Yesterday we looked at the silly “26(f)” promotion for what are, for the most part, conservative and diversified investment vehicles that are suitable for a lot of passive investors… so today we’re doing a full 180 degree turn and looking at a pitch for a crazy and speculative little oil stock. We try to be equal opportunity ad-watchers here at Stock Gumshoe.
The ad that caught my eye was from Chuck de Castro’s Penny Oil Speculator, which is one of those “old school” stock tip letters that still looks like it comes out of a typewriter. That letter has, they say, been around for 19 years recommending microcap little oil explorers, and my assumption would be that he’s had a few extraordinarily successful picks and a large number of washouts — that’s the nature of the beast for junior resource investments.
I don’t know what his long-term record might be, the teaser picks of his that we’ve covered have been hit or (more often) miss over the long term (we don’t know when he might have pushed the “sell” button on those, our tracking system assumes “buy and hold forever” for all teaser picks), but like all other newsletter promoters he talks up his winning picks and fails to mention the losers (Penny Oil Speculator and its sister, Penny Mining Speculator, both published by Chuck de Castro out of somewhere in Asia (Singapore, maybe? I don’t remember) are newsletters in the truest sense — they do get sent by email, but they don’t really have a website presence at all).
The letter does claim that “Chuck’s closed positions have averaged 135.8% profits over 19 years,” and the teaser pitch includes lots of the kinds of returns that make everyone excited about junior resource stocks — little guys that go from ten cents to $2 or otherwise have massive several-thousand-percent returns like his claimed past recommendations Hardman Resources, Coastal Energy and Ultra Petroleum (though remember, a few thousand-percent+ winners combined with a couple dozen 100% losers can still get you a very high average return… as long as you owned all the stocks). And then, of course, we get to our teaser hints:
“Bonus reco: A tiny company with a huge property in one of the world’s hottest oil exploration zones
“Chuck LOVES finding tiny companies with properties that may hold huge amounts of oil. This is one of those. It’s key property is bigger than the entire state of Delaware, and it’s in the sweet spot of one of the world’s hottest oil and gas exploration zones.”
Exciting, right? Especially after you’ve been primed by the subscriber testimonials about the stocks they bought that turned $1,800 into $74,000. So what is this stock?
These are the other clues we get:
“… a whopping 5 billion barrels of oil has already been discovered in this region….
“… just 18 miles away from their property, a British oil major just found $31 billion dollars of oil….
“Sproule Associates… concluded that their property could hold as much as 445 million barrels of oil. With oil at $52 a barrel, that’s potentially worth as much as $23.1 BILLION above the ground.”
We know, of course, that oil in lightly explored underground reservoirs is worth a LOT less than oil above the ground, but still — that’s a lotta oil. What else are we told about this company to pique our interest?
“… market cap is not even $30 million.”
OK, so it’s super, super teensy.
We’re also told that they have a joint venture with someone who’s helping to pay for exploration:
“… one giant company ponied up $100 million for a seismic survey (kind of like a ultra sound exam of the earth) and drilling the first two exploration wells for a piece of the action….
“The joint-venture partners just completed shooting 520 kilometers of the survey…. drilling of the first exploration well is expected by the middle of this year.”
So what is this stock? The Mighty, Mighty Thinkolator says we’re being teased about Simba Energy (SMB on the Venture exchange in Canada, SMBZF OTC in the US). The market cap is right around $30 million — it’s just over C$40 million at the moment with the stock at C$0.10 a share.
Simba is an early stage oil and gas exploration company focused on Africa, and their joint venture partner is Essel Group Middle East, an Indian company that shares leadership and directors with Simba and that will soon own about 25% of Simba (thanks to some warrant exercises). Essel has invested in seismic data collection on block 2A in Kenya, and the acquisition of a drilling rig for Simba’s first exploratory drilling projects on that block. They’ve said encouraging things about the progress of analyzing that data to identify drilling targets, but I don’t think they’ve yet said anything specific about drilling dates — the interpretation of the seismic is anticipated “in early Quarter 1 in 2017.”
My guess would be that the seismic data release is not likely to be a big deal, but that traders might get excited about the drilling itself — there is great catalyst potential when you drill into a possible oil reservoir for the first time, so they might find something huge (like what drove Africa Oil, the company that found oil in Kenya a few years ago with their first drilling attempt, from $2 to $10), or they might find a dry hole and see their share price collapse… though at C$40 million and with other early stage properties to explore in a half dozen other countries, perhaps expectations are low enough that any downside on a dry hole would be minimized — you never really know until it happens.
Essel Group is a pretty strong funder, and from the last investor presentation it looks like they’re putting up as much as $250 million to earn their controlling stake in Simba’s assets (60%) over time, though it’s still pretty early on in that process and it looks like there hasn’t been all that much spending on Simba’s exploration yet — though the seismic and drilling will start eating into that pretty quickly.
Sproule did estimate that there could be 445 million barrels of oil equivalent (MMboe) of “prospective resources” in the Kenya 2A block, though that’s still a lot of guesstimation until you start drilling. Much is made, of course, of the big Twiga discovery by Africa Oil in the Lokichar basin in Western Kenya, but Simba’s block is in Eastern Kenya… closer (about 30KM from) Sala-1, which was a less impressive discovery that was mostly natural gas.
You can browse through their presentation here if you like — presumably they’ll be announcing drilling specifics for Kenya 2A soon, and they do also detail some of their other less-advanced prospects across the continent in that presentation.
They apparently have some cash flow and debt issues, since they had a stop trading order in mid-December after much of the Essel Group’s funding had been determined to be disallowed “shares for debt settlement” agreements (at least, that’s how it read to me), but they don’t really have any debt on their balance sheet so I don’t know where that’s coming from — which makes me a little bit worried about “related party” debt and private placement deals. On the surface, none of them look very big and it’s mostly a result of Essel and Simba having the same management and Essel helping Simba to pay off creditors, from what I can tell, but it means there may be opportunity for some bad behavior that obscures results or could disadvantage outside shareholders. Simba itself doesn’t have enough money to do anything, so on that front it’s a good thing that Essel is shouldering exploration costs for now.
I do currently own some shares in Africa Oil, and that’s a far more conservative play on Kenya’s potential oil business — though that doesn’t mean it’s genuinely conservative, just a lot further along than Simba (and with a lot of cash). This is what I wrote about Africa Oil when I did my annual review a couple weeks ago for the Irregulars, just FYI:
“And Africa Oil (AOI.V, AOIFF) is the stub I still hold from a very profitable position that was inspired by, again, a lot of newsletter promotion of the stock about five years ago, before they drilled their first well in Kenya. That first well was a big hit, and they’ve built on that and defined a meaningful and large potential oil field and continue to have exposure to other exploration blocks in East Africa… which they’ve also derisked by partnering all of their blocks and selling large chunks of their discoveries to Maersk, Tullow and other partners. Africa Oil surged by several hundred percent back in 2012, I sold half and took some profits, and the rest I’ll keep holding until we see either enough infrastructure development in Kenya to get these wells into production or we see enough of an oil price spike to make the shares get overvalued again.
“I like their large cash position (almost C$650 million) and the fact that they won’t have to raise money or spend a lot anytime soon, though there is some risk that they could use that cash to make a large and risky investment to expand somewhere else and start the exploration process over again, which could hurt the share price depending on what that acquisition is… but they’ve done well operationally so far despite a couple of years of sleep stock price, and large undeveloped on-shore oil fields are still a rarity and worth owning, so I’m willing to be patient — it’s not a stock that I’d necessarily be excited about buying right now for any short-term potential, but the assets are valuable and I like what management has done to derisk their operations and I wouldn’t try to talk you out of a small position below C$2.50 or so if you want some exposure to frontier oil prospects.”
I’m not an expert on oil exploration, but Simba seems less attractive to me today than Africa Oil did back in January of 2012, partly because Africa Oil had the Lundin’s on board (a well known global resource investing family with a good record of building exploration stocks into big companies) — but that’s also reflected in their relative size, back before the first drilling results came out Africa Oil was a C$300 million stock… and Simba today is about a tenth that size. So it will probably be very volatile, and I would guess that the stock price’s future movement will be almost wholly dependent on when they start drilling and whether that first drilling effort yields anything exciting, but it’s such a tiny company that almost anything could happen, good or bad.
And, of course, if oil falls to $20 no one is going to be excited about finding another new oil province in Kenya… unless it blows everyone away with a Spindletop moment.
That’s all for me, this one’s more speculative than I’m interested in right now, particularly since I already have exposure to the uncertainty of Kenya’s future as an oil producer… but it’s your money, so what matters is what you think — have any interest in Simba? Experience with Chuck de Castro’s picks in the past? Other favorite oil explorers in far-off lands? Let us know with a comment below.