Crude Oil’s “Bounce Multiplier” — Crisis Trader

By Travis Johnson, Stock Gumshoe, January 12, 2009

“On January 21st, Crude Oil’s ‘Bounce Multiplier’ Kicks In…

“A first-in-history mix of factors offers you a brief chance to gain 190 times your money from the
biggest petroleum price-rebound of all time.”

This ad comes in from Christian DeHaemer, who runs the Crisis Trader newsletter. The teaser picks from this letter have been wild ones over the past couple years — the stories they’ve chosen to tell have been about potential “home run” stocks that in most cases never really made it to the plate … last seen, they were under the bleachers throwing up, bleary-eyed and naked, wondering what happened.

I don’t know how the actual newsletter has done, of course — they’re not tracked by Hulbert and don’t publish overall performance data that I’ve seen. But the ads over the last year or so were much more entertaining than the teaser picks were remunerative — not that I don’t appreciate the entertainment, I certainly enjoyed reading about the wild pirate oil adventures in Somalia, and the blockade in the “gunboat basin.

Arguably, the main problem with the picks from Crisis Trader has not been the actual companies chosen, but the fact that almost all of them have been oil and commodity stocks, many of them of microcap size, and that little sector has been absolutely clobbered with commodity deflation — anyone who chose stocks that depend on the price of oil, gas, wheat, nickel, copper or almost anything else that comes out of the ground would probably have performed very poorly if they held the stocks through last Fall (and I don’t know that Crisis Trader did, but everything I track reflects a “buy and hold” decision).

The current pick is no different, but unlike with many of the picks over the last couple years the big argument here is not just that this company is an undiscovered gem in the resource space (in this case, oil and gas), but that oil prices are going to rebound in short order, and that this pick will be a “bounce multiplier” as it goes up substantially more than the commodity price.

I’ve written about this company before, and it has been consistently pushed by DeHaemer for several months now, so I won’t try to drag out the “reveal” of the secret any longer … the company is still Dragon Oil. You can read my initial article about Dragon Oil here, and it is indeed a company with a good story. Maybe not a great investment, of course, but a good story regardless, backed by an actual company with real profits (for a change, says the skeptic).

So, we’ve been told since September that this stock will be an earth-shaking grower, with the potential to be the next PetroKazakhstan (a huge winner back when crude was moving inexorably higher and China thirsted for all things oily — they were bought out by the Chinese at a massive premium).

Dragon Oil is actually a decently sized company — it owns a fair chunk of oil and gas rights in Turkmenistan and is producing oil in the Caspian Sea right now, and even with a depressed share price the market cap is right around a billion dollars. It’s quite a bit cheaper than it was back in September when Crisis Trader started touting the shares and they were just a bit under $4. Dragon Oil Trades primarily in Ireland and London (ticker DGO), where it closed at 154 pence today ($2.28 at the current exchange rate), and there is also a tiny bit of volume on the pink sheets (ticker DRAGF) where it last traded at about $2.35. If you happen to be interested in buying this one on the pink sheets, be careful to watch London trading before you set your bid price.

For those who didn’t read my earlier writeup, or who want an update, I’ll keep it brief: Dragon Oil is an Anglo-Arab company that’s controlled by the Emirates National Oil Company (ENOC) with slightly over 50% ownership, and that is producing oil in Turkmenistan and drilling actively there (they also own some other development parcels in Turkmenistan, and a few more in Yemen).

In their November drilling update, Dragon Oil announced that they had drilled the eight wells they had planned for 2008, and that they were on track to reach production of 40,000 barrels of oil (and equivalents) per day (per their deal with Turkmenistan about half of that flows to Dragon’s coffers). Earnings for the first half of 2008 were, perhaps not surprisingly, spectacular — they reported earnings of 32 cents per share, so even if earnings fall in half for the second half that would be a PE ratio of probably something like 5. Of course, earnings could fall further, either now or in the future. The company has not yet ever paid a dividend.

Dragon Oil will release their annual earnings on March 4, and finding information about the company requires some digging for US investors but they do have a few presentations and factsheets available on their website. As of their last report they have no debt outstanding and a nice cache of cash on hand ($500 million+), which seems to offer some stability, even with significant capital expenditures for a new trunk line and for new drilling capacity. The main fields in the Caspian sea reportedly represent about 650 million barrels of oil according to their reserves reporting, and Dragon Oil’s share of those reserves is about half.

But now it’s not even really just about Dragon Oil and their specific prospects — they are a producing oil company, they’ve been profitable for several years and they have a nice low valuation, the company owns other development projects in areas that seem to have potential, and they also have a controlling shareholder who can do whatever they want, and their projects are in politically unstable or otherwise turbulent or risky areas of the world (to get oil out of Turkmenistan you pretty much have to either send it through the pipelines that Russia likes to leer at, or through the gulf by way of Iran, right now most of it goes through Iran).

You may or may not find the company compelling based on those trends and ideas, and the shares might be cheaper than other companies who have similar portfolios, but if oil returns to past highs you’ll be able to choose one of dozens of inexpensive oil stocks and see remarkable returns. The big question for the 19,000% returns that DeHaemer touts is whether oil prices resume their climb, and whether the Chinese or other resource hungry nations (the Chinese are a nice bet largely because of proximity) will be eager to buy out producers like Dragon.

The argument from DeHaemer is that OPEC is actually going to be able to get prices to climb again, and that this company will soar as a result … in DeHaemer’s words:

“But you’ve got to hurry. By my best estimate, petroleum’s violent price rebound will begin on or about January 21st, 2009. If you’re not in on the opportunity I’m offering you today by then, it may be too late…

Here are the “nitro” and “glycerin” factors that add up to a petro-price explosion…

“NITRO: “OPEC’s History-Making Oil Ransom”

“OPEC has tasted the nectar of greed.

“Circumstances mostly beyond the cartel’s control — or their wildest dreams of profit — catapulted oil from an average price in 2007 of a then-outrageous $64.20 to an unfathomable $147 a barrel by July of 2008…

“That price spike changed everything.

“It showed OPEC how far oil has to climb before people will finally slow their consumption of it. And that bar is a lot higher than they thought…

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“That’s why the racketeers in charge of OPEC summoned the cartel’s heads to an emergency summit on December 17th, 2008. That summit’s objective: Identifying the steps needed to keep petroleum prices as high as possible — starting IMMEDIATELY….

“GLYCERIN: The “Petroleum Pendulum”

“Like any other commodity, petroleum products have their price fluctuations. And there’s one specific annual fluctuation in gas and oil prices I call the ‘Petroleum Pendulum.’

“Right now, that pendulum has swung briefly to lower-priced side of the mean. But that’s NOT because of new oil deposit discoveries or radical new alternatives to fossil fuel energy — or anything else that will permanently lower the cost of oil and gas.

“It’s because of predictable and typical demand forces that happen every year. Now stay with me here…

“The vast majority of the word’s oil-consuming population is in the northern hemisphere. And in top half of the world, the summer driving and flying season is over — and the winter heating energy ramp-up is about to come into full swing.

“That means petroleum commodity prices are about to jump…

“Just like they do at this time every year.”

So … shall we distill that down to what it really means?

They’re arguing that now is the perfect time to buy oil-sensitive stocks, because OPEC is going to pull out all the stops to get the price climbing again, and because the price of oil tends to fall in the, well, Fall and Spring, and rise in the Winter and Summer.

Both of these arguments are potentially useful, but also quite possibly overwhelmed by the state of the economy and the consumer. OPEC, even with Saudi Arabia saying they’ll cut far more than they have already agreed, has been absolutely incapable of getting oil to revisit anything like a “high” price, and it is very hard to imagine the typical seasonality of oil price changes standing up against dramatic rises in unemployment and worldwide cuts in industrial production. Relying on seasonality in oil prices right now seems somewhat akin to a sailor relying on the predictability of prevailing winds when he’s in the middle of a hurricane.

Personally, I do find the argument that many oil-related stocks are drop-dead bargains to be at least somewhat convincing right now — but it’s certainly not because I think oil is going to start rocketing higher on January 21st. My sentiment about the long term price of oil is based on my own assumption, which may be entirely wrong, that the world economy will revive within the next few years, and that higher marginal costs for oil production and increasing global demand as the population grows will let us resume a demand-driven climb in the price of crude.

It is impossible to know, however. Futures traders are telling us that the price of oil won’t get back above $70 a barrel until 2012 … but of course, they didn’t exactly outshine themselves in their ability to predict the price spike that last Summer, and you can quite easily find reasonable energy economists predicting oil at $20 or at $100 a year from now. To be fair, after the fall from $140 it’s certainly true that oil is much more likely to climb than it is to fall by 75% again, but there’s a lot of middle ground there.

So what do you think? The only price we really know for oil is today’s, and right now it will cost you less than $40 to buy a barrel of oil. Would you take a chance on a smallish company like this that might benefit more than others if oil prices climb, or would you prefer one of the big oil companies that’s also trading at a low valuation? Or do you think oil is a dead investment idea entirely? Comment below and let us know.



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Daniel Victor
Daniel Victor
January 12, 2009 12:48 pm

If Oil doesn’t bounce from current levels,the world economy is in real trouble.
Problem is,the World Economy IS in HUGE trouble,Oil is contangoed [priced up] hugely into the future,and that expectation of recovery is currently priced into Oil stocks’ prices.I’d wait for the next big shakeout before buying,and risk missing out.

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Steve Bell
Steve Bell
January 12, 2009 1:03 pm

If you all only learn one thing it is this: Sell on weakness, buy on strength. Simple enough to understand.
You don’t need lots of information, hype, and other garbage. You end up “anal-yizing” the market the more you look at it. (analyze to paralyze as we say).
Is oil going up, down or sideways based on the price action over the last four weeks? It can’t move in any other direction.
It really is that simple.
Same for gold and ALL other commodities.

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Elissa Stein
Elissa Stein
January 12, 2009 1:34 pm