After writing about Virtus Oil and Gas (OTCQB:VOIL) a couple of weeks ago some allegations appeared suggesting the stock was nothing more than a stock promotion. During this time period, the stock surged after a well-published promotion and then plunged following the publication of a bearish article on Seeking Alpha. The stock now sits at $1.19, solidly above where it was when the original article was written.
For those new to the story, Virtus Oil and Gas is a U.S. oil and gas exploration company that launched in October 2013. The company is planning to drill a 12,000-foot deep test well in central Utah by September 2015 at an estimated cost of $2.5 million. It hopes to discover oil in the Central Utah Thrust Belt Region. A research report by Gustavson Associates details the potential for sizable amounts of oil in the acreage leased by the company.
Anybody who read the first article should know that the company plans to drill just one well making it obviously a very risky stock even prior to the allegations of a stock promotion scam. With no historical revenue and limited assets besides oil and gas interests, investors are placing a high bet that its drilling program will tap a sizable oil and gas reservoir and that the company will obtain decent financing to move forward.
When originally studying the story, I wasn't aware of a pending stock promotion. Nonetheless, it's one of the risks that one undertakes investing in a micro-cap stock. The situation reminds me of some of the hot patent stocks with limited assets other than patents or even Chinese reverse merger stocks that everybody claimed a few years back were all frauds. The news doesn't necessarily change the story, but the higher stock price and promotional concerns should give investors a reason to pause until the dust settles.
Following the release of the original article, The Moskowitz Report issued a stock promotion on Virtus Oil and Gas that clearly identified the firm was paid $5,000 by YXIME Partners to publish the report. Even worse, the report has a big disclaimer that the publisher made no attempt to identify whether the YXIME Partners owned any position in Virtus Oil and Gas that would benefit from the publishing of the report. The stock immediately shot up to $1.50 in the next week after only trading around $0.74 the weeks prior to the promotion. The stock though had limited volume prior to the paid promotion by Moskowitz making it worth noting that the real potential to profit would be to short the stock following the promotion and ride it down based on a negative report highlighting the promotion.
Anybody looking at the report from Moskowitz should immediately question the highly promotional nature of the report. The report uses a ton of graphics and references to well financed and successful oil firms to make the comparison to Virtus. Remember that Virtus has potential, but until it successfully drills the first well and raises a ton of cash, one cannot view it in the nature of this highly promotional report.
For its part, the company issued a press release denying any involvement in the promotion.
The article presented by Penny Stock Realist appears to suggest that the stock is an automatic scam due to the stock promotion and lack of financial assets. The article lists a bunch of past failures, but it fails to admit that the very nature of these stocks is that business plans don't always work out. It doesn't make the stock a scam especially considering a stock promotion isn't necessarily paid for by a company. Somebody hoping to manipulate a thinly traded stock could've engaged in such an activity.
Possibly the biggest discrepancy in the short thesis is that Virtus is a scam due to the shady past of the former CEO. The new executives all appear legitimate with the CFO being a former auditor with PWC and KPMG and the COO has experience at Anadarko amongst other well-known energy firms, including heavy involvement in several large scale land deals. Not to mention, it seems very unlikely that a published author with a doctorate would agree to work as Exploration Director at a stock promotion scam.
The Chinese reverse mergers are a perfect example of where investors now make false assumptions on all the related stocks. A study by three professors including Charles M.C. Lee of Stanford University concluded that these Chinese stocks weren't inherently toxic. The study found that the Chinese reverse mergers actually outperformed U.S. peers in several important categories including survival rate. In the same light, a stock promotion doesn't ensure that the stock is a scam.
Even a stock with a market cap of $6.5 billion can have Wall Street legends fight over whether it is a scam. Pershing Square led by Bill Ackman continues to claim that Herbalife Ltd. (NYSE:HLF) is a pyramid scheme while Carl Icahn famously bought shares on the original plunge following fraud allegations. The multilevel marketer continues to face more allegations of a pyramid scheme including the latest by the business dean at the College of New Jersey.
While these examples are on different levels, it does provide prime examples of where allegations of stock scams aren't always true. Herbalife might be an extreme example compared to Virtus, but it highlights how what appears like an automatic scam to one group isn't always accurate.
This whole situation with Virtus Oil and Gas calls for investors to be more alert and understanding of investment positions. Investors should never buy a stock solely on a paid promotion, and allegations of fraud aren't always accurate. Anybody owning or holding the stock prior to The Moskowitz Report should've probably dumped the stock with a nice profit and let the dust settle on the promotional aspects. While the stock doesn't have a lot of assets, it does have access to a prime lease covering a reported large sum of oil reserves. Until the Gustavson Associates report is refuted or these new executives are deemed in question, the investment thesis holds. Instead of chasing the stock, investors should let all the excitement settle down and likely the stock price before entering a position.
The company still needs to show investors it can raise cash and produce results or it is just as likely to end up in the pile heap suggested by my fellow Seeking Alpha contributor due to failed operations as much as a stock scam.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.