The infamous Ivanhoe Energy (NASDAQ:IVAN) is a stock either loved or hated. Depending on where you bought it or if you believe in what they’re doing. I’ve been following this tiny little company for almost half a decade. But my first orders went out in early 2008 after which I was allowed to trade around the position following a 200% move in six months. Then my attention moved to the bottoming U.S. markets in finance and housing. There was blood on the streets and the panic was coming in mid March. It was an electric moment on the trading desk. When I checked in on IVAN in early March around the time of the U.S. bottom, IVAN was offered for $0.60, nine months after I unloaded at an average of $3.40. This stock was definitely one of those I would put a bucket under and collect the cascading waterfall sell-off.
What started out as a trade turned into a series of rapid fire M&A transactions that within 12 months had transitioned the company into a new entity. The first major M&A transaction was acquiring Talisman in 2008, which gave it approximately 7,660 acres of a contiguous block in the Canadian Athabasca region. Companies keep their M&A tactics tightly secret, especially in wildcat drilling and new frontiers. The overall strategy wasn't yet clear but when you factor in the complete divestiture of their US assets combined with the acquisition of Talisman and the Ecuadorian plus Mongolian & Chinese pick-ups, all of a sudden, the “proof of concept” became an integrated oil and gas developer with new technology and drills going into the ground and an HTL sight going into production in Ecuador. Aligned with the Ecuadorean state oil company to explore and develop Pungarayacu, a heavy oil field, its HTL technology is being deployed in the field to upgrade heavy oil on site for easier transport via pipeline while recycling natural gas into clean burning fuel to be used as energy to transport to the refinery, further improving the efficiency ratio.
The Mongolian transaction delivered rights to develop 4.2 million acres in the massive Nyalga basin. This is especially important if you dig up the 1990 report BP (NYSE:BP) conducted on that exact block, the Block XVI that IVAN has dug into now. The rapid expansion of interest in the Mongolian Basin is due to 70 years of former USSR dominance and control over the country, which restricted drilling activities in the region to Exploration and R&D. But the BP report of 1990 implicates Block XVI as having a significant amount of surface level bitumen present. Moreover, that area is surrounded by a recent find of almost 1 billion barrels of light sweet crude in China.
The drills went in during Q4 of 2010. Advances in technology are allowing more environmentally sound and efficient energy extraction from remote locations. The company uses Syntroleum’s (NASDAQ:SYNM) technology to convert natural gas into clean fuel on location for use in transport rather than just burning the gas off. The idea is to make each well self sufficient in water, energy and self sustainable, which allows for partial refinement prior to shipment of the extracted product. I’ve always said ... never a trade based on a chart, only a chart based on a trade. Meaning, use the charts after you make up your mind whether you like the stock or not. Then refer to the chart for assistance in timing your entry or exit. It’s always best to buy after an extended regression that follows a strong rally to multi-year highs. We’re in an inflationary environment; the U.S. driving season is upon us and gas is expensive. With multiple macro and micro variables, along with quantitative qualifiers and smart M&A transactions that appear to be clearing the short sellers out as they get scared of multiple transactions, buying into the regression of 25% gives the buyer the benefit of Soros’ elasticity theory.
For example, as the company was testing highs in March of this year, out comes a “company” report that spooks investors into an overnight 30% haircut. Exxon Mobil’s (NYSE:XOM) corporate treasury is always buying and selling company stock. But unlike most treasuries, which retire stock they buy off the market to increase EPS, Exxon uses its tactics to buy its own stock at cheap prices with the benefit of inside knowledge, and then parks the stock without retiring it; waiting to use it for a big acquisition. Using cheaply bought stock as acquisition currency later is tremendously tax efficient and very smart for the worlds few largest companies in existence. Point being companies always intentionally behave in ways by saying things, or issuing power points that if slightly misinterpreted, could turn into an out of control rumor, slamming the stock heavily. Tech companies in the ‘90s were notorious for pulling off these stunts with Microsoft (NASDAQ:MSFT) setting the example for others to follow. Since stock options were a critical part of compensation and retention, when employees cashed in millions of shares per month, the treasury had to sterilize that new stock to prevent a hit to earnings. But the company hates paying a premium for its own stock so they’ll make an off the cuff remark followed by a block for sale to a natural buyer. This sequence results in a flash crash, and the treasury can buy the stock back below the exercise price. Did IVAN do this in March of 2011? A power point comes out on the site and the stock takes three gaps down then fully recovers with equally aggressive upside gaps?
Behavior shows bulls in control and after testing the $3.75 level for a third time. A 25% correction has closed what would be an exhaustion gap, and the six year chart looks like and is in fact a textbook inverse H&S pattern. But that merely implies long-term accumulation is underway, and the stock is rotating into new hands with much longer time horizons. Long-term accumulation removes the stock from the tradable float because the stock won’t return to the market until at least a 10 bagger. The chart is an illustration of the transformation of the company from a “proof of concept” to an integrated producer using new edge technology that improves the efficiency ratio of heavy sulfur bitumen, introduces crucial refinement at the site, recycles the gas into a clean fuel used for transport and leaves a very small carbon footprint relative to primitive open hole mining.
Keep an eye on buyers at $2.65. I see an iceberg bid that seems to have some serious mass in reserve. But whoever that buyer is might pull the bid to let the stock drop to $2.25 where several quantitative variables converge and creating that magnet effect. Monitor to see if it makes this turn successfully or drops under $2.65. If so, then bid $2.25- $2.35. Otherwise, back above $2.75 start building a line. Aggressive traders should start passively building one here, and adding if there’s a quick move to $2.25.
I have no doubt these flurry of transactions over the past three years have been the result of absolute and final proof of concept and ideal knowledge of where to target because they were sent samples by every company from every corner of the globe to test their technology. In the process of testing other firm’s bitumen, they learned where the ideal bitumen existed for them to focus on, which I’m very glad to see that as their strategy rather than a technology developer for sale or lease. They were successful enough in proving the efficiency to get the capital and liquidity to pull off the transactions necessary to let them focus. Since they poked holes in Q4, a possible announcement may come soon, which is why the stock is behaving like this. It’s gapping all over the place, which says there are large buyers and sellers on the open and close of the market. That’s pure institutional interest. A break above $4 will send this stock running. That will be a milestone to celebrate. A gap open above four after a rally to the $3.40 level is a monster long term breakaway. That is the ideal scenario. I’ll keep this in front of everyone as I maintain my ears on the ground with IVAN. Remember, this is a long-term play and those of you that take six-figure-share sizes, trade around the position to capture that extra alpha when possible. The original article is on InvestmentCapitalist.com, also picked up by Seeking Alpha. There have been two major corrections since, this present one being the second.
Disclosure: Author owns a position in IVAN and plans to continue buying it at opportunistic intervals and prices. Please check with your investment advisor or broker on the suitability of any investment. Never construe this article as a recommendation to buy or sell the stock. It is merely for informational purposes and a way for the author to share some insights with his followers.