The Great Red Oil War (part three — Turkmenistan)

By Travis Johnson, Stock Gumshoe, April 3, 2009

Well, is anyone tired of the “Great Red Oil War” yet? Wake up! We’re closing it out today with what Christian DeHaemer calls “the biggest potential boomer of the bunch.”

If you missed installments one and two — which would be terribly sad, after the fun we’ve had — those articles are here (the Kurdistan/West Africa oil company … plus a look at the whole concept of the “Great Red Oil War”) and here (the Uganda oil boomer).

The rest of you, still with us? Good, let’s have a quick look at the clues:

“RED PROFIT TARGET #3: A sudden challenger to Russia’s gas dominance
“‘Chinese oil majors continue to scour Africa for quality assets…’ — Reuters

“On October 13, 2008, an independent British resource-consulting firm released a report commissioned by the new president of Turkmenistan, a crisis-torn Asian republic on the Caspian Sea. The findings of their report have completely changed the energy game in Europe and Asia overnight…

“Those findings: Turkmenistan’s natural gas deposits are far larger than historic estimates — catapulting them virtually overnight to a position second only to Russia in the gas reserves game.

“How much gas does Turkmenistan likely have? Enough to service Chinese, Russian, European, Iranian, Turkish, and other area nations’ needs for 391 years at current usage levels. The net worth of these reserves, based on current market data, is around $5.7 trillion.

“Needless to say, control of this mammoth new gas reserve may prove to be the single most important objective of the Great Red Oil War — and will be of crucial importance to the energy future of Europe, no matter who obtains that objective…”

Sounds pretty good — and if you’ve been a Gumshoeholic for a while it might also sound a bit, well, familiar … so we know it’s about some big oil and gas reserves in Turkmenistan. What else?

“… one perfectly positioned company stands a totally realistic chance to make you 183 times your money. Don’t scoff. It has happened before in this area of the world. A small Canada-based driller (PKZ) in neighboring Kazakhstan could’ve banked early investors 18,343% gains in the early 2000s”

Ringing any bells yet? Remember that good ‘ol “Next PetroKazakhstan” teaser? No? OK, don’t worry, we’ll get to the details …

“While other energy companies feared to put down roots in Turkmenistan, the gutsy company I’m talking about was sucking up the stakes of troubled energy firms in a coveted Caspian Sea petroleum block controlled by this historically politically unstable country….

“Just take a look at what this firm’s got going for it:

“Rare Exclusivity — They own 100% exclusive drilling and extraction rights to one of the Caspian Sea’s richest proven reserves of oil and gas

“Regime Support — Turkmenistan’s new, stable, resource-savvy President awarded them a $25 million oil and gas infrastructure contract

“Increased Production — In 2007–08, they boosted year-over-year petroleum production an average of 42% per year

“Soaring Revenue — On August 22, 2008, they posted an impressive 34% jump in year-over-year profits, and a 63% surge in total revenue

“New Pipelines — The new Turkmeno president is aggressively pursuing five new pipeline projects to service Chinese, Pakistani and Indian markets to the east, plus Western markets in Iran, Turkey and Central Europe

“5x Assets vs. Market Cap — With a market cap of US$3.2 billion and proven oil assets of $16.2 billion (based on $50 per barrel oil prices), this firm is trading for around 20% of its pre-production asset value in OIL ALONE, not including its billions of cubic yards of natural gas…

“Were this firm to be bought out tomorrow by a major oil and gas player, their fair market price would be at least five times what you could buy this company for right now. Maybe more like 10 times, with all that “bonus” gas in the mix….

“The oil and gas are there. The money is there. The deals are there. The political alignments are there. The infrastructure is growing every day.

“The only thing that ISN’T there yet (but will be any day now, I predict) is a realistic valuation of this company’s shares in the market!”

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“…. I’m telling you right now: If EVER there were a realistic shot at 183x gains, this “target” company is that shot, and now is the time to take it.”

OK, so now we’ve gone through all the clues — what is this stock that’s the favorite for potential 183X gains?

Regulars won’t even need to wait for the Thinkolator to churn up to speed today — this is our old friend …

Dragon Oil (DGO in London, DRAGF on the pink sheets)

Dragon is indeed an offshore oil producer in the Caspian, they do have ties to the government and access to other resources there, mostly natural gas, and they are pretty inexpensive based on those potential reserves — of course, they’re also in Turkmenistan, smushed right in there between a few other ‘stans, including Afghanistan and Uzbekistan, and Iran — and Russia and China are quite close by too. A pretty volatile location, which depends on some jumpy neighbors for access to transport (most of their product goes out through Iran at this point, though they are working on other pipelines). And their one real investment outside of Turkmenistan is in the comfy confines of … Yemen.

The last round of teasers on this stock, which DeHaemer has been pushing for a while, touted it as a way to benefit from the death of Turkmenistan’s former dictator, since that was expected to open up the oil business a bit and Dragon already had an “in” — seems like that basic argument is still true, and I said some encouraging things about Dragon Oil when I wrote about them way back when, but I’ve never owned the shares. You can see the initial writeup on Dragon Oil with more detail here, from back in September, or more recent notes about them when it was teased as a crude oil “bounce multiplier” in January, and an opportunity to take advantage of the “petroleum pendulum profit window back in October.”

The general facts about Dragon as teased are pretty much accurate, though I don’t know if they will get a possible buyout at some point — and if they ever do, I would expect the terms would be far less exciting than the PetroKazakhstan buyout that came when oil prices and stocks were both shooting upward. Still, you never know. One other note to consider about Dragon is that they have a major controlling shareholder, Emirates Oil owns a bit more than 50% of the company, last time I checked.

Other than that, I haven’t noticed any big news about Dragon lately — it looks like they are restructuring to have a primary listing in London and move their official HQ to Bermuda, which seems unlikely to change their core operational stuff (they’re already primarily traded in London, though their corporate home and stock market listing have been in Ireland). The shares themselves have mostly bounced around between 150 and 200 pence for the last six months or so (they did get far higher for a while before that), though the performance in London has been quite a bit better than the pink sheets shares that trade in dollars, thanks to the wilting of the Pound.

You can see their basic 2008 “highlights” on their website here, as well as prior reports — most US financial websites don’t have much info on Dragon, but they are fairly large and have been around for several years. The announcements and quotes associated with their soon-to-be-primary London Stock Exchange listing are here, including the most recent earnings announcement.

So … not a lot to add on Dragon Oil from my perspective, though I still consider it interesting — if you’ve got something to throw on the pile, please share your thoughts with a comment below. I’m still traveling, so I probably won’t be actively responding to questions or comments for a little while.