Taste of the Friday File: Namibia’s “Oil Kitchen”

By Travis Johnson, Stock Gumshoe, September 10, 2010

Questions are piling in once more about Byron King’s “Oil Kitchen” teaser ads about a big oil field offshore Namibia that he hopes will mirror the huge fields offshore Brazil, so I thought I’d share the article that I wrote to the Irregulars (the paying members of Stock Gumshoe) in the Friday File on July 30, back when this ad made it’s inaugural run. The situations has not changed dramatically for the firm since, aside from an extension on the deadlines for completing work on one of their blocks (most oil exploration grants and licenses have rules like this, you have to have completed the seismic survey within a set number of years or lose the exploration license for the block, etc., and it’s also not terribly unusual to see extensions or renegotiations over time). Oh, and they did release their second quarter results, though most of that was known at the end of July… and the stock jumped to new highs following King’s original ad and is still up about 30-40% from when I wrote this.

What follows has not been updated or revised, my position remains “intrigued, but not buying” and I still have no investment in this company … I was hoping the attention would die down and give me a chance at a more sober look and lower price, but that appears to not be in the cards just yet (which means, I wager, that the ad must have worked pretty well).

July 30, 2010:
This is one of those teases that clearly jumps out at people — when a relatively high profile newsletter teases a new and undervalued oil reservoir held by a tiny penny stock, folks get interested … or at least, that’s what I conclude from the vast number of emails I’ve received in just the last 12 hours since this ad started rolling.

Byron King tells us that this stock could make for life-altering gains … and that it could easily rise tenfold, or a hundredfold as Wall Street gets interested in this major oil discovery, though he also says in some of his promotional materials that he thinks a buyout from another company (like Petrobras, for example) seems pretty likely.

The details of this are available from Mr. King himself, should you choose to subscribe to his “premium priced” (about $1,500) Energy & Scarcity Investor to get the “free” (with subscription) special report. But of course, since you’re so tight with your friendly neighborhood Stock Gumshoe, you get a sneak peek at a few details here today … assuming I can figure it out.

Here are the clues he shared in a recent article/ad:

“The moratorium on drilling in the Gulf of Mexico will only accelerate the “internationalization” of oil exploration. With the moratorium, deep-water drilling rigs will leave the Gulf. The newest, most modern, most capable rigs (and the “safest,” if you REALLY care about safety) will be the first to go. They’re in demand from firms like Petrobras and Statoil to drill in places like Angola and Namibia…. the moratorium will create new urgency to explore and develop deepwater projects elsewhere in the world.

“I recently told the subscribers of Energy and Scarcity Investor about a small Canadian oil developer with BIG acreage offshore Namibia. Out of deference to my Energy and Scarcity subscribers, I can’t divulge the name of Company “X”. But I’ll share a few details about it, just to give you a flavor of the terrific investment opportunities that are now emerging.

“Company ‘X’ holds astonishingly large acreage in oil prospective waters in the southerly regions of Namibia’s offshore. We’re talking about HUGE amounts of prospective oil resource – in the billions of barrels. Yes, billions.

“How good is the acreage? Well, let’s look at the neighbors. You’re known by the company you keep. Petrobras holds the Namibian blocks to the north. Shell holds the South African blocks to the south. Company ‘X’s’ acreage also surrounds a multi-trillion cubic foot natural gas discovery. This natural gas field also contains oil. The oil comes from an ‘oil kitchen’ that the seismic indicates is deep, and to the west, of the gas field. And that’s EXACTLY where Company ‘X’ holds prime acreage.

“What else? Well, if you do the plate tectonic reconstructions, you can see that Namibia used to be right next to what’s now Brazil, in South America. And what part of Brazil did Namibia used to be close to? Why, the pre-salt areas off Brazil which hold oil resources in the range of 100 to 200 billion barrels – although the Brazilians hate it when people like me use such large numbers. ‘We really have not found all that oil, not officially,’ one Brazilian told me. No, not yet. But it’s just a matter of time.

“To be perfectly accurate, most of the Namibian offshore doesn’t have the miles-thick salt layers that we see in Brazil. But that’s just an issue of the ‘seal’ over the oil-bearing structures. The Namibian waters, instead, have miles-thick shale formations acting as a seal over the oil-bearing strictures.

“In many respects, the shale cap makes for better seismic and better drilling conditions. Shale tends to be more transparent to seismic energy, which makes for better resolution of the deep structures. That makes for more accurate drill-hole placement.

“Plus, those Brazilian salt-beds are a pain, as the Halliburton people have explained to me. When you drill in deep, thick salt the salt tends to move in a “plastic” manner. It squeezes the hole thinner. Sometimes, the salt-squeeze even sort of “grabs” the drill pipe. Bottom line is that it makes for tricky down-hole operations.

“Despite these challenges, exploration activity is heating up on both sides of the southern Atlantic Ocean. On the eastern side, the ‘Namibian Oil Rush’ is still in the early stages. Opportunity abounds.”

So that caught my attention, too — the numbers are pretty astounding in this article and in his other promotional stuff (like so many of the newsletter guys are doing, he also put out the teaser in the form of a video).

King also tells us that he knows about a special exploration block owned by this stock, and he gives that block the “code name” of XX13A, with 2.3 million barrels of oil.

That one is Namibian offshore block 2713A: the company describes it as having gross unrisked mean resource potential estimate of 2,391,742 barrels of oil equivalent (gross unrisked mean resource potential estimate of 567,452), Resource estimates and report carried out by third party and prepared in accordance with Sections 5.9 and 5.10 of NI 51-101 of Canadian Securities Legislation Universal has 90% working interest for both blocks.

So what’s the stock? I’m going to be quick so I can get this out to you ASAP, since the stock is moving already this morning — this is Universal Power Corp. (UNX in Canada, UPWRF on the pink sheets). It’s jumping up this morning, I assume because of the buying pressure from King’s new subscribers and from other folks out there who are trying to decipher the teaser ad, as I type it’s at about US$ 1.75, but do be careful, this is a small cap stock (market cap under $200 million — there are now 100 million shares outstanding after their latest equity sale a few weeks ago, and they now have $25 million in cash according to their corporate factsheet)

This one has the flavor of past highly promoted small cap oil picks that have made some big runs, like Petro Matad a few weeks back — not necessarily because it’s going to become a hugely profitable company in the near future, or see any other specific catalyst like a discovery or a corporate deal, but because it’s being promoted by a large newsletter company and the ads have been so widespread that it seems likely to be a campaign that will reach a lot of people. Of course, they could cut off the ads tomorrow, which would mean fewer subscribers and less buying pressure for the stock, but I get a hunch that this is unlikely — I don’t own shares in this one, but if I weren’t writing about it today I’d be tempted to try to catch some of what I expect will be a runup (and frankly, the company does look fundamentally interesting, too, though if the past holds long-term buyers may well get an opportunity to buy at a better price when the attention dies down… maybe I’ll take a nibble sometime after my three-day no-trade window closes following this article.

Is the company for real? Well, they really do hold interests in all those blocks — they have two in northern Namibian waters that are effectively being produced by a partner, with Universal Power just getting a small carried interest of 2.7%, and several more in southern Namibia, near the South African border that are near the big Kudu gas field and “oil kitchen” as described by Byron King (some of the southern blocks have active partners on board as well, with Universal holding 40%, others are still 90% held by Universal).

If you line up Africa and South America along their original boundaries (before the continents split), the Namibian blocks are quite near the massive offshore fields in Brazil, like Tupi, that were discovered in recent years and transformed Petrobras from a sleepy South American value to a mega-growth international oil stock that’s been sucking up essentially all the world’s spare capacity in deepwater drilling rigs.

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As I said, I’m trying to get this out to you quickly because the stock is already moving, but what appeals to me most — other than the big potential of these areas (and make no mistake, it is really largely just potential at this point — they have been in Namibia for years acquiring blocks but have done relatively little drilling, though they have filed one NI 51-101 so far), I really like the fact that they are clearly looking for partners. They describe themselves as a “project generator” company and, it appears, would love to have friends come on board to take much of the drilling risk and expense — here’s how the put it on their website:

“Universal Power Corp. is an Oil and Gas company focused on building a portfolio of highly prospective and under-explored exploration and development targets in Namibia, Africa. Management follows the Project Generator business model, using joint ventures to fund exploration to reduce risk and minimize shareholder dilution. The management team and directors have established an excellent relationship with the Namibian Government, and their local partners over 8 years of in-country development. To-date Management has built a portfolio of over 52,000 gross square kilometers of highly prospective hydrocarbon concessions.”

So … color me curious, I obviously won’t buy this one for at least three days, per my rules, but I wouldn’t be surprised to see it take a bit of a run on King’s attentions (it sounds to me like he’s been recommending this one to his subscribers for a while, though I don’t think I’ve seen it teased or publicly touted by him before), and I do like the idea of the stock. I’ll be digging into this a bit more in the future, and if I like what I see and decide to buy shares I’ll let you know.