“Transylvania Gas” and Phase 1’s April 26 Conference Call

Sniffing out the latest teaser pick from Frank Curzio's Phase 1 Investor

By Travis Johnson, Stock Gumshoe, April 25, 2012

This teaser has gotten a lot of attention from my readers, as do all the pitches thrown by the folks at Stansberry’s Phase 1 Investor newsletter — you just know that if you charge $5,000 for a subscription, and use one of the world’s largest investor mailing lists to tease a tiny stock in order to entice people to that subscription, well, they’re going to sit up and take notice.

And email me. So yes, the inbox is full.

What, then, is Frank Curzio teasing as the teensy weensy stock that Phase 1 is recommending and that will be the subject of the conference call they’re holding tomorrow? (Phase 1 usually does a conference call for these new picks, often including company management, as a way to further “add value” to Stansberry’s premier … or at least “most premium priced” … newsletter, but they also usually release the name and the report well before the call, as they have in this case, so it’s not a secret to current subscribers … and, one expects, the price has probably already bumped up as a result).

Well, it’s a little company that’s supposed to benefit from the boom in unconventional shale gas in Eastern Europe — in Transylvania, as the tease puts it, though we usually see that term used these days only when folks want to be gothic and silly (Transylvania is a region, somewhat loosely defined by most people, of Romania, though I think all the vampires have moved to Brooklyn). If you want to see the whole teaser ad “presentation,” by the way, it’s currently online here … but if you don’t want to sit through that, we’ll sift through some highlights and get to those answers for you (and no, we won’t charge you $5,000, or even the “sale” price of $4,000 … though we’re always happy to have new paying members at a 99%-off discount to those rates).

As usual, the Stansberrians say that “this could be one of the most lucrative opportunities we’ve ever uncovered,” and that they may have to http://www.economist.com/node/21540256 limit the number of new subscribers who they allow in to get this report — though they aren’t quite as specific as they were last time, when they said only 75 people would be allowed to get their “Territory 4” gold report (that one worked out quite well, at least so far, with a bit of a pop when they released it and when we covered it for the Irregulars, then a much bigger jump when they released good drilling results).

So … what sort of teasing and tantalizing do we get this time around? Here’s what we’re told:

“… this situation revolves around a tiny energy company, currently trading for less than $1 a share that has recently been awarded rights to drill in one of the youngest untapped shale basins in the world.

On Thursday, April 26th we will be conducting a private subscriber-only conference call with the Executive Chairman of this company. On this call we will detail this firm’s operations and its financial position. The information we expect to learn from this call could help make our readers a fortune within the next 18 to 24 months….

“America’s shale gas boom may sound like old news to you by now. But there is another side to this story few people know about.

“You see America isn’t the only country in the world with shale gas.

“Across the ocean in Europe there is an estimated 639 trillion cubic feet of untapped shale gas, which accounts for 10% of the world’s total shale gas resources.

“That’s almost as much recoverable gas as there is in the U.S. It’s also enough to radically reshape Europe’s energy paradigm in the same way shale gas has for the U.S.

“As Alan Riley from the Center for European Policy Analysis, recently wrote in The Wall Street Journal: ‘In the age of austerity, cheap gas could be a major tool for restoring European prosperity. Shale gas has gone from something ignored by policy elites on the grounds that it can only be developed in America, to something that is happening in real time in Europe.’

“He has also said ‘any significant shale gas deposits found in Europe will fundamentally transform the energy security profile of the region.'”

We’ve seen European shale gas and shale oil stocks teased before, of course — everything from the “oil under the Eiffel Tower” tease that was so popular a few years ago to the several Polish and German shale gas plays that have been touted from time to time … but of late, with natural gas so cheap and with the fracking push-back generally stronger in Europe, these ideas have been pretty quiet. This one, apparently, is something new to Gumshoedom.

And then we get to the part that really sets you to drooling — the part where you can start to imagine that this company will make you rich enough to be a modern-day Rockefeller. He starts talking about the fact, which many of us probably already know, that most of the shale gas exploration and production in Europe is being spearheaded by big US firms that are experienced with these technologies … but that the outlier is a “tiny” company with an enviable land position:

“Many of these companies have already made a fortune in America’s shale basins. Others have missed out and are now turning to Europe for new opportunities. ExxonMobil, for example, is active in Hungary, Poland and Germany. Shell is active in Sweden, Romania and the Ukraine. And Chevron, ConocoPhillips, and Marathon are all hunting for shale gas in Poland.

“The one thing these companies have in common is that they are BIG, brand-name businesses. None of them has a market cap of less than $10 BILLION.

“But the truth is, when it comes to winning drilling licenses and funding projects of this size, smaller energy firms usually don’t have the cash or political pull to compete with these larger exploration firms.

“But we’ve found the one exception…

“Over the past 18 months a tiny North American company has moved in to benefit from Europe’s upcoming shale gas boom.

“In fact, this company has recently been awarded rights to explore and drill in over 700,000 acres of land in one of the biggest shale gas basins in Europe…. a 12-well drilling program set to begin later this year.

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“But what’s truly unusual is that this company has a market cap of well under $100 million. Its stock trades for under $1 a share. To put that in perspective, that’s less than 0.1% the size of ExxonMobil.”

Of course, it’s not really that unusual for little teensy companies to buy up exploration blocks or start exploration programs in new areas — mineral and oil and gas exploration projects are not all that different from biotech projects, it’s the tiny companies that are fast moving and entrepreneurial and who “bet the farm” and stake out new research or new territory, and the big guys who come in later when some of the risk has been removed. And after 90% of those tiny companies have gone bankrupt, revealing the somewhat de-risked successes that the big players don’t mind paying a premium to own.

But still, just because it’s not that unusual doesn’t mean it’s not enticing. Particularly if you think you’ve got a line on a tiny player with “better than average” chances to discover or develop something worthwhile.

The argument in the tease goes on, focusing on the fact that this company has assets in the Transylvanian region, and using a broad definition of that term to say that “Transylvania” encompasses eight different countries (pretty much all of Southeastern Europe, though particularly attention seems to go to the former Yugoslavia — Serbia, Slovenia et al — along with Romania and Bulgaria).

And that these former Eastern Bloc countries also have something else in common (other than being included in a broad definition of “Transylvania” by Curzio): They hate Russia.

Which means they hate Gazprom, since that’s probably where pretty much all of their natural gas comes from.

Which means they want to develop their own gas supplies. And apparently there is quite a bit of natural gas (or so some experts expect) under the rolling hills of Transylvania. Here’s how Curzio describes the potential:

“According to Dr. Gabor Bada, a geologist of 10 years who specializes in basin analysis, the Transylvanian basin is ‘still one of the youngest unconventional systems in Europe.’

“To date around 500 conventional oil and gas fields have been discovered in the Transylvanian basin.

“But now, thanks to fracking technology this basin could well become the largest producing shale gas deposit in Europe…

“According to a 2006 U.S. geological survey it could hold up to 7.4 trillion cubic feet of untapped shale gas. That’s nearly as much recoverable shale gas as Germany has under its entire territory.”

So that’s the gist — there’s some kind of company that has a lot of drilling territory in Transylvania. And it’s priced at less than a buck, with a market cap (as they’ve teased in their emails introducing this ad) in the neighborhood of $35 million.

And we later get confirmation from Curzio that it’s specifically Romania that he’s focused on, where several discoveries have already been made.

And that this “tiny company” already not only has 700,000 acres of exploration territory … but that they they’ve also farmed it out to a larger partner, so they won’t have to pay for that 12-well drilling program.

So is that enough for the Mighty, Mighty Thinkolator?

Hmmph, how can you even ask? Ye of little faith …

This is, sez the Thinkolator, almost certainly East West Petroleum (EW on the Venture exchange in Canada, EWPMF on the pink sheets).

How is it a match? Well, the 700,000 acres doesn’t match particularly well — East West Petroleum actually has concessions for over a million acres according to my quick read on their Romanian assets. But they have farmed out 85% of those resources in exchange for being carried for the next $60+ million of exploration costs on 12-14 wells by their new partner, which happens to be … Gazprom (through a subsidiary, Gazprom Neft).

And they do have the people teased in the ad (I don’t think I excerpted those for you above … I know you’re busy … but they include a participant in a euro shale gas pioneer, and a 25+ year oil industry veteran with global experience — that matches their science guy, Dr. Marc Bustin, who is a founding shareholder of Cuadrilla Resources, and their CEO, Gregory Renwick, who spent 30 years at Mobil). And they do have approval and stated plans to buy back almost 10% of the company this year (the approval started in October and goes for 12 months), though those approvals and plans never come with a guarantee that management will follow through.

Perhaps most importantly, they do have a lot of cash — so yes, as teased, a good 2/3 of their share price is backed up by liquid assets (though the accounting of those assets is now more than six months old).

East West Petroleum has what seems to be a bit of a scattershot approach to exploration — they’re doing preliminary studies in Russia, they have an oil shale exploration project in Morocco and some shale exploration projects in India that are very early on (just won some bids in India, with a five year plan to explore, and they want to bid in next year’s round), and they have a few operating oil and gas projects in Canada that produce a small amount of cash ($12,000-ish a month in cash flow, declining as fields deplete), but the primary focus for the near term is on those Romanian blocks.

As you might expect for such a tiny company, there are few guarantees. The market cap really is teensy, right around $40 million right now, even after it shot up a bit on the presumed Phase 1 recommendation … and that’s down dramatically from where it was a year ago following their initial concessions and some private placements that helped to raise that cash (the fund raising was done at such better prices that the warrants that private placement buyers got came with a $1.75 strike and an expiration of this December). Most of their projects are very early, with plans for seismic data acquisition underway and drilling at least a couple years off, but the drilling in that Romanian project should start before the end of this year. Their Romanian concessions haven’t even been ratified following the deal with Gazprom, though they say in the most recent presentation expect that to happen this quarter.

And, though I’m sure Romania is excited about some energy independence (though you can argue that point if Gazprom’s going to be operating some of their prospective gas projects), there’s also still plenty of public concern about hydraulic fracturing — so political and regulatory risks will remain real, I’m sure, particularly in these early days of initial drilling and exploration.

I have no idea how that will work out, but here’s a recent article that gives some of the taste of the public concernsv over tracking, and another that notes the Romanian President’s interest in keeping gas development moving (though the first wave of concern has all been about Chevron’s more advanced project, which is on the opposite side of the country from East West Petroleum’s blocks). For a broader assessment of shale gas in Europe and the expected timeline, there was also a good, brief article in the Economist last Fall that you can see here.

It’s also worth noting that I have not even looked at how prospective their exploration basins are, or how much gas they think might be there, or whether these are valuable assets beyond what their partners have committed to the projects — that’s because I’m far from being an expert on that stuff, so looking at it wouldn’t do me (or you) much good. I don’t really know what the gas fields of the Transylvanian Basin are like, or whether they’re likely to find stuff where they’re looking, or what gas prices are likely to be in Romania in five years (natural gas, as you probably know, is priced locally still, since transport costs are substantial and transport routes generally inflexible, so it’s worth a lot more in Romania than it is in Ohio … but when and how that changes with increased LNG shipping and new shale developments outside the US, I don’t know).

So there you have it — a teensy company, a free ride for 15% of four exploration blocks in Romania, some unconventional oil and gas exploration projects that are in their very early stages (just won concessions) in India and Morocco, and a pretty nice pile of cash that they might use to either buy back shares or keep investing in exploration or new block auctions around the world. I don’t know what the Executive Chairman will say on Stansberry’s conference call, but he’s a former stockbroker so I’m sure he’ll be enthusiastic in pitching the company — you can get a taste of the kind of thing he’ll probably say in this interview from December if you’re interested, and, as I noted above, the company’s latest investor presentation is here.

Will it go up? That, of course, is the question — it shouldn’t go down too far since they’ve got (as of September, at least) about $30 million in cash (about 10% of that is restricted) and a market cap of only about $40 million … which tells me that this was, before the recent Phase 1-caused recovery, a bit of a bottom fishing pick with limited downside and possible big low-cost upside if the Romanian exploration goes well over the next year or two. But they could certainly blow that cash (and have probably spent and committed some of it already, given their acquisitions in India and Morocco that both took place after their last earnings release) or get bad news on their concessions or their exploration projects that would bring the shares down.

So there’s your proposed gamble from Phase 1, according to the mighty machinations of the Thinkolator … think it’s a good fit for your portfolio, or do you have other exciting ideas in unconventional energy you’d like to share? Toss your opinions on the pile with a comment below.


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