Iraqi Oil: “The Most Dangerous 1,400%+ You’ll Ever See?”

By Travis Johnson, Stock Gumshoe, July 23, 2009

This ad is getting a lot of attention from my readers, if my inbox is any indication — it’s for the Phase 1 Investor service from Stansberry & Associates, which is their expensive premium letter that has historically focused mostly on biotech stocks but is also used by them for any super-tiny stocks that would be swamped by interest from their larger newsletters (or, if you prefer to think of it a different way, their best ideas that they want to keep most “exclusive”), so in recent months we’ve seen them tout some little resource companies — including today, when we hear about a mysterious Iraqi investment.

They’re calling their special report “The Treasure of Baba Gurgur,” and the ideas are apparently based on some thoughts from Matt Badiali, who helps the S&A Resource Report (they must have just changed the name, I still have it here as the S&A Oil Report). Part of his recent claim to fame in this area is a recommendation of Addax, which was one of the potential players in Iraq and was recently bought out at a nice premium by a Chinese company.

Just a quick aside: we should give a little “huzzah” to Christian DeHaemer here, he’s the one who teased Addax and a few other potential Chinese takeover targets among emerging oil companies when he was pushing the ad that he called the “Great Red Oil War” for his Crisis Trader newsletter way back in April, so congratulations to him for being right on that one.

But what’s the tease today from the Stansberry folks?

“I’ve learned of a tremendous moneymaking opportunity that is about to unfold in Iraq.

“Honestly, I can’t say exactly how much or how soon you could profit from this situation. But I am EXTREMELY confident it will make some people A LOT of money… and soon.

“Right now, there are two ideal ways to play the Iraq oil boom…”

They go on to say that they’re pushing two different companies as their best ideas for this theme — one of them I won’t get to today, the actual oil producer, but the potential oil services monopoly sounded interesting so I thought I’d take a look at that first …

“A Near Monopoly that Could Double Your Money

“My top recommendation in Iraq is a company that will, in all likelihood, soon have a near monopoly on servicing Iraq’s oil wells for the next decade, and beyond.

“This situation is very speculative and there is significant risk involved.

“First, here are a few things you should know about this company:

• “Earlier this year, they began negotiating a landmark $400 million joint venture contract with the Iraqi government, beating out bids from some of the world’s biggest oil companies including BP, ExxonMobil and EDP.

• “This company’s contract is the first a Western firm has signed with the Iraqi gov’t since the fall of Saddam Hussein in 2003.

• “Under this contract, the company will potentially be one of three companies in the entire country who will be acting as a service provider to foreign oil drillers. In other words, every time a new oil company comes into Iraq to drill wells, they’ll need this company’s equipment and expertise to get the job done.

• “And most importantly, this firm has actually partnered with The Iraqi Oil Ministry to form a quasi-government organization.

“What this means is, this new company will have sole service contracts for all the new companies that win exploration contracts in the future…

“But let me be clear: This contract with the government is still pending. No work has yet begun. There is no guarantee that it will go through. We’re talking about Iraq, a place that is only just starting to do business with the modern world. I believe we will have our answers very quickly, but until then, we’ll just have to be patient.

“But if this deal does go through, as we expect, you’ll likely make 100% overnight.

“Remember, this tiny company isn’t exploring for oil. Its job is to supply the equipment for the companies who are.

“With over 35 companies now bidding and landing deals in Iraq and an additional 120 companies now showing interest, this tiny company is likely to see a ton of business in the near future.”

Sounds pretty good, no? Then we get into a few specific clues about the company:

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“The company I’m recommending you buy is a private firm. It is not traded on the American stock markets.

“But through one of my contacts in the industry, I have found a way to invest in this company via the stock market.

“Best of all… it will cost you less than $1 per share.”

So who is this oil services company?

Sounds to me like it must be the Iraqi Oil Services Company, which is a potential new joint venture that might be formed between the Iraqi Drilling Company and Mesopotamia Petroleum, a UK oil company. So Mesopotamia must be the pick, eh?

Not so fast, Mesopotamia is itself a joint venture, so the company we’re looking for is probably one of the partners — Midmar Energy Group and Ramco Energy. Midmar looks like it’s private, so the process of elimination leads us to Ramco Energy (ROS in London, RMNRF on the pink sheets, where it trades with very low volume).

And Ramco Energy does indeed trade for less than $1 per share, the closing price in London today was 49.25 pence, which translates to a fair price of about 81.5 cents (US investors are paying a premium for pink sheets buying right now, looks like the close in the US yesterday was for close to 2 cents more than the UK price).

And if you’ve paid any attention to Ramco, you might notice that the shares got cut almost in half about two weeks ago — that’s because they missed a deadline for funding this new joint venture, and the Iraqis backed out.

That might just be posturing, and Mesopotamia Petroleum says they’re still pushing through with the deal and that the delay was in approvals on the Iraqi side and they’re entitled to an extension, but it does introduce a clear definition of the risk involved here — any hope that this joint venture will become a dominant driller in Iraq depends on continued (resumed?) tight relations with the government, among other things … and you never know, maybe the next government will have a different brother in law that they need to push into a cushy oil services job.

Here’s an announcement of the deal, and here’s a note about the end of the joint venture, and Ramco’s hope that they’ll be able to revive it.

So, the teaser ad made very clear that this is a risky situation — If this is indeed the stock they’re touting (it matches the clues, but the clues were not so overwhelmingly precise that I can be 100% sure), then there’s certainly a huge risk that Mesopotamia Petroleum will get shut out and lose the potential joint venture. I also am not entirely certain about whether the teaser thinks the deal should bring a 100% price jump from the current price, or from the levels it was at before the Iraqi’s cancelled the joint venture (almost double the current price).

If Mesopotamia Petroleum does manage to revive the joint venture with Iraqi Drilling for the formation of the Iraqi Oil Services company, then I expect the shares will spike up, doubling or better would not be surprising — if not, or if the deal is materially different, then it’s anyone’s guess what might happen. You can learn more about Ramco Energy, whose other main focus is offshore wind energy, from their website — you’ll also see their updates on the Iraqi deal there. And no, the company is not otherwise profitable, and part of the delay in this joint venture sounds like it was the need to actually raise the cash.

So what do you think? Interested in Iraqi oil? Have a better solution for this teaser? I’d certainly agree that Iraq is the home of the last untapped mammoth oil reserves that can be easily and cheaply extracted, since that seems to be a consensus among experts, but of course “easily and cheaply” depends on continuing improvements in safety, and turning “easily and cheaply” into profits also relies on relations with a new and unproven government and a growing, and probably quite corrupt, bureaucracy. Worth a tumble? It’s your money, so that’s your call.

And yes, there’s another oil company teased in this same ad — didn’t have time to get to it today, but I’ll do so for you shortly (or if you’ve smoked it out yourself, feel free to share your thoughts with a comment below).

If you’ve ever subscribed to Phase 1 Investor, click here to share your thoughts — expectations are high when you have a retail price of $5,000 a year.