“Magic Drug” Oil Recovery Technique Brings “$31.5 Billion Bonanza?”

Sniffing out a small oil stock teased by Chris Mayer's Special Situations newsletter

By Travis Johnson, Stock Gumshoe, January 31, 2012

Today it’s time to come back to Chris Mayer, who’s teasing a small oil stock with a “magic drug” and that owns a massive $31.5 billion “oil bonanza” right here in the US of A.

Sounds intriguing, right? Several of my readers thought so and passed it along, so let’s see if we can sleuthify out a solution for you.

Here’s how he pitches it:

“Well I’ve recently found one small company that’s secured exclusive rights to a staggering $31.5 billion oil bonanza in the heartland of America.

“And thanks to the groundbreaking ‘magic drug’ technique, the extraction of this gargantuan oil deposit is now finally possible.

“In short: This small company is sitting on an oil fortune worth more than 39 TIMES its total market cap.

“You could see gains of 3,800% or more off this little-known stock.

“Turning a tiny retirement stake of just $10,000 into as much as a life-altering $380,000!

“That’s money you could use to put your kids or grandkids through college, buy a second home, take that exotic vacation you’ve always dreamed of, or even buy that fancy new sports car you’ve had your eye on.

“The bottom line here is that this stock is massively undervalued.

“It’s no wonder that this company’s insiders own a whopping 41% of the stock’s shares.”

What’s the “magic drug?” Here’s more form Mayer to tease that idea:

“The U.S. Department of Energy says that in the U.S. it ‘has the potential to produce over 80 billion barrels of oil.’

“That’s QUADRUPLE the estimate for the oil found in North Dakota’s booming Bakken play — which some say could hold 20 billion barrels of oil.

“In fact, I gave my readers the chance to pocket 110% gains on Bakken driller Kodiak Oil & Gas, but I believe that’s peanuts compared to the gains you could make thanks to this advanced recovery technique.”

And then he does actually just come out and tell us what the “magic” is:

“It’s carbon dioxide (CO2)….

“First you pump the carbon dioxide gas into an oil well.

“Then after injection, the hot CO2 gas mixes with the trapped oil, thinning the gooey fluid. That allows it to bubble right out of the reservoir.

“Sounds pretty simple. But it was only perfected recently.

“A recent joint study by the Massachusetts Institute of Technology and the University of Texas says it, ‘could boost domestic oil production by as much as three million barrels a day by 2030, an increase of more than 50 percent over current levels.’…

“There are now over 111 projects in the U.S. using the ‘magic drug’ technique, accounting for 5% of total U.S. oil production.”

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He also thinks the company got a steal with this “discovery” …

“As you may know, it is said that Utah and Colorado could be sitting on more recoverable oil than all of the Middle East.

“And here’s the best news of all: the company purchased their initial rights to this oil bonanza at a ridiculously low price…

“How much? A mere $86 million…

“A superb deal since its total stake in this massive oil field is now estimated to be valued at $31.5 billion at today’s oil prices. That’s over 366 TIMES what this company paid for pieces of the property!”

And just a few more details for us to use as we’re filling up the hopper on the ol’ Thinkolator …

“… this ONE oil find in Utah represents just a small portion of the company’s total positions in the United States…

“This fast-growing energy company has more explosive energy plays across the United States… including North Dakota, Wyoming, Alabama and Oklahoma.

“In North Dakota alone — a state that could hold 20 BILLION barrels of untapped oil — they’ve got 33,000 acres of oil rich landwith plans to drill up to 20 wells….

“And in Wyoming, a state that sits on what could be one of the largest untapped zones of oil in the U.S., the company has major property in the Hilight oil field….

“Plus this company also has significant exposure to yet another red-hot emerging oil play in Wyoming.”

(that last “red-hot emerging oil play” is the Niobrara Shale, by the way)

So who is this?

Put the mighty, mighty Thinkolator to work a’churning those clues, and we learn that this is … Resolute Energy (REN)

Which is a sort-of-new company — they were founded seven or eight years ago by industry veterans who had started HS Resources, and they did indeed, as teased, turn that from a $150 million investment into a $1.8 billion buyout by Kerr-McGee.

Resolute had actually originally intended to go public as a MLP in 2007, which gives some indication of the stability and cash-generating capability they expected to have (you don’t set up a MLP for speculative exploration projects, you set one up for cash-generating assets with long expected lives and low capital needs) … but the MLP market was soft at the time so they held back, and then went public by merging with a “blank check” company in 2009.

And yes, their core property is in Utah — in the Aneth oil field, which is a very large field that has been producing for more than 50 years, with continuing CO2 floods to keep production levels up, and with a long life and predictable production profile that they use to fund their other work. Aneth accounts for the vast majority of their production, despite the fact that they do have projects in those other states and “hot” oil areas teased.

They bought their Aneth holdings from Chevron and ExxonMobil in the mid-2000s, though I don’t know if their initial buy was really for $85 million (that would have been the Chevron buy). They have a partner in this project, too, in the Navajo oil corp.

Resolute has seen their share price come in quite a bit in recent months, the stock was in the high-teens for the first half of last year, then fell pretty abruptly over the Summer and has now dipped to about $11. For my full disclosure, I’ll note that I started to get a little interested in bottom-fishing as I was researching this one and picked up some call options in REN to gamble a bit on their ability to recover (I will not trade those for at least three days, per my trading rules).

The production for last year came in a bit lower than they had projected, which I expect is the primary reason for the decline in share price, though they’ve also invested in a few more prospective areas. The general business plan of the company is summed up pretty well by this quote from their last quarterly report:

“Resolute has a unique portfolio of assets, including our Aneth complex, which provides stable and reliable cash flow and a platform for organic, self-funded growth. Free cash flow generated from Aneth is reinvested into other growth areas. For example, during the year, we expanded our presence into two oil resource plays in the Permian Basin of Texas, advanced our initiatives to evaluate the upside in our legacy oil producing areas in Wyoming, and continued to build oil production in the Bakken.”

Resolute also had some big insider sales recently, though it was from Thomas Hicks (the investment fund that had put together the SPAC/blank check that Resolute merged with), not from the actual management team … they have had fairly consistent insider selling over the years since their IPO as well, though insider ownership remains quite high (from what I can tell from the filings it’s not at 41% anymore, though it was near that at their IPO — and it may be in that neighborhood if you include warrants, REN has outstanding publicly-traded warrants in addition to their public stock).

The stock also has a huge short interest, which is part of the reason for my little dabbling in the options (the possibility of of a “short squeeze” that could drive the prices higher if their performance improves even briefly), but the insider selling and the high short interest and the production numbers as of last Fall that I think you’d have to describe as at least somewhat disappointing or lukewarm all combine to make this a pretty contrarian pick from Mayer (a term I’m sure he’d embrace).

You can make your own call, as always — their last presentation from December is here for more information, and if you’ve an opinion you’d like to share on Resolute I’m sure we’d all be delighted to hear it, just use the happy little comment box below.