Mongolia and Dragon Oil in Turkmenistan, have done very very well, It always gets my attention when he teases a new one for his $995 Crisis and Opportunity newsletter.

And, as you may have guessed from that paragraph, that’s what he’s doing today — he’s been talking up his visit to Kenya and his interest in East African oil for a couple weeks now in free articles, hinting around about finding that next high-potential oil stock for a while now, and apparently he found it. The teaser started circulating with more details a day or two ago, and it builds off of his basic premise that East Africa is the next global oil hotbed to start hinting at his favorite investment in the area. So let’s look at the teaser.

The pitch is, like some we’ve seen before, about how some folks are going to “steal” some of the oil from the huge Middle Eastern oil kingdoms — but like the last similar pitch we saw (from Chris Mayer for his idea that a Turkish company is siphoning off oil from Iran’s fields), it’s a very prehistoric, geological-shift kind of “stealing,” the basic idea is that there are huge oil formations in the area, and that when the earth shifted to open the Gulf of Aden and the Red Sea, moving Somalia and Ethiopia away from Yemen and the Arabian Peninsula, some of what were continuous oil-bearing formations under that land moved with the African land mass and should still be there and ready to be discovered and exploited.

Which is logical enough, and seems to be borne out by at least the preliminary assessments of geologists and explorers who continue to push eastward across Africa in the search for more big oil fields — especially after Tullow Oil found its really shockingly huge fields in Uganda, which is just inland from Kenya. Dehaemer describes the oil formations as a “mega-system” of oil-bearing rock formations that extend down through Somalia, Ethiopia, the Sudan (mostly what will be Southern Sudan, to Al Bashir’s consternation), Kenya, and Uganda in a variety of potential fields that are in a few cases producing oil but in most cases still being explored and defined. Here’s how Dehaemer puts it:

“And it’s this part — the part that nobody’s heard about yet — that’s so critical…

“With the U.S. Geological Survey estimating 71.1 billion barrels locked in East Africa (the most significant deposits occurring in Northern Kenya), the lower half of this massive intercontinental resource has yet to make any impact at all on the region’s economy.

“Remember, these aren’t similar or comparable to the oil formations that made the Saudis the richest people in the world…

“These are the same formations!”

So why aren’t these all wealthy oil states now? Here’s Dehaemer’s explanation:

“But why would such unimaginable wealth remain untouched, while the rest of the African continent is teeming with new oil wells?

“The answer, unfortunately, has nothing to do with the wealth available to be had — but with the political stability of the region.

“Wracked with violence and anarchy for years, Kenya’s northern neighbor, Somalia, continues to make headlines today with stories of roving death squads, kidnappings, and piracy on the high seas.

“It’s a reputation that, up until now, has kept companies and investors at a distance… and not just from Somalia, but from the entire region.

“Which means that East Africa, one of the world’s richest oil regions, remains the world’s least developed.

“This, however, is already rapidly changing.

“Kenya — the jewel of this energy-rich geology — is now in its third straight decade of political and economic stability.”

And we’re told that although Tullow has obviously caught a lot of attention for its Uganda finds of a couple billion barrels of oil, which continue to be in some dispute over licensing, taxation, and export (Uganda’s landlocked, so they’re talking about export by train until a pipeline can be built), but that even Tullow is focusing on Kenya for future exploration, securing some blocks and resisting a sale to the Chinese giant CNOOC. So Kenya is the heart of the action, per Dehaemer, helping to send the stocks of both Tullow Oil and Afren soaring in the last couple years. But it gets more interesting, of course …

“These two examples are big, established companies with thousands of employees, multi-million-dollar monthly overhead, and infrastructures that would rival small nations.

“But the most important player in this game, the one you haven’t heard of yet, isn’t a multi-billion-dollar international conglomerate like Tullow… or even a $500-million outfit like Afren…

“And it’s not a name-brand oil producer that takes the crude and processes it right into the gasoline you put into your car every week.

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“This is a much more aggressive brand of company.

“And what it does in the months and years to follow will literally mold the Kenyan oil revolution — and its entire economy — for the remainder of the 21st century.”

So that’s our teaser target — this “more aggressive” company what will “mold the Kenyan oil revolution” … sounds pretty sexy, no? The clues are not as substantive as I’d like, but we do get some — here’s a taste:

“Sometime in early January of this year, another real estate deal went down….

“It was for a 7,300-square-mile chunk of property located in north central Kenya.

“The acquisition was the last in a series of purchases that secured a grand total of 32,000 square miles of Kenyan territory…

“All of it dead center in the heart of this vast, untapped oil-rich region…

“… All of it now held by this young upstart energy company.

“By the estimates quoted in the company’s own website, their overall land holdings in Kenya alone add up to a chunk of land about the size of South Carolina.”

And it’s not just Kenya:

“… an additional 101,000 square miles — equivalent to the state of Nevada — held in surrounding countries, the total resource wealth possessed by this company is enormous.”

And how much oil do they have?

“… with inferred reserves already totaling over 2 billion barrels, the total value of what’s already been measured is in the hundreds of billions of dollars.

“However, taking into account the massive size of this company’s East African holdings, the actual wealth buried in this land is far, far greater.”

We’ll leave aside the notion that “measured” and “inferred” shouldn’t be used quite so interchangeably when talking about oil companies, and that “inferred” doesn’t mean “reserves,” a word which connotes much more certainty about a prospect, but that does still sound intriguing. Dehaemer then goes on to make a mathematical comparison, saying that the 133,000 square miles this company owns should be similar to Saudi Arabia’s 1.5 million square miles in geology, and therefore …

“We can conservatively estimate a total reserve of 29.04 billion barrels getting ready to be tapped, for the very first time.”

That sounds like the biggest stretch of all, of course, since the idea that this company’s holdings are, acre for acre, as potentially valuable as Saudi Aramco’s is, well, let’s say “optimistic.”

But it does make the company sound dirt cheap if you describe it that way, of course — which is what Dehaemer does next:

“… the company which owns all this land, in a region that is a virtual geological photocopy of the same land which made the built the biggest oil dynasty…

“Today trades for only $1.80.

“And has a market cap of just $320 million…

“Even when viewed most conservatively — and assuming these properties are less than one-fifth as fertile as the properties of Saudi Aramco…

“A $1.80 stock price is, technically, a 99.4% discount!”

After that projection of massive potential, we get back to talking about the actual numbers that the company has apparently released, which ought to be another useful clue for the Thinkolator:

“… this company’s latest inferred reserves analysis state a total resource of 2.24 billion barrels.

“At today’s oil prices, this oil reserve would be valued at $222 billion — more than 740 times what the company trades for today!

“That’s theoretically bigger than Conoco, BP or Chevron!

“And remember, that’s if no more oil is found anywhere within these vast holdings.”

As with any good teaser, we also have a catalyst — though in this case, the catalyst is not necessarily their own drilling, but Tullow’s:

“Tullow, the global oil explorer and one of the region’s biggest operators, has recently announced an extensive survey project to begin towards the end of this summer.

“Through a good deal of research and analysis, our best approximation is that this will commence on or around Thursday, August 11, of this year.

“Once that happens, new data will flood the marketplace starting the very next business day.

“And we expect this to send junior oil mining prices up immediately — not just for Tullow’s own projects, but for everything sharing this common geology.

“So when I say that this company is explosive, I mean it very directly.

“Right now, as I write this, the stock’s trading at 76% below where it was two and a half years ago.”

So his prediction is that …

“The stock will rise as we head into the summer, and never come back to where it is.”

And of course there’s one final enticement in the P.S.:

“Awaiting crucial news, a group of major insiders have just bought into this stock at $1.88. As of this moment, it’s trading at $1.80. Don’t wait another second.”

So who is it? Well, when we toss all that info into the Thinkolator is does quite a bit more chugging than usual … and even with the steadfast cooperation of the Mighty, Mighty Thinkolator your friendly neighborhood Gumshoe has been unable to make a 100% certain match here … but I’m now 95% sure that this is Africa Oil (AOI in Canada, AOIFF on the pink sheets).

And no, it’s not at $1.80 … the shares have been trending down in recent weeks, partly due to the decline in oil prices, but it was at $1.80 recently, and that did put it close to (though not exactly) at $320 million market cap. Trading in Canada at about C$1.50 right now, the stock carries a C$275 million market cap. And the stock is down about 76% in roughly two and a half years, though you have to go back a couple months further than that, to the fall 2008 financial crisis — Africa Oil was trading around $6 a share before the world fell apart, and collapsed to about a buck when oil was crashing and the economy was melting down. In the intervening years they’ve had a couple jaunts up to $2 or so, but have mostly traded between $1 and $2, a range they’re right in the middle of right now.

Africa Oil is actually related to a company we wrote about, with some derision, about four years ago — that was when Range Resources of Australia was teased (also by Christian Dehaemer, though he was connected to a different publisher at the time) for its Somalia oil exploration. That stock almost disappeared, due to the further decline of Somalia and their inability to even convince a drilling contractor to move a rig there, but they ended up farming out much of their stake in those Somali fields, which probably do have oil, given their location, to a company called Canmex … which is one of the companies in the vast Lundin-affiliated scheme of natural resources stocks. Canmex later renamed itself, you guessed it, Africa Oil.

And now the talk of those potential Somali resources is picking up again, too — and is a substantial part of Africa Oil’s future planning, though their large holdings in Kenya are certainly the headline-grabbers right now. The oil exploration areas are in the northern part of the country, in what are becoming the more independent areas of Puntland and Somaliland, but I have no idea what the political future is like for that region … so oil or no, I can’t blame Africa Oil for focusing on Kenya.

Now, about those matches being inexact — I’m pretty certain that Dehaemer is talking about Africa Oil, but the numbers he pitches are not an exact match, even beyond that slight disconnect with the share price and market cap, which are pretty close. He throws out that “inferred reserve” number (though “inferred resources” and “reserves” are different classifications under Canadian standards, which is what AOI is using) of 2.24 billion barrels of oil. That number is pretty close to what you get if you add up all the prospective resources (which also is different from “inferred,” I think) from their latest press release that has Kenya resource estimates, back in March. And if you look at their three most valuable Kenyan concessions, shares of Block 10BB, Block 10A (both partnered with Tullow, which is the operator) and Block 9, which they operate, then Africa Oil’s share of the “net best estimate” of the oil in those blocks is right around 2.5 billion barrels. And most of those numbers are not “unrisked” numbers (if you “risk” a number you multiply it by the probability that you’ll be able to find and extract the oil — and the probabilities are often in the 10% range for what I’ve seen from Africa Oil, so the “risked” numbers are a lot lower).

So we’re in the right ballpark, at least — but I can’t tally up the numbers to match the 2.24 billion given in the tease, which holds out a small amount of room for error. In their defense, those numbers might match up better if you take into account the recent acquisition by Africa Oil of Lion Energy, which gives them more of the production sharing contracts in a couple of those blocks and may move the numbers from the March press release that I used in my matching.

The somewhat squishy language about recent “real estate deals” is also not a precise match, at least not according to the commonly accepted numbers I’m using — Dehaemer says that they made a deal “sometime in early January” for a 7,300 square mile chunk in North Central Kenya. Africa did initiate a deal with Centric Energy late last year, and close it early this year, for their interest in block 10BA, which is indeed in north central Kenya, though that territory covers 16,205 square kilometers … which is 6,256 square miles. Still, the Kenyan oil production sharing contract zones are pretty big, and Africa Oil seems to me, from a look at the maps, to have at least a share in all of the ones that I would classify as being in “north central” Kenya.

The bigger numbers also don’t necessarily match perfectly — when I add up all of their East African holdings I get about 90,000 square miles of concessions (that’s not their working portion, they have partners on essentially all of those blocks, so probably about half of that applies to them) … so again, it’s close to the 101,000 square miles, and it’s hard to picture two companies who have roughly similar huge land holdings in this specific area (and yes, even 90,000 square miles is larger than South Carolina).

More confidently, I can say that the images that Dehaemer uses in his presentation, including those showing the geologic separation of Yemen from Somalia and the matching oil formation “bands” of those two countries, look like they were lifted straight from the presentation materials of Africa Oil … which is usually a pretty sure sign that we’re on track with a match. And, of course, it’s hard to come up with small companies that have real prospects and large land tracts in Kenya and their neighbors, there just aren’t all that many.

Africa Oil has been acquisitive and dilutive in building up their East African portfolio of assets, most of which are quite early stage prospects that have seen a limited amount of drilling, reliant largely on seismic surveys or on older exploration programs from the oil majors 20 or 30 years ago. I like very much that they are partnering with Tullow, which will operate most of their blocks and definitely has the expertise in this part of the world, and that Tullow is carrying a large part of the initial exploration costs in some cases, and there are definitely some potential catalysts later this year. Not only is Tullow pretty actively drilling in several areas in East Africa, which helps to keep the attention of investors, but Africa Oil has two rigs working in the third quarter to drill in Kenya, Ethiopia and possibly in Puntland and Somalia, and they have the cash to do the work.

I also think that, assuming I’m right about this one (only 95% sure, you remember), Christian DeHaemer may well be pounding the table on it for a while — which can supportive of a stock in itself (he’s definitely not right all the time, he’s touted several stocks that failed to perform, but he has a big mailing list and has gotten folks excited with Petro Matad in particular over the past year). Add in the fact that the shares have come down substantially from when this tease was written, and I like it more. That’s not to say it’s guaranteed at all, of course, even if we assume the Thinkolator is right … and I’m not recommending you rush out and buy the shares and I haven’t bought shares myself. But the associations with the Lundins is compelling given their history of backing some huge resource stock winners over the years, the exposure to what really is an up-and-coming oil exploration area offers some real potential, and the fact that they’re drilling later this year provides some potential catalysts.

Of course, catalysts can be negative as well as positive, so we could see them drilling dry wells. And there have been plenty of companies in recent decades that gave up and pulled out of East African exploration projects either because of dry wells or political drama, but the stock is small enough given its large holdings and good Tullow partnerships to offer some interesting potential as a bet on Kenyan oil, along with what I would consider a call option on Puntland and Somaliland on the off chance that exploring and developing oil in that part of the world becomes genuinely feasible, along with some sweeteners in smaller holdings in Ethiopia and, way over on the other side of the continent, in Mali.

There have been a lot of transactions over the last year as they’ve built up these operations, particularly in Kenya, and I’d want to look more closely at their financials before jumping in, but if I weren’t writing about these shares today I’d probably be taking a small nibble for my accounts and digging in for more research.

Full disclosure: as noted in the intro, I did later buy shares of Africa Oil and still hold those shares. I will not trade in a