This one came in last week as an ad for Chris Mayer’s Special Situations Newsletter … he also writes the Capital and Crisis newsletter, and this is certainly a trend, hot newsletter editors creating “more exclusive” newsletters with higher prices that address smaller companies or unusual opportunities.
I imagine the Capital and Crisis subscribers are a little cheesed off that what they might consider to be the “best ideas” are now going to the “Special Situations” subscribers who pony up $995 for the privilege (though it’s on sale until Sept. 4 for $495 … woohoo!)
But I don’t really want to pay either of those amounts just to find out what the next “energy miracle” is and research whether I can make money from it. So I started to read this loooong email …
And then something wonderful happened — a reader solved it for me! Thanks to Hexdek16, who many of you know from the forums as one of the most prolific and helpful posters, I got a head start on this one. A little later in the day, nanopole over at the forum solved it, too, so we’ve got another confirmation and he gets an honorable mention.
But still, you’ve got to continue reading the Gumshoe’s verbal diarrhea if you want the answer!
This ad actually teased several companies, but one in particular was the sine qua non of the teaser — the one company to buy in this area.
And what is the area? Addison Wiggins, who publishes these newsletters, calls it the next great energy “miracle,” though the idea has certainly been around for ages — it’s shale gas. He compares the exploitation of natural gas from shale as equivalent to the “Beaumont Miracle,” when Patillo Higgins discovered the Spindletop gusher that launched the Texas oil economy.
As you might imagine, I think comparing Fayetteville Shale exploration to a history-changing event like Spindletop is a little bit misleading — but it is certainly a nice new natural gas resource that hasn’t been fully tapped yet, and it may well make lots of folks some money. And that’s just about the standard level of hyperbole for a stock teaser these days, so we’ll let it pass.
So this shale gas revolution is apparently enriching several companies, as you might imagine — and some very established ones, like the big nat gas companies that are plying the Barnett Shale for natural gas, and have been doing so for years.
But the Fayetteville Shale is apparently the next bonanza, according to Chris Mayer. And his special report tells you how this is going to be the site of the “Next Great American Energy Miracle.”
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So what’s the “Company X” he talks about? The one with the most to gain?
In Wiggins’ words, “the ONE company that has a hidden gas recovery technique that not only slashes exploration risks and improves the discovery ratio… but could make this the richest stock in your portfolio by the time Wall Street wakes up to this trend.”
Well, this is actually probably not quite what you’re thinking. This isn’t a technology owner, or an extraction technique that no one else knows about. There are technologies that enable gas extraction from shale, but I don’t know that they’re particularly secret or proprietary.
No, it turns out that the “hidden gas recovery technique” that they’re talking about is actually a financial technique — this company outsources discovery, exploration and production and incentivizes all their subcontractors and partners to make the process more efficient. As we’ll see in a moment, they have a payroll of almost zip.
So what are the teaser clues?
“The founder and owner of this company owns 13% of the outstanding shares himself … upper management owns 24% of the company.”
That always sounds pretty good, as long as management aren’t idiots.
The company owns 10% of a LNG facility.
They own six alternative energy companies, including a hydrogen fuel cell company.
And they own offshore wells as well as their Fayetteville shale properties.
Market cap of $468 million.
That ought to be enough to find them, eh? And thanks to Hexdek16, I didn’t even have to pull the ‘ol Thinkolator out of the closet. I did follow up on his idea and research the company a bit, and confirm all the details, and this is almost certainly ….
Contango Oil & Gas (MCF)
There is one little problem with matching the teaser, but it can be explained away pretty easily — the market cap is now up to just over $600 million. But if we assume that this teaser has been in the works for a couple months we can explain that away, since the market cap was near that $468 back in May or so when the shares were kissing $30. Today, they’re at $36 and rising. Maybe part of that rise is due to the newsletter’s recommendation, I don’t know.
But everything else fits quite perfectly, so I’m fairly confident on this one. They do own 10% of a LNG facility under development, the Freeport facility in Texas.
And they do own a bunch of small alternative energy plays as part of their subsidiary venture capital firm — including one that is now publicly traded, Trulite (TRUL, traded OTC), that is indeed a hydrogen fuel cell company. I have no idea how successful they’ve been, or are likely to be, with this venture capital stuff.
Management does own 24% of the company, with most of that by Ken Peak, the CEO and Chairman since the founding of the company in 1999.
They do have property in the Fayetteville shale, though they started as an offshore company and continue to have much of their business in offshore wells.
This is a pretty interesting company, and I’m glad to have it brought to my attention. They’re not profitable, and because they outsource virtually all their operations (they have something like 6 or 8 employees) it’s somewhat difficult to really get a handle on their financials.
From a look at the snapshot, we can see not only that their standard effectiveness ratios are negative, and that profit and cash flow are virtually nonexistent, but that they have a high short ratio (about 10%) and they are trading at high multiples of book value and sales … so what on earth would keep us looking? Not necessarily those insider holdings, because they’ve been net sellers over the past quarter.
Well, what we don’t see in a snapshot is how they might incorporate the reporting of all the incentivized partners who they deal with to actually do the on the ground (or water) work, and how much profit might roll through that we don’t see coming without a closer look. And on the plus side, sales growth is absolutely astronomical for some reason at 4,000%+, so there’s got to be something worth looking for in those numbers.
With very little of their Fayetteville share properties actually producing yet, and may of their offshore wells also in one pre-production phase or another, it might be that we’re just looking at a prospective investment based on the natural gas gushers some folks predict for this firm … so keep your fingers crossed. It could well be that we’re just at an inflection point, where their current wells that are preproduction or have just started producing (since the last earnings release) are on the verge of creating real earnings.
This one cries out for some more research, not only into the likelihood of production in the near future from many of their properties but also into their structure, as I’d think investors would want to understand how all the various subsidiaries (production, the LNG LP, the venture capital arm) work together … and since in many ways this works as an investment company, I’d want to try to understand whether their subsidiaries and partners carry any debt or other liabilities that don’t make it into their filings.
But I’ll certainly give Mayer (and our own sleuth, Hexdek16) credit for coming up with a company that is indisputably a “special situation,” with a structure that I’ve not seen before. Whether or not it will be a profitable special situation, well, that’s going to take some time to figure out. Best of luck in your research.
Oh, and if anyone wants to look into the other natural gas shale companies, either from this teaser or elsewhere (and there are dozens of them, at least), feel free to let us know what you find, either here or over in the Forum.