February 2009
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Pearl Exploration and Production Ltd
February 2009
Folks, we’ve got a great one for you this month. Let me introduce you to one of the best investments to come across my desk in a while. It’s got all the elements necessary for a win-win situation, because the folks calling the shots have done it all and done it well before. The company is Pearl Exploration and Production Ltd. and I am very excited about how the future looks like for this company.
In this report we will draw many comparisons between Pearl and BlackRock Ventures (BVI) for reasons we’ll lay out in this article. First a little background on my experience with BVI: US investors in Black Rock Ventures benefitted from a variety of factors including the price of oil. Share prices rose steadily, so investors like me that bought at $4 and sold at $24 had a 600% gain on the share price. Now, this was compounded by a 31% increase in currency. So, after making 600%, add another 180% for a total gain of 780%. I fully expect the same factors to be working for PXX moving forward. It is my opinion that the stock price of Pearl will follow the same pattern as BVI. To prove my point, we’re going to compare oil price, capital structure and currency gain. After that,
you’ll have to make up your own mind. I know which way I’m going….
Among the many comparisons between BVI and PXX there is one thing that remains the same – and this is the most important aspect of what we’re talking about here. Heading up the team both at BlackRock and at Pearl are John Festival, President; Don Cook, CFO; the Pearl team ads Ed Sobel as Vice President of Exploration and Chris Hogue as Vice President of Operations. Remember the old Zapata George adage – we don’t buy companies, we buy management. We bought into this management once before – at BlackRock – and we’re going to buy the same management this time, just with a different name over the door. It’s not the company, friends, it’s the people.
Bear in mind that this sane, well seasoned and competent management team is not taking off in a new direction. They’re doing the same thing that they did at Koch, and the same thing that they did at BVI. Heavy oil is their area of expertise, and that’s what they’re doing at Pearl – nothing new, same old story and same expert team. Another Zapata George adage… “If it ain't broke, don’t fix it!”
The mission as it stands for Pearl is basically the same as it was for BlackRock, utilizing a three prong approach. There’s a small property that will generate cash in the short term. There’s a long term big property with a very large reserve of oil that can only be achieved through strong secondary recovery methods such as steam, but that holds vast potential. The wild card is the middle “prong” so to speak, which has yet to be identified. There is the potential for Pearl to have a scenario such as Seal was for BlackRock. Through the utilization of this “we’re not going to go out of business” philosophy, the management has shown that they can, and will, make Pearl a success. So, with a long term goal in mind and some intermediate moves that will allow for prosperity, this could go very well. Now remember folks…none of this previous paragraph came from management. These are my projections, not theirs.
Now, let’s do some of those comparisons we talked about.
Price of oil comparison:
We purchased BVI beginning in 2003. The price of oil at that time was around $30. We sold in spring of ‘06, with oil priced at almost $70 dollars. Purchasing Pearl, Feb. ’09 – shares at .68 Canadian (02-25-2009 closing price) cents and oil trading in the low $40s. I expect oil to rise during the holding period to upwards of $220. It took three years for oil to go from $30 to $70 with BlackRock. It will not take any more three years for oil to go from $40 to $220 with Pearl.
Comparing the capitalization and the price of shares:
BlackRock had approximately 50 million shares outstanding and sold for about $4 when we began to accumulate it. (Total cap of $200 million)
Pearl has 200 million shares out standing and a price of less than .70 Canadian. These are approximately the same market caps at the point of accumulation for both companies. Obviously, BlackRock was sold at $24 on the Shell takeover in the spring of 2006. Naturally, anywhere along the line Pearl could become the object of takeover plans by other companies. I am in hopes that we will be able to hold this one together for its ultimate outcome.
When I was buying BlackRock Ventures – I bought it at $4.10, $5.50, $7.00, $9.00, $12.00, $15.00 and $18.00 and sold at $24.00.
I had a very rosy projection for BVI. I had believed that if we had been able to hold it together for another two or two and a half years we would have been looking at a price of $70 per share. Perhaps I would have been wrong. Choosing
the rosiest of scenarios for our discussion here – and let me remind you that these numbers are mine and mine alone, not management numbers – the calculations are as follows:
Anticipating a rise in production over an extended period of time from 6000 bbl per day to 40,000 bbl per day, times 360 days, times $100 per bbl produces a $7.20 per share revenue. If you take a company valued at 3 times revenue then at that point the shares should be worth $21.60. However, I suspect that Pearl will not be viewed at three times revenues, but because we use $100 as the price of oil in our calculation, we may be looking at something north of $200 and then the revenues would be valued at $20 giving us then a very rosy, rosy picture of $144 per share. Note Current Price: $.55 per share.
Production:
When we began to purchase BVI they were producing fewer than 12k bbl of oil per day. Same is true with Pearl. Production had risen dramatically before the sale of BVI stock at $24. I fully expect that over an extended period of time the oil production per day at Pearl will also greatly increase, and could reach 40k BOBD.
Currency:
Anticipated currency factor: Currently, Canadian Dollars are available for roughly .80 USD. We are investing low. During the anticipated holding period, I expect the value of the Canadian Dollar to rise to 1.20 against the US Dollar, realizing a 50% increase from that factor alone.
Now, when you combine all of these parallels which are easily drawn between Pearl and BVI, (which, by the way, we sold for 6 times what we bought it for), I fully expect the conditions will be of much greater benefit to Pearl than they were to BlackRock. Honestly, I am not looking for a six-fold increase but one closer to 20. Again, though, I remind you…these are my estimates and mine alone and have no concurrence from management.
Okay, so how long will all this take? It could take five or six years, and chances are we will get taken out before we achieve the full fruition of these comparisons. Pearl is a public company and anyone can buy the whole thing at any time. If that happens, I guess we’ll just have to wait for Mr. Festival to start yet another company.
Is it time to start accumulating?
Folks, it's up to you, but I've seen this movie before and I am buying a ticket to see it again.
Chart Courtesy of StockCharts.com
Please click on the image below to link to the Pearl Website
For the purpose of full disclosure, George Blake has purchased a position in Pearl Exploration and Production Ltd.
As always, when we make a new investment, we do not put all of our eggs in the basket at the same time. This is a long term investment. Due to the recent volatility in the market in the next several months we may be given an opportunity to buy it at a lower price. However, when a stock begins to move steadily forward as did BVI, we will be buying it at gradually higher prices, but only as it is proven that the management team is carrying out the game plan. So…beware short term market volatility, don’t put all your eggs in at one time, and be prepared to buy the stock on a three year basis.
Monthly Markets Update
S &P Index
We now have established a definite bottom at the 750 level. It is mandatory that this bottom or something near it holds solid. The 50 day moving average line on an intermediate term basis has flattened. 200 day is still declining but at a lesser rate. Right now the S&P needs to move above 850 for the confirmation of the double bottom.
Crude
We’ve had a sterling week – in fact, one of the nicest weeks in some time. We have broached the 50 day moving average; we won’t confirm that until it is successfully above $45, which it is not as I speak. But, we now have a strong indication of an intermediate – perhaps even a long term – bottom from the late December lows; they were never officially broached. So here we are at the 50 day moving average. I’m looking for much positive and I’m looking for it very quickly.
Gold
Gold may suffer in a ratio between gold and crude oil. I’ve recently published some long- term 42-year charts on that subject, and some commentary is available in this letter. We did not exceed last March’s high. We came close to it, we penetrated $1000 but then we pulled back. We’re in a consolidation phase that could last literally for months. The charts will allow a multiple month consolidation in gold.
US Dollar Index
Let’s take a look at the US Dollar index. This is literally a phenomenon. It defies gravity. In my mind it’s unbelievable that it is able to keep the hold as the level it is at. We’re at the 88 level, that’s right up against recent highs. You have to go back many, many months to see a higher level significantly. This is a market that will have to play itself out. There is now way I can make a prediction from the charts, they’re just not telling us anything at this time.
Natural Gas
Now, my personal favorite, Natural Gas: We’re still at the lowest price in way over a year; a long ways from $13 of last July. We are teasing the $4 level, literally $4 even. One day we even traded below it. We have to get to $5 to even get a hint of a change in trend. We’re so far away from this one the only thing we can say is “Yep, it’s still down folks.” So, we shall wait for the fundamentals to come to our rescue.
Peak Oil – One Last Thought
As you know the world is divided on two sides on the question of peak oil production. That thing that Mr. M. King Hubbert said back in 1959 would happen in the United States in 1970. It did. He said that the world would peak in 2005. It has. There are just many who won’t accept it. I just have this comment: Most of you have seen the movie Titanic. After the side was ripped by the big iceberg the damage reports were forwarded to the designer. After reviewing the reports, he wired back to the captain saying “Your ship will sink.” Our designer in this instance is M. King Hubbert. He has told us that this ship of ours will sink. On the Titanic the word was put out to basically abandon ship. There were those passengers who said Hey…this thing is unsinkable. I’m not getting into that cold water. There were people who believed the man who designed the boat who said this ship will sink, and they got into the lifeboats. Now, there are people who have believed in Peak Oil because Mr. Hubbert was right the first time. Those of us who have believed Mr. Hubbert have already gotten into the lifeboats and secured our position for the future. Those of you who have chosen to remain on the Titanic of disbelief will suffer the consequences just like the passengers on that ill fated boat. And I’ll try not to say “I told you so!”
Image: Willie Stower
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We publish the No Bull Strategy Newsletter and Reports. It is a monthly newsletter enhanced with audio and video placed on this website in which we discuss energy, along with precious metals, base metals, minerals, commodities (George calls it stuff) and the financial markets. Attention will be given to various mineral, energy, commodity and resource companies or products that George believes offer excellent investment potential, as an investor, you take advantage of direct frequent contact of companies and their officers. As a shareholder, you have a vested interest in the company. Financial statements, corporate charters, board membership, contract details, and other critical information should be made available for close review upon request. "No Bull Strategy" is written and published by, "Zapata" George Blake and ContraryInvestorsCafe.com and is made available only for information purposes. In the past George has always owned, almost without exception, every stock that was recommended. In this letter it will be impossible for him to own every one. So this way, we will not, I
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