Lots of questions rolling in from the Gumshoe faithful about this ad today — it’s a teaser from Matt Badiali and his S&A Resource Report, and it’s all about the massive oil shale resources in China, and how to profit from them.
Here’s how the pitch begins:
“World’s Largest Oil Shale Field Discovered… in China?
“Just when you thought the China story couldn’t get any bigger… the Chinese make a massive discovery.
“Inside this report: Early investors made a fortune in Bakken Shale (3,685%), Barnett Shale (1,213%) and the Canadian tar sands (5,700%). But that’s nothing compared to what’s likely coming…”
So I can see why so many questions are pouring in here at Gumshoe Headquarters — which is, thanks for asking, in a complete tizzy over our planned move, so please forgive if the Gumshoe is slow to respond to questions over the next couple months.
That sounds like an enticing promise, indeed — a chance for folks who missed the big stock booms from the Bakken Shale to get in on something even bigger.
Badiali (well, his copywriter, at least) draws a compelling picture of China’s energy demand, to get us started:
“I’m sure I don’t have to tell you that China is ravenous for energy…
“According to the International Energy Agency, they will become the world’s largest consumer of energy by the end of this year.
“What you might not know is just how desperate they are…Are you getting our free Daily Update
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“‘For the Chinese leadership,’ reports MSNBC, ‘survival depends on maintaining momentum, which is why Chinese companies have struck out in all directions to secure oil deals.’
“Adds Dr. ZhongXiang Zhang of the East-West Institute in Hawaii: ‘[It’s] a national security issue.’
“No wonder, in just one month alone, China spent $41 billion securing oil supplies from all over the world….”
And he goes on to explain the huge demand drivers — the rapid increase in auto sales, the continuing huge demand for energy from Chinese factories. Which leads us to the discussion of the potential supply in China’s shale fields:
“To date, China’s ‘proven’ shale reserves — the oil they already know for a fact is in the ground — amounts to 32 billion tons. Or as much as 23 billion barrels.
“But that’s not counting the potential reserves still sitting underground.
“According to JL Qian of China’s University of Petroleum, the potential shale reserves could be as high as 600 billion tons. Or as much as 428 billion barrels.
“To put that in perspective, that’s more than all the proven reserves in Iraq and Saudi Arabia, combined.
“And that’s just the oil. China’s shale gas reserve could singlehandedly supply the country for over three centuries.
“If oil firms working the Piceance Basin made 500%-1,200% for their investors…
“How much do you think you could make from this massive find?
“In my mind, there’s simply no precedent — and virtually no limit — to the amount of money that could be made.”
Then he goes on to describe the latest agreement between the US and China, over clean energy, greenhouse gases, and, more importantly for our current purposes, the development of shale oil … this was called the U.S.-China Shale Gas Resource Initiative, all about partnering to develop extraction technologies and promote investment in Chinese shale projects (you can see the gummint press release here).
Are you salivating yet? That’s the idea, after all, that you’ll be so excited about the potential at this point that you’ll have set aside all your worries, qualms and concerns … and now, we start to hear about the actual company that Badiali is teasing — the way you can invest and get rich from the potential of China’s shale:
“This Stock Could Simply Explode
“You have to understand, the shale industry in China is in its infancy…
“And while geologists all agree that the potential is massive, this trend is only just beginning.
“In America, the first companies in — and the first ones to make investors rich — were the exploration companies with the technology to assess what exactly was underground.
“This is known as a ‘seismic’ image in the oil and gas world, which is a fancy way of saying ‘big underground map.’
“Just look at a company like CGG Veritas (CGV), one of the most prolific seismic companies in the world today, with projects all over the globe — including the Bakken formation and the Haynesville, a shale deposit in northeast Texas.
“During the manic years of America’s shale boom (a period we’re poised to see in China) CGV soared from less than $3 a share to more than $60 — a 2,000% gain.”
OK, so that’s the comparison to get us excited — in the last boom, CCG Veritas got rich … who will get rich in this boom? Finally, some actual clues …
“No western company is going to get close to China’s shale reserve without first partnering with a Chinese oil firm — which, as I’m sure you know, is basically like partnering with the Chinese government itself.
“This is how China maintains ‘control’ over its resources.
“As you can imagine, that shrinks the list of potential players down dramatically… which makes picking the winners that much easier.
“Which brings me to our first target…
“The first company I predict could make a fortune in China is a tiny seismic imaging firm based out of Houston, Texas.
“Despite its small size (market cap about $600 million) this company was actually created back in the 1960s, making it one of the oldest and most experienced firms in the sector… with a long history of innovation…. In 1988, they pioneered a totally independent seismic platform that single- handedly moved the oil industry away from old 2D imaging technology and into 3D.
“And today, they’re developing a new technology called ‘full-wave,’ which, I can tell you as a lifelong geologist, is poised the overhaul the industry once again.
“Perhaps that’s why they’ve become a global leader in seismic exploration, with operations in Europe, the Middle East, the former Soviet Union and North America…
“Perhaps that’s why they were among the first to successfully explore America’s major shale basins — including the Barnett, the Haynesville, the Bakken, the Marcellus, and the Fayetteville…
“And perhaps that’s why they’ve also just been tapped by the Chinese government… to pioneer their massive new shale effort…
“On March 27, 2010, this tiny firm formed a joint venture with a subsidiary of China National Petroleum Corp. (CNPC) — one of China’s three huge state-run oil firms.
“As part of the agreement, this tiny company will ship equipment and technology — including their new ‘full-wave’ system — right into the heart China’s shale movement…
“And work exclusively with the Chinese to start exploring their shale fields.
“Says the CEO of this tiny firm: ‘This transaction will create [a company] capable of seizing high-value opportunities in the fastest-growing geophysical markets.'”
And the promise is, well, promising:
“This is the only western seismic company that’s been tapped by the Chinese government.
“Now, the firm expects to triple their land-based seismic market share with this deal. Running the numbers, that means their stock could easily quadruple from here.
“But it could grow much, much more than that…
“… now that the Chinese government (and Chinese oil industry… and the entire future of the Chinese economy) has a direct stake in the success of this tiny company, I expect them to receive the same preferential treatment (read: monopolistic rights) as every other state-run firm in China.”
Phew … OK, that’s a lot of info and a lot of clues. And there’s even more teasing in this same ad, with a couple oil companies that are also poised to profit, I can tell you more about those in another article but today let’s just throw all this in the Thinkolator so we can figger out who our seismic company is …
And reliable as ever, the Thinkolator spits out our answer: Ion Geophysical (IO — click here for the free trend analysis of IO from Marketclub, one of my advertising partners)
Ion’s agreement with the Chinese is through a joint venture arrangement, the joint venture is called INOVA Geophysical and it’s 49% owned by Ion and 51% owned by BGP, which is the world’s largest seismic contractor … and which happens to be a subsidiary of China National Petroleum Corporation (CNPC). You can see the press release about that here if you like.
There are a number of other seismic companies out there, but this is certainly one of the most talked-about in newsletter land, though a lot of that chatter was back in 2008 when oil was shooting for new highs and IO (and most other oil service companies) were going crazy, for a while it got up over $15 a share before collapsing when oil and the markets fell apart, getting down to under $2 a share when the world was coming to an end. It has come back strong from those lows, and if you wanted to buy shares now it would cost you about $6 a share. The market cap and price are up slightly from when the teaser must have been put together a couple weeks back (the stock lingered around $5 through the end of March, but is up a bit from there and now has a market cap of about $720 million).
So the company is still quite small, at least compared to CGG Veritas (CGV), which is the biggest public oil service company in this little sub-sector of seismic studies and data analysis. It’s quite a bit larger than the other public company I often see mentioned in the sector, Dawson Geophysical, which comes in at a bit over $200 million … and, perhaps most interestingly, IO has the highest gross margins of all three, which indicates that they’re possibly getting better pricing, perhaps because of advanced technologies or better management. I haven’t looked into why that is, it could just be a more profitable business mix or a fluke, but it did catch my attention.
CGV, as the giant in the field, has been consistently profitable and trades at a forward PE of 21. DWSN and IO are both coming out of unprofitable years and expected to move into the black this year, though the forward estimates tell us that IO is far cheaper, with a forward PE of 16 compared to DWSN’s 60+. That’s still based on estimates, and doesn’t tell us anything about why DWSN is trading at such a premium price (perhaps there are bigger expectations further out), but from a quick look at the financial basics I’d say that IO stands out as more appealing even if we don’t make big assumptions about the riches coming from Chinese shale exploration.
What do you think? Excited about the potential of IO or anyone else in the seismic space? Worried that the slowdown in US offshore drilling that we’re likely to see as a result of the massive spill in the Gulf will cut into their business? Have harsh memories of IO’s cruel fall from grace a couple years ago? Let us know with a comment below.
And we’ve heard from many, many subscribers to the S&A Resource Report, with a general favorable impression (this is the top-ranked of the Stansberry letters, perhaps in part because it’s one of the least expensive) … but we always want to know more, if you’ve ever subscribed to this newsletter please click here to share your thoughts. Thanks!
If you’re excited about other opportunities in China through oil companies, I’ll try to follow up and look into the other companies he teased soon … have a great week!