If you want to be a real contrarian, buy a company that’s drilling for oil. No one likes them, not with oil having fallen more than 50% in the last six months and threatening to keep declining, and with investors fleeing the sector and capital budgets at oil companies being slashed. It’s not pretty.
But that, one imagines, is where fortunes are made. Right? We’re supposed to buy when there’s “blood in the streets.” So does that mean we should jump up and down and buy the stock being teased by Diggers & Drillers today? Well, I don’t know about that… but I thought we might at least be interested in finding out who this “Mazagan Motherlode” company is.
(And if you’re keeping track, this means we’re covering teasers for Australian stocks two days in a row now … haven’t done that in a while.)
Here’s how the ad is introduced:
“You have to move quickly…
“Because the fuse on this oil bonanza is burning down fast.
- The oil rig is on its way…
- The two ton underwater drills are being readied…
- And this tiny Aussie-listed firm is just DAYS from ‘spudding’ some of the most oil rich lands of Africa.
“This is a ripper of an oil play and I want you to rinse every dollar out of it.”
Sounds exciting, right? Well, I guess we should at least go in with an open mind — after all, plenty of fortunes have been made by folks discovering big new oil fields even when oil prices are on the low side… and $50 a barrel is only low by the standards of the past six years, oil (even if you adjust for inflation) was under that level for 25 years after the oil embargo before it started climbing a decade ago, and plenty of oil companies made big discoveries and made lots of money in the 1980s and 1990s. So that’s the “open mind” part, even if you don’t think that oil will bounce back quickly like it did the last time it collapsed in 2008/2009.
An open mind doesn’t mean we have to completely swallow the hype-y projections in the ad, though — this is what they say:
“A gigantic, untapped deposit of oil has been hidden off the coast of Morocco for decades…
“Now, thanks to a breakthrough test-drill, one tiny Aussie firm is on the verge of claiming every last drop!Are you getting our free Daily Update
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“Get in on this dynamite driller TODAY and you could turn every $500 you invest into $5,000.
“I’m not kidding — there are TWO drill dates in place for 2015 –and this tiny ASX-driller is poised to rocket 849%.”
Maybe there is a gigantic, untapped deposit there — but do keep in mind that “dynamite drillers” who are looking for offshore oil sometimes miss the mark. Many people expected a “gigantic, untapped deposit” of oil off the coast of Namibia a few years ago, too, matching the presalt finds off Brazil on the other side of the Atlantic, and this is what the chart looks like of one company (HRT Participacoes) that drilled a few unsuccessful holes looking for that deposit (I owned it for a little while during that drop, as a speculation on drilling success… as you can see, it didn’t work out):
So now we’ve got an open mind, and we’ve also got some skepticism. What is the stock being teased by the Australian Diggers & Drillers newsletter?
Well, they’re in a neighborhood that’s already gotten some good news:
“…this driller is poised to sink a well in an area confirmed to have an enormous, untapped offshore petroleum reservoir.
“In fact, they received a huge clue to where the oil is buried from a recent strike by a nearby rival driller.”
And he says that confidence is high:
“‘Big oil’ knows that around US$174bn worth of oil is down there.”
And the stock is, of course, cheap:
“This ASX-driller is selling for less than a dollar… And the drill date is fast approaching”
And a few more clues about exactly where this drilling is about to happen (or maybe has already begun):
“Energy firm Genel recently encountered oil during a test drills in an area that sits right beside the January 2015 drill-site.
“It’s too early to tell if it will be a gusher…but one thing it does confirm — the oil is down there… multiple off-shore wells drilled to date have shown that a potentially huge petroleum reservoir exists. The race is on.
“And the ASX-listed driller I want you to get into today has two prime claims in that exact region!”
OK… there’s more, but that ought to be plenty for us to feed into the fully fueled-up Thinkolator to get you an answer… and… there we go, this is Pura Vida (PVD in Australia, PGNYF on the pink sheets). This is a tiny stock, market cap around $50 million, it’s not very liquid even in Australia and it doesn’t even trade every day on the pink sheets. If you decide you want to own it and must trade on the pink sheets (over the counter in the US), make sure to use limit orders based on the Australian price… and be aware that the stock will likely be very hard to sell at a reasonable price if you ever want (or need) to unload your shares in a hurry.
The stock did jump up a bit today/yesterday in Australia, thanks either to the pushing by this newsletter or to anticipation of news from that drilling. The first test well they’re drilling is in a deepwater prospect offshore Morocco, they outline it in some detail in this investor presentation. The photos of seismic studies in the ad are from this presentation, they’re subleasing a drillship from Kosmos to do their two test drills this year.
And no, this “tiny Aussie driller” is not going to secure “every last drop” — their Morocco project has been farmed out to Freeport-McMoRan Oil & Gas, which is operating and will be carrying the first $215 million of expenses for this drilling, including firm commitments for at least two wells. It looks like Pura Vida is holding 23% participation on that one. They also do have interests in less-developed licenses off of Gabon and Madagascar, both of which they have also either partnered or will (they hope) partner before any expensive drilling is done (you can see their investor presentation from September here, it’s a bit out of date but outlines their hopes for their three assets). The company itself is admirably small and relatively non-dilutive, but that means they only have $20 million in cash so they depend on partners to do most of their heavy lifting.
If you’d like some more detail on the first drilling site, which will be a deep and expensive well that they’re calling MZ-1, you can see the presentation where they discussed the well here — the well might push them past the $215 million carry amount if things go badly or there are substantial cost overruns, in which case they say they’ve secured an additional carry “option” that will be exercised if necessary. I haven’t seen a specific “spud date” (that’s the day the drill bit hits the earth) for this particular well, but it’s widely talked about as happening in “late January” and the well is described by the company as happening in the first quarter.
I’m no expert in exploring for oil, and I wouldn’t venture a guess on what the odds might be — but the setup is certainly there for a high risk and, if they hit a monster oil reservoir, a high reward venture, even with oil at $50 or below. Their share of their estimated possible resources in all the different seismic targets combined is something like 1.6 billion barrels… but, of course, if they find natural gas instead, or don’t find any big hydrocarbon formations at all, well, I’d bet the stock would go down very fast. Any interest? Check it out, look at their presentations and filings, and let us know what you think with a comment below.
The speculators are already out in force, with the stock up about 30% in the past week as anticipation builds for this well to be drilled (a lot of that’s probably from this newsletter push, but there are several analysts with rosy price targets on this one too) … Freeport is using a new rig that was just delivered from the yard last year, I don’t think it’s drilled any wells yet, so presumably it wouldn’t be crazy to expect some time for them to get the ship in position and set up. If there are any delays in getting the actual drilling done or in reporting preliminary results, even those delays might cause some wild volatility — I haven’t seen any estimate for how long the well might take to complete, or when results might be expected, so keep in mind that if you decide to make a bet on this one you might be in for a period of sitting on your hands and muttering expletives at your computer as you wait for news… whether that’s days or weeks or months, I don’t know. Enjoy!