Oil is getting clobbered as Hurricane Harvey continues to flood the Gulf Coast of Texas, so I thought we’d take a look at an oil teaser today — and this one seems to be a new newsletter, or at least a newly branded newsletter.
The teased pick is from Chuck de Castro, who I’ve written about many times as he has pitched his Penny Oil Speculator, often hinting at super-teensy little microcap oil explorers, but the ad is for a newsletter called Penny Oil Winners that he’s apparently running for Martin Weiss now at The Edelson Institute (which itself seems to be the nameplate now for all the scions of the “hard assets” newsletters that the late Larry Edelson put out for Weiss over the years).
So presumably this Penny Oil Winners, which is “on sale” at about $1,000 a year, will be similar to Penny Oil Speculator — from the language of the ad, it sounds like it’s the same newsletter, it has just changed publishers and names.
What, then, is this secret stock pick they’re using to tantalize us? Here’s a bit from Martin Weiss to introduce it:
“Last time we recommended a penny oil stock like the one we’re recommending now, investors following our buy-and-sell calls could have invested a meager $3,000 and made actual profits of $74,520. This time, our new pick could do even better.
“It’s a tiny penny oil producer that’s just made the largest discovery in 36 years in oil-rich Alberta, Canada.”
OK… so, not so sexy on a day when oil is falling by a couple dollars — but we’d like to be contrarian, right? So what other clues do we get about this little penny oil?
Weiss says the “street value” of the oil this company discovered is $23.7 billion… which is an odd term, it’s not like they’re drilling for heroin or making black-market deals for crude, but it does supply a hint because he says that $23.7 billion is 485X the market cap of the company they’re recommending.
And we have the power of math on our side, so that means the market cap is somewhere near $49 million.
What about other clues? Here’s more from Weiss:
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“Right now, you can buy its shares for about 50¢ each. If their follow-up test wells confirm half or all of the $23.7 billion of oil — as we expect they will — those shares could easily explode to $5 or $10….
“Based on a recent study by a top independent petroleum engineering firm, this company’s deposit could hold as much as 485.5 million barrels of oil….
“…this is the highly-valued, light, sweet crude oil that’s easy to refine into gasoline and diesel. It sells at a premium to the more common, heavy, sour crude oil….”
So who is it? You can check out Weiss’ ad/article if you want to get more of the gist, but that’s enough clues for us — Thinkolator sez this is Ikkuma Resources (IKM in Canada, PRCYF OTC in the US), which last had its day in the sun back in 2014 when it was still called PanTerra Resources, before the collapse in oil prices in the second half of that year (which led right into a reverse split and a name change in the fall of 2014).
Ikkuma is indeed a perfect match for this — trading at about 50 cents (US), with a market cap of $49 million, and a “large light oil discovery” that they’ve been advancing this year that’s described in their recent press release here.
The more interesting thing is that Ikkuma has just made what they call a transformational acquisition to expand their business — they’re selling control of their infrastructure assets and using some of their cash and/or debt facility and some equity to buy (for about $34 million) a bunch of producing natural gas assets in the Central Alberta Foothills, in addition to adding some to the oil pools they’re trying to develop. The deal is explained in a press release here, but it looks like it will add to their debt but otherwise improve pretty much every metric otherwise… including more than doubling their cash flow per share.
The cash flow from those assets will be used, it appears, to develop their light oil discovery — so you get some exposure to both oil and natural gas, which is good or bad depending on where you think those prices are headed. That doesn’t mean the company will be worth $23 billion anytime soon, of course — the proven developed and producint reserves are currently valued, with a 10% discount rate, at $230 million (that’s on a pro forma basis, assuming the deal goes through and the projections about natural gas prices are accurate)… so the company is trading at a discount to that estimated value, but companies pretty much always trade at a discount to the value of their future production.
And that’s a nice base level of production, I guess, for a company that has ambitions of developing the much larger light oil discovery they’ve made in the Narraway area, in the Northern Alberta Cardium and Badheart formations. So the story is interesting and logical — a producing natural gas field that’s generating cash flow, with some potential for growth, and a place where they can reinvest that cash flow into developing a potentially large oil field. A nice, logical story doesn’t necessarily mean it’s going to be a winning investment, of course, and I haven’t looked into a lot of little junior oil players lately so I can’t say that I’m sure about whether this one is cheap or dear in comparison to its peers… there are probably a lot of inexpensive-looking oil stocks out there these days.
If you’d like to dig in and start judging for yourself, you can start with the company’s latest investor presentation here — it includes that “transformational” acquisition. I’m favorably inclined to this one, given the undeveloped light oil and the solid cash flow from their existing natural gas wells during a time when natural gas prices are not particularly robust, but that could just be because I haven’t looked at their competitors to see whether their economics also look reasonable under the current pricing pressure — maybe all these little cash-flowing juniors are looking better now that we’re all afraid of oil stocks, I don’t know.
That’s just my two cents after skimming through the company’s details for a little while, and I’m certainly not an expert on the oil and gas producers of Western Canada… perhaps you’ve something to add? Think these folks have a great discovery on their hands? Are they overvalued or undervalued? What are we (or Chuck de Castro) missing? Let us know with a comment below.