You can always count on a good story from a Phase 1 teaser — Phase 1 is the fancy top-of-the-line upgrade newsletter from Stansberry & Associates ($5,000/year, though it’s usually “on sale” for $3,000 when they’re promoting it as they are now), currently edited by Frank Curzio, and it has historically focused on lots of small-cap companies either in the natural resources or biotech space.

Over the last six months or so they’ve spun tales of the “Chi-Tab” computer revolutionizing the world, and of the “Supernova Gold” mother lode, and no matter what the tale is, I always get a ton of questions from my readers. Partly that’s because of the huge marketing reach of Stansberry and the rest of the Agoraplex, but partly it’s just because the stories are enticing.

So what is the story this time? Basically, it’s that Curzio has found a “dry drilling” company in Canada that is guarding “what could soon prove to be the most valuable financial secret in the world” in a new fracking technology. Here’s a little bit from the beginning of the letter to give you a taste:

“Why we spent $20,000 (and recruited a former CIA officer) to track down the tenants of this building

“(They’re closely guarding what could soon prove to be the most valuable financial secret in the world. Early investors could make a fortune in the next few years.)

“The company I’m going to share with you, is the most secretive firm we’ve ever come across in 11 years at S&A Research…

“They’ve never been profiled in Barron’s… The Wall Street Journal… Forbes… Fortune… or any other mainstream media publication.

“We even spent $20,000 on financial software (Capital IQ) – usually reserved for hedge funds – to research this company, and we came up empty. Something we’ve never seen happen before in our business.

“When we called the company’s office they refused to talk to us, and their General Counsel sent us an email stating they would not disclose the information we were looking for.”

I didn’t copy the photo over, but the “this building” part refers to a picture of an office building in downtown Calgary that they say they say is home to this “secretive” company. We’ve seen this tactic used in ads before a few times, showing a photo of the company’s office or building — I’d guess that’s because it reinforces the feeling that these newsletter guys must be for real because they’ve gone there and checked it out, and it gives some confidence that it’s a “real” company and not a fly by night stock promotion or something like that.

And Curzio tells us that this company is secretive because they’re “sitting on such a potentially lucrative opportunity, they don’t want their competitors to know what they’re doing.”

Really? Well, maybe. There are two parts to this — one is the huge opportunity of shale gas and shale oil, dependent on developments like hydrofracking and horizontal drilling, that have opened up lots of new oil and gas fields. That’s certainly true, and when the ad quotes an executive as saying that this is a “once in a century event” it’s a legitimate quote — but that’s not to say this particular company is necessarily at the heart of it. The ad draw the picture of the huge opportunity, which most of us have heard of and is certainly real …

… and then they talk about a specific company that they seem to think will revolutionize this business, and you can then draw the connection between a big opportunity and a big innovation, and start to see dollar signs dancing in your eyes.

The story actually leads off with the silliest part of the tease, this stuff about the company being so secretive that they won’t even expose their address or give the Stansberry folks the info they requested (more on that in a couple minutes), but they do actually get into some of the detail of what they say makes this company and their “secret” so special. Here’s some more from Curzio:

“the main reason I hired my ex–CIA contact to travel over 1,900 miles to go visit the secretive company.

“Because, the new resource find – which the small company sits in the middle of – may be the most potentially lucrative formation to date…

“And they hold the key to unlocking it….

“This new formation is located in a remote territory of Northern Canada, which according to the American Association of Petroleum Geologists, covers an astounding 3 million acres….

“Not surprisingly, Canadian Discovery Digest calls it ‘… The most significant [deposit] in North America.’

“‘The enormous [resource] potential will reshape global energy markets over the next decades,’ says Canada’s Globe and Mail.”

He then goes on to talk about the huge investments that are being made in this area of Canada by pretty much every oil company you can think of (and he lists ’em), and then he starts to tell us that this company isn’t going to buy the land, or extract the oil and gas.

“But suspiciously absent from this list is the secretive company we went to visit.

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...

“A company that won’t extract a drop of oil or gas from this new find… and who won’t set up a single drill rig, or tunnel 7,700 feet underground, either.

“Then what will they be doing?

“It’s the reason for the company’s intense secrecy…

“And why I expect this could create some of the biggest gains of any stock I’ve ever researched in my entire life.”

I know, right — are you just about so excited that you have to change your shorts? Me, too. So how about some details?

Well, we get a spiel about how these tight gas and shale gas fields in Canada — particularly the one teased above that’s such a hot ticket — are different from the shale fields in the US like the Barnett and the Marcellus. In Curzio’s words:

“Simply put, the traditional extraction methods won’t work in Canada.

“But that’s where this secretive company comes in…

“You see, this company has quietly developed the world’s most technologically advanced, patented process, for extracting natural gas without using any fluids.

“In short, they have developed a technique using nitrogen gas instead of water and chemicals.

“As the four page document stated –which my ex–CIA contact uncovered for me:’…Dry System Uses 100% Nitrogen Gas.’

We call it ‘dry drilling.'”

So now we’re getting somewhere. Here are a couple examples of this company’s work to help us narrow it down to which “secret” specialist he’s teasing:

“In over 400 wells, this nitrogen–based, ‘dry drilling’ technology has doubled the rate of production….

“For instance, on a project in Central Alberta, after two months of using this company’s patented process, they were able to extract 3.5 times more gas than regular methods.

“On another project in Southeast Alberta, after just one month, this company’s ‘dry drilling’ technology extracted 6 TIMES more natural gas versus conventional methods.”

Starting to get some stuff that I can feed into the mighty, mighty Thinkolator now … how about some more?

“… 3M – which makes everything from Post It Notes to contact lenses – wants a piece….

“They’ve given their financial and technological backing to this small company – and their dry drilling technology. ”

OK, good. And we also learn that …

“In October of 2010, ExxonMobil signed a licensing deal with this company.”

Curzio tells us that the client list is not public, but that …

“we do have good reason to believe that these guys are working with three major players involved in the big Canadian natural gas formation. “

So that’s pretty much it in terms of what we’re told about the company — Curzio tells us that they’ll get into more details when they have their special conference call on May 19, They’ve recently been doing these conference calls for their Phase 1 teaser picks, I’ve never heard one so don’t know what they’re likely to share — though unlike some previous conference calls they’ve promoted, the company CEO apparently won’t be on this one, they’ll be relying on their favorite wildcatter and on Matt Badiali for details … which probably flags this as a company that’s less investor relations and PR-focused than some tiny miners who’ve jumped at the chance to confab with S&A investors, but that’s not saying much.

But I told you I’d get more into the “fun” part with the ex-CIA guy, so …

The “secretive” nature of the company is, of course, questionable — it makes for a great story, but the part about hiring a “former CIA officer” to track them down is perhaps a little bit silly. They’re a public company, after all, and presumably a legitimate one, so why the secrecy?

Here’s the “expose” of their non-secret secret (their address):

“They claim to be located in a building in Alberta, Canada… but my research indicated the building contained an art gallery, a bank, a Merrill Lynch office, an Asian restaurant – but no sign of them.

“I even contacted the property manger of the building to verify their location, but he didn’t return my calls or emails.

“That’s when I decided to reach out to one of my top contacts – a former CIA officer –to investigate this company and uncover what they were hiding. “

This is apparently what the ex-Cia contact of Curzio’s told him:

“As you indicated, there’s no trace of these guys on the building registry, but I managed to bypass security and locate their office on the 29th floor. The secretary was well trained and wouldn’t answer a single question or allow me to meet with anyone. She didn’t even want to give me a business card. But your money was well spent. While I was there, I had access to a four–page document that confirmed everything you’d suspected.”

But what you really want to know is, who is it? Right?

Well, the Thinkolator did have to do a bit of work on this one — nice to get a workout for a change. And I can tell you that this is almost certainly …

Canyon Services Group (FRC in Toronto, CYSVF on the pink sheets)

Why is this the match? Well, first the silly part — they are in a building that looks exactly like the one in the photo from the teaser, and they are on the 29th floor (suite 2900, so they might have the whole floor — dunno). Their address, which they’re perfectly happy to disclose on their website and in their filings, is 255 5 Ave SW, in Calgary — in the Bow Valley complex of office buildings. And yes, there is a Merrill Lynch office in the same building as well as an art gallery, a bank branch, an asian restaurant, etc. And, this being Calgary, there are also lots of offices of other oil and gas companies.

And no, I don’t know or much care if their name is actually on the business directory in the building lobby, though I applaud the persistence of Curzio’s guy in going to check that.

But the business itself is a match, too — Canyon Services is an oil services company with specialization in, among other things, fracking and well stimulation. Here’s how they put it on their website:

“Canyon Services Group Inc., is a publicly traded (FRC-T) Canadian oilfield service company that provides specialized fracturing and well stimulation services.

“Our mission is to provide leading edge well stimulation and cementing technology to our customers. Canyon provides its services to our customers focusing in both conventional and unconventional reservoirs, including natural gas from fluid sensitive, low pressure formations, shales, and tight gas.”

And no, I didn’t need a secret code or handshake to access their website. The stock has done very well over the last year and a half, running from about $2 to near $15, and it’s near the top of that ladder now at about $13.50, and the only thing that seems particularly secretive about them to me is that they don’t issue a lot of press releases.

The company is of a decent size, with a market cap now at just under $900 million, and it seems to be very decently valued, with a trailing PE of about 14 and a 2011 PE of about 10, with analysts clearly expecting more significant growth in their earnings after that (the 2012 earnings are expected to be $1.71 a share, which would mean a forward PE of less than 8). They just started to pay a semiannual dividend of five cents a share back in January, so though it’s tiny (if they keep it steady, that means a yield of less than one percent) it is generally a good sign when a company that has significant capital investment plans also thinks it has the cash wherewithal to start paying a dividend.

Are they doing something secret that’s about to change the face of fracking? Well, on that you may have to make your own decisions. They are partnered with 3M on part of this advanced technology, 3M apparently helped to develop their “light weight proppant” (LWP) technology that they’ve trademarked, and the “dry drilling” technology is apparently their nitrogen-based fracking that uses nitrogen to inject the LWP — I don’t know how secret it is, since they’re trying to get customers and they have it on their website (they call it the “Grand Canyon Process”), but it does sound impressive to a layperson (that’s me). The nitrogen part isn’t new — lots of folks do fracking with nitrogen and some other folks do seem to call it “dry fracking” or “dry drilling,” but it’s specifically this new kind of proppant that’s a technological development specific to Canyon and 3M.

And they do have a licensing deal with ExxonMobil that was signed last October, so that’s another match — though it’s Canyon that’s licensing technology from ExxonMobil, details are in a press release here.

Not being ex-CIA (though I did interview there once — long story), I can’t say that I wrangled a special four page document out of them as Curzio’s guy apparently did, but I can say that you can find their investor presentation on their website here.

So what else should we know about them? Well, they do have offices that should be able to serve that hot new area of shale gas exploration in Canada that Curzio teases — I don’t know how precise he was being, but the big area in question is probably either the Montney Shale or the Montney and the Horn River Shale combined, all of which is part of a big push for discovery in northeastern British Columbia and just across the border in northwestern Alberta, and their office in Grande Prairie is probably in the heart of the action up there. It is a huge area with, as far as I can tell, somewhat challenging gas extraction demands and different fracking techniques.

I don’t know if Canyon has a particular edge on fracking technology in these newer shale discoveries, but they are certainly focusing broadly on the whole Western Canada Sedimentary Basin, which ranges from this area of BC through all of Alberta and Saskatchewan and further, and is the source for most of Canada’s oil and gas, and more particularly on the deeper basins that require more specialized (and expensive) equipment.

They have also recently pushed expansion on the eastern end of that range, into the Bakken, and though they are pushing this LWP and nitrogen fracking technology, that’s still described as experimental so I assume that most of their revenue still comes from somewhat more “standard” hydrofracking and they also provide a number of other related services, including nitrogen, sand and CO2 supply and application, coiled tubing, and acidizing stimulation. And no, I can’t explain very well what all of those are. They claim to have the most advanced pumping fleet, with great capability for the deep basins like Montney and Horn River (which require higher horsepower), and they have greatly increased their capacity in the last couple years, with more increases coming online this year. They do see the Horn River as a significant expansion opportunity.

So … it sounds like an intriguing investment, to be sure — I haven’t bought shares (thought I oughtta write to you about them first, which means even if I remain interested after reading further, I have to wait at least three days), but they are reasonably valued, they do have an interesting new technology with this “dry drilling” nitrogen suspended LWP that they hope will prove more effective than sand or other proppants (this is still in the experimental stage, as far as I can tell), and they are growing nicely and expanding services in a hot area … it could certainly lead to a backlash if natural gas prices collapse or even stay relatively low, since that should over time lead to less investment in extraction, but that’s a risk with any natural gas services company and it’s not particularly specific to Canyon.

Sound like the kind of stock you’d like to invest in? I’ll raise my hand and say I’m intrigued, the over-the-top teasing about secrecy seems silly but at first glance it looks like a real company with good growth and a good valuation, so I’ll be looking into it more closely. Let us know what you think with a comment below.

Thankfully, this is a somewhat larger company than usual for the Phase 1 folks, so we shouldn’t be making the stock price go crazy just because we’re writing about it here — though, of course, do be careful out there, the stock is down so far today and the Phase 1 folks and yours truly will probably have some influence on the shares (with the hype from them that builds interest, and the actual name and ticker symbol from us), and the bump from a newsletter recommendation, even a heavily promoted one, tends to erode over time … all else being equal (which it never is).

They release earnings on Tuesday and Curzio’s conference call is slated for May 19, so plenty could happen in the next few weeks. I won’t buy shares before earnings, since I’ve set my three day window as a trading rule, but I’ll be keeping an eye on them to see what happens next week.

Finally, if you’ve enjoyed (or not) a subscription to the pricey Phase 1 newsletter, we’d all like to know what you think — share your brief review over at Stock Gumshoe Reviews by clicking here. Thanks!