What’s Frank Curzio’s Under Fifty Cent Company that he says we should Buy by November 1?

Checking out the latest Phase 1 Investor teaser -- a week later, the ad was updated to say it was "under a dollar"

By Travis Johnson, Stock Gumshoe, October 3, 2013

Buy this ‘Under $0.50’ Stock by November 1st, 2013

“This is one of the few times in the history of our business we have recommended a company so small and with such high upside potential. A triple-digit gain within the next 12-36 months is highly possible….

“We’ve been vetting the opportunity for nearly two years.”

That’s the intro to the latest Phase 1 Investor teaser pitch from Frank Curzio, and lots of readers have been asking me who this tiny company could be. So let’s find out, shall we?

The ad starts with a pretty long spiel about how powerful the shale gas revolution has been in the United States, driving down gas prices and creating boomtowns in the areas where shale gas (and oil) are being produced, and giving hope for an increasingly energy independent future for the country (or at least more profits, as natural gas, in the form of LNG, gradually becomes a widely-shipped fuel). If you’ve done any thinking about the markets or about energy during the last few years, you already know this.

And as usual, several examples of hugely successful investments in North American shale production are cited, including some producers and some service providers, just to reassure us that yes, this kind of stuff does create huge returns.

But then we get to the big story they’re pitching in the form of this 50-cent stock: International shale gas. Here’s some of Frank’s verbiage:

“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….

“The quest for shale gas in Europe is getting bigger and bigger every day…

“As energy consulting firm Gas Strategies indicates, “The interest in shale gas is turning in earnest to Europe, precipitating what some observers have called a ‘land-grab’ for potential shale gas acreage.”

And we’re told that the the problem, beyond the fears in (mostly Western) Europe about hydrofracking, is that the technoloqy, practical expertise, and equipment for “unconventional” oil and gas exploration and production aren’t widespread in Europe — they need North American experts to make the next leap forward.

More from Frank:

“So what are European countries who are keen on replicating America’s shale gas boom doing about this?

“They are turning to the companies who do have the experience in shale gas production in order to unlock these deposits for them.

“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.

“… smaller energy firms usually don’t have the cash or political pull to compete with these larger exploration firms.”

And then, you guessed it, we get to the part about the “one tiny company” that’s the exciting exception which will bring us profits:

“But we’ve found one of the only exceptions…

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

“In fact, this company has been awarded rights to explore and drill in over 700,000 acres of land in one of the biggest shale gas basins in Europe.

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“A 12-well drilling program is now underway… And when results from these wells are announced, this stock could easily explode in value.”

Aha! You know what those are, right? Clues. And then we get a few more…

“… this company has a market cap of well under $100 million….

“tiny company that has been awarded rights to drill in one of the largest basins in Europe. My colleagues and I like to call it the ‘Transylvanian basin’ as it is located directly beneath the Transylvania region of Eastern Europe.

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

We’ve heard tell of the “Transylvania Basin” in past teasers, so we’ll find out in a moment if this is the same company we’ve heard teased before … but we do get a quick explanation of what it is …

“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.

“But what makes the Transylvanian basin particularly unique is that it spans into eight different countries including Slovenia, Serbia, and Romania. “

This is an area that, like the rest of Eastern Europe and much of what we used to think of as the “Soviet Bloc” is still extremely dependent on Russia for energy — they get essentially all of their natural gas from Russia, so they are the ones who feel the most pain when Putin’s Gazprom cuts off supplies for strategic or political reasons, as they did with the Ukraine most notably a few years ago. All of Europe is worried about Russian gas prices and supply, but Eastern Europe is extra-worried.

So that’s part of why these governments are pushing for development and giving exploration companies good concessions and good terms, we’re told. But do we get any more clues about the specific 50-cent stock Curzio is touting?

First we get hints about specifically which country

“But of all the countries in Eastern Europe, only one of them is headed towards energy independence.

“Last year a natural gas deposit was discovered in this country. Preliminary estimates indicate this deposit could hold up to 80 billion cubic meters of gas.

“And according to officials, several additional gas deposits will soon be revealed in this same area.

“This is why the country has been particularly active in exploring the area.

“… as an added incentive to get foreign exploration firms into the country, the government of this country has implemented a unique system that gives contractors 70% of the profits. The government takes the remaining 30%.

“This is one of the highest contractor takes in the world. “

OK, so that’s a good little passel of clues for the Thinkolator. How about some hints then about the specific company?

“during a recent exploration bid round to companies, one tiny North American firm was the successful bidder for exploration properties in this deposit…

…A region covering well over 700,000 acres of land….

“… in 2012, this tiny company signed an agreement with a large oil company. And under this agreement this tiny company won’t have to spend a dime of its own money to drill here.

“Instead they will get a cut of the total profits while someone else pays the bills.”

That’s the kind of commodity company I tend to prefer, one that has someone else footing the exploration and development bills, so that perked up my ears a bit.

And then we get the clue that this company also has a major stake in a different shale formation …

“This tiny company also has a major stake in one of the last untouched shale formations on earth… This formation is not in Africa, the Middle East or any other dangerous region.

“It’s actually located in one of the safest countries on earth….

“this formation already has over 500 million barrels of proven oil reserves and over 7 trillion cubic feet of gas. To put those numbers into perspective, that’s enough oil to supply this country’s needs for nearly the next 9 years alone….

“… only a few major exploration firms have gained access to this formation.

“One of these companies has acquired 1.7 million acres of land within this formation. That’s an area bigger than the state of Delaware and this land is said to hold 14 billion barrels of oil.

“Over the past few years the company has already drilled 22 for 22 successful wells. The stock has shot up by more than 10,000% since 2008.

“So why am I telling you about this company?

“Because the tiny stock I’ve been telling you about has partnered with this business and is now set to drill nine wells within this formation as part of its 2013 exploration program.

“The first well is literally being drilled right now.”

So that’s where the catalyst is probably really coming from that has Frank Curzio recommending his Phase 1 subscribers to buy shares before November 1 — the drilling that’s currently happening in this “untouched shale formation.”

And he says he’ll be holding a subscribers conference call with this company on October 10, a call that will include the leader of the company he’s teasing, but the stock has already been recommended to his subscribers and the information released in a special report they’re calling The Next Frontier of Shale Discovery — so that call won’t necessarily be a catalyst for the stock (depending on what the folks say on the call, I guess).

What, then, is this little stock?

Thinkolator sez: This must be East West Petroleum (EW.V in Canada, EWPMF on the pink sheets)

The “Transylvania Basin” exploration is happening in Western Romania, and Romania has historically been a substantial oil and gas producer — though the talk about Romanian energy independence last year was spurred by their big gas finds offshore in the Black Sea, which is about as far away from East West’s concessions as you can get and still be in the same country. And the “undiscovered” shale basin is New Zealand, where East West recently won a bidding round for a few blocks in partnership with TAG Oil and is already drilling.

And I personally threw down a little speculation on this one as well, partly because the trend of attention drifting toward this company seems substantial and actual catalysts might soon approach — we had Myron Martin suggest it to the Irregulars a few months ago, and now the much more massive Phase 1 Investor mailing lists are hearing all about it (again … more on that in a moment), so that’s a lot of folks waiting for info on a ridiculously little company. That could lead to terrible, terrible results for investors, just so you’re aware — East West has a market cap of under $40 million and is priced at 42 cents as I type (Myron suggested it at 28 cents, to his credit), so a bad sneeze could wipe out the company. But it is a real company, with a real balance sheet and assets.

Just to clarify my personal trading rules, in case you’re curious: As a Stock Gumshoe employee I can’t trade a stock for three days after I write about it, which means I can buy it and disclose to you that I own it as of the publication of my note, as I always do for the Irregulars when I add a new equity position, but I cannot then immediately sell it after saying something nice about it and possibly driving the stock up — we don’t impact the price of stocks very often here at Stock Gumshoe, we’re small fish in this market, but ANYONE can impact the stock price of microcaps like East West Petroleum. So in this case, to make sure there’s no fear that I’m trying to manipulate the stock, I’ll promise to hold the speculative position I took on for at least two weeks (the standard rule is three days). That ought to be long enough for any words I share here to be long-forgotten and for the “real” market to drive the stock price. I’ll probably hold it for longer as we wait to see what the results are of their New Zealand drilling and their initial drilling in Romania, but I promise to hold it for at least two weeks. OK?

So what’s the deal? This is a stock that has been nibbled at by touters in the energy space a few times over the years, since they have some compelling characteristics — notably a diverse set of positions in some appealing energy basins around the globe (with Romania and New Zealand being by far the most advanced), and a decent financial position with enough cash to fulfill this year’s obligations and no debt. That means they’re potentially pretty levered to any positive news but, because of the cash position, the downside from any one disappointing well shouldn’t be overwhelming because they do have several drilling operations that might possibly hit exciting paydirt. It is still absolutely a gamble, a bad result or two could easily cut the shares in half and a series of weak drilling results could essentially destroy the shareholder value in the company. So that’s the downside.

The upside is that Curzio does describe the picture pretty well — other than the fact that he says they’re drilling in shale, which implies that they’re doing the kind of unconventional exploration that has led to huge finds in the Marcellus and the Bakken and elsewhere. Because of political concerns, presumably, they’ve recently actually gone out of their way to explain that their Romanian drilling is expected to be conventional gas exploration — no hydrofracking, though the term “unconventional” was used in their investor materials for a while in 2012 before they published that clarification this Summer. And their New Zealand exploration is in the Taranaki Basin, the only producing oil & gas area of New Zealand, where producers might use fracking but which are not the hugely prospective “oil seeps” areas of the eastern part of the North Island that are often touted as the “huge upside, low certainty” area for unconventional exploration when newsletters tease about the “next Bakken” being in New Zealand.

Interestingly, if the Thinkolator is correct this time around (and I’m 99% certain that it is), Curzio and Phase 1 were teasing the same stock in April 2012, about a year and a half ago. At the time he said much the same stuff, about how they have 700,000 prospective acres in a compelling shale play in the Transylvania Basin, carried by a large partner … and at the time, yes, East West was also expected to begin drilling in that area before the year was out, and was well-backed by cash with about $30 million in cash behind a $40 million market cap. In fact, the teasers are so nearly identical in parts that this helps me be certain the Thinkolator is right again — because that was a 100% certain and confirmed match.

Now the picture has changed slightly — it’s more like $22 million in cash and a $35 million market cap, and they’ve added the exposure to New Zealand that they didn’t have before, after bidding on some blocks in partnership with TAG Oil. The stock bounces around quite a bit … but in the intervening 18 months EW has not, in fact, given shareholders the opportunity for massive returns as was teased.

But maybe it will now? The ratification of their concessions in Romania was apparently the delay that kept them from beginning drilling with a Serbian subsidiary of Gazprom Neft last year (yes, Gazprom Neft is a subsidiary of Gazprom, though according to one of the presenters at the Value Investing Congress it’s far superior to the parent). The first of their four concessions wasn’t ratified and fully approved by all the relevant parts of the government until December of 2012, despite the fact that they won those bids in a competitive round in 2010, and they are still waiting on final ratification for the other three blocks. So that part of the “story” has not failed (yet, at least), it has just been delayed. Which isn’t all that rare, though it has starved them of catalysts that they were hoping would boost the shares. They thought that they would have their first drilling done last Fall, a year ago, because they characterized the government ministry approvals as a “formality”, but if it is a formality it’s been a long one in being formalized.

The work program that they say is fully funded is their first ten wells, roughly speaking — nine in New Zealand that they are paying a share of along with their partner TAG Oil, a process that’s been underway since July, and possibly one in Romania before the end of 2013. 2014’s work program in New Zealand is not necessarily “fully funded” by cash once those first nine wells are done, though they ought to still have close to $10 million left at the end of the year … and the Romanian part of the exploratory drilling is funded probably for a few years — that was farmed out to the Serbian arm of Gazprom Neft, who essentially got 85% interest in the fields in exchange for funding the initial stages of exploration and the first 12 wells — the obligation is for Gazprom Neft to drill at least two wells in 2014, and perhaps as many as 24 wells if they find success in the next couple years and move on to phase two of their exploration agreement. Those first three wells will be, I presume, in that one concession area that has been fully ratified by the government (“phase 1” of the first 12 wells is for Gazprom Neft to drill three wells in each of the four concessions, which at this rate could take a while).

The wells in New Zealand have not been gushers so far, though it is a proven region and they have found hydrocarbons that they say are worth flow testing, and the Romania drilling hasn’t started yet, which is one reason why there hasn’t been huge excitement in the stock … so we’re still really waiting to see what happens.

I’m willing to go along for the ride for a bit with some of my speculative cash to see how these results turn out — they should have some sort of flow results from their first couple of New Zealand wells over the next month or so, which might be the first catalyst (remember, catalysts can be either good or bad), and I wouldn’t be shocked if Romanian drilling doesn’t start until early next year, since government delays have been long already, but there should be at least some substantial idea of whether that first well is successful within the next four or five months, and the other two wells could follow quickly if they want them to (their operating partner has had successful wells less than a kilometer away from these blocks, so the equipment and processing capacity are both readily available). Their own recent updates are here on New Zealand, and here on Romania. They do also have (much) smaller interests in California, Morocco and India that are not particularly significant but could turn into something eventually.

So what do you think? Interested in a punt on a Phase 1 Investor idea that is absolutely teensy and risky, or is it too risky for your blood? Let us know with a comment below.


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