by Travis Johnson, Stock Gumshoe | September 27, 2011 11:27 pm
This one comes in from Elliott Gue for his Energy Strategist newsletter — we haven’t looked at one of his ideas in a while (you can see reader reviews of his letter and more info in the right hand column), but he often picks interesting energy stocks …
… and we share a fondness for his favorite deepwater drilling stock (that would be Seadrill, which I’ve written about many times), so I thought we’d take a moment to see what the new picks are that he’s teasin’.
The lead-in makes for a good story, as always:
“Inspired by the TV series Dallas, an unknown accountant beats ExxonMobil to the punch with the biggest oilfield discovery in 50 years. It happened near latitude 0°, longitude 0°, deep in the heart of “darkness.” It redrew the map of the global oil industry, and it could reset your entire financial future…
“The creators of the hit ‘80s TV series Dallas would be surprised to know that “the Ewings” inspired one of the most successful new oil companies of our time.
“It all started when an “ordinary” accountant received a tip that changed his life, and the future of the global oil industry. It has the power to change your life, too.
“On the fateful day, a banker acquaintance happened to remark to the confessedly bored accountant that Senegal, a small country on Africa’s west coast, was hunting for a company to develop its oil and gas.”
Fun story, right? That leads in to the part that doesn’t ever get highlighted, the part where his company spent years looking for oil before they found anything, and spent a lot of money before they started hitting some good discoveries. And the key, we learn, is the massive oilfield offshore Ghana called Jubilee …
“Jubilee: Oilfield of Dreams
“As one jubilant Ghanaian told a BBC reporter recently, ‘It’s out there: oil, oil, oil.’
“In fact, ‘oil, oil, oil’ is thirty-seven miles off the verdant coastline of Ghana, beneath 4,000 feet of water.
“And it was here that our determined accountant from the Emerald Isle discovered his ‘oilfield of dreams’ — and changed the future of the entire nation of Ghana, as well as his own.
“The discovery of the mammoth Jubilee oilfield is proving a game-changer, not just for West Africa, but potentially the world.
“It turns out Jubilee is not just a producing oilfield—it’s a gargantuan find that could ultimately produce in excess of 500 million barrels of oil per day.”
If you’re not super-savvy to the oil market (I’m not either, don’t worry), just note that 500 million barrels of oil per day is a LOT. Reserves, Gue tells us, run up to an estimated 1.8 billion barrels.
Which doesn’t make any sense, someone must have missed a decimal point or mixed their apples and oranges — because if there’s 1.8 billion barrels there and they produce 500 million per day, the field’s done producing in three and a half days. Which would be impressive, and miraculous. But we’ll take the clues in the spirit that they’re given (teasey and slightly misleading hints, or manipulative deception? I’m a friendly optimist and choose the former).
Gue tells us that this is a “historic investing opportunity” that he likens to the oil and gas discoveries in the Gulf of Mexico 70 years ago.
And, as promised, there are some stock ideas for this “historic opportunity” — here’s how Gue teases em’:
“I know several perfectly positioned producers with a virtual lock on the Jubilee field, as well as other exciting new discoveries off the west coast of Africa.”
And yes, one of them is the company run by that “daydreaming accountant” — you may already know this one, because the story’s been told many times and it has grown into a key oil company in Africa, but here are the quick clues:
“An ASTOUNDING 83% Oil Strike Success Rate
“At the top of my recommendation list is the company founded by our restless Irishman. An unlikely oilman, this CEO has created an unlikely oil company. Despite rocketing growth, he understands that his company operates in a different environment—one in which it is no longer acceptable to exploit the developmentally vulnerable.
“Hopelessly idealistic? Far from it. Last year the firm posted an astounding 83% success rate on all new wells it drilled. I expect new well successes to be announced later this year and into early 2021. Your projected upside: 35-40% profits in 8 to 10 months. You’ll get all the details on this top pick in my special report, West African Wonder: Profit from the New Oil and Gas Powerhouse.”
So who is it? This is, sez the mighty Thinkolator, Tullow Oil (TLW in London, TUWOY for the pink sheets ADR. This is a $20 billion market cap company and is traded fairly actively on the pink sheets, so it’s not a particularly scary stock to trade on the pinks … but trading volume is very low compared to US-listed majors — be careful about using limit orders if you do choose to invest in Tullow using the ADR).
Tullow is probably the name at the top of most peoples’ lists for exposure to oil in Africa — it’s leading the charge in Uganda as well as their big finds and exploration projects in West Africa, and is also helping to pioneer East Africa oil exploration in Kenya and elsewhere as was mentioned prominently in some Christian DeHaemer teasers a few months ago. There are, of course, hundreds of other companies exploring for oil in Africa, from the majors that we all know (ExxonMobil, Total and their ilk) to more midsize firms like Tullow or the smaller Kosmos Energy (KOS) that IPO’d a while back on the strength of the Jubilee field (they partner with Tullow on that one — Kosmos, FYI, has a market cap of about $5 billion and isn’t yet profitable), and of course down to the tiny ones who haven’t even officially found oil yet but who hope to become the next Kosmos or Tullow.
If you want the backstory of Tullow, there was a pretty good story about them in BusinessWeek about six years ago, including the founder’s tale of pretty much falling backward into building the company.
Tullow is right in the middle — it looks expensive next to the low PE, high dividend yield oil majors, and it looks huge and steady and profitable next to the tiny explorers. With their breadth of exploration targets and production in many countries they certainly offer more diversification than many emerging oil companies, but by the same token it’s quite true that the story of Tullow is overwhelmingly about Uganda and the Jubilee field offshore Ghana right now — their focus broadens to South America and Europe to some extent, with some production contributed from those areas, but the overwhelming majority of their reserves and future production are in (or going to be in) Africa.
And yes, African oil production is getting a lot of attention — and not just from the newsletter guys. Lots of countries are looking with some envy at Ghana’s big boost in GDP from oil production as Jubilee gets started, and if an oil price collapse doesn’t scuttle their plans there are lots of countries, particularly in West Africa but also on the other side of the continent, hoping that new discoveries and production will jump start their economic development.
So … I think of buying Tullow for exposure to African oil as somewhat akin to buying Chesapeake (CHK) for exposure to the shale gas boom in the U.S. — hard to argue with the choice, they’re clearly a big (or the biggest) player in the segment and a large, profitable company that is close to being a pure play in a hot segment, but in Tullow’s case they’re also the company that everyone thinks of first when they consider investing in African oil production, so they’re not necessarily unknown or value-priced.
I haven’t scoured the books on this one, to be sure, and I don’t own shares of Tullow, so I’d be happy to hear other folks’ opinions on the company and their growth prospects — I’ve seen one analyst put a price target on them of 2,000 pence, which is about 50% above today’s price, but it’s your money … what do you think? Let us know with a comment below.
And yes, I know that time fell away from me today — I’ve got at least two other picks to look into for you from Gue’s teaser, we’ll dig into that tomorrow. Stay tuned!
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