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  • Petrodorado Energy: The Cheapest Energy Explorer In Colombia Has Significant Upside Potential


    After analyzing five energy producers from Colombia over the last two years, I believe that the time has come for me to present an energy explorer. Given that there is not another article about this obscure explorer to date, you will likely hear it here first. I am talking about Petrodorado Energy (OTC:PTRDF). The company's main board is the Toronto Venture (ticker: PDQ) and the average daily volume over the last 3 months is 550,000 shares (Yahoo/finance).

    To overlook Petrodorado due to its micro cap stature, would be foolish. The cowl does not make the monk, you know this.

    Petrodorado's stock is currently trading for cash value, while the company is entering in exciting times. As such, getting shares of this overlooked explorer might be a challenge worth pursuing, given that there are several ongoing catalysts with transformative potential. For those investors who carve out part of their investment capital to buy energy explorers, Petrodorado currently has the best risk/reward ratio among all the energy explorers in Colombia. And I am going to prove this in the next paragraphs.

    The Common Misconceptions About The Penny Stocks

    Petrodorado currently is a penny stock, but it would be foolish to overlook Petrodorado due to its micro cap stature. I am saying this because several financial advisors will tell you that investing in penny stocks is inherently and necessarily riskier than investing in non-penny stocks. As such, many retail investors often steer away from stocks that trade for less than $5 per share, let alone $1 per share.

    Me personally, I have debunked this myth over the last fifteen years or so. And before analyzing Petrodorado, I will debunk this myth by pointing out a few recent facts about the common misconceptions and generalities related with the penny stocks:

    1) The SEC has this to say about the risks of micro-cap stocks: "While all investments involve risk, microcap stocks are among the most risky. Many microcap companies tend to be new and have no proven track record. Some of these companies have no assets or operations. Others have products and services that are still in development or have yet to be tested in the market."

    2) The price does not mean anything about the quality of a company, nor does it indicate its upside or downside potential: I have seen numerous companies, whose stocks have gone from $1+ to $1- and vice versa over the last 25 years I have been investing in the international stock markets. I am sure I am not the only one who has seen this. For instance:

    A) If you thought that Quicksilver Resources (NYSE:KWK) was a great company for you to invest in just because it traded higher than $1 per share, you were grossly mistaken, as shown at the company's chart:

    (click to enlarge)

    In April 2014, I was heavily bearish on Quicksilver Resources, when its stock was at $2.83. I warned all about the company's dismal quarterly numbers and significant downside risk. I said that Quicksilver was at the mercy of its creditors, and I recommended the investors to not bet on this highly risky company.

    I received a lot of messages from Quicksilver's bulls who laughed at me back then. I also disagreed with some fellow SA contributors who were very bullish on this energy producer, as shown here.

    The fact is that the stock has dropped a lot since then. And just one month ago when the stock was at approximately $1.3 per share, I reiterated my bearish call on Quicksilver, noting also that the company might go broke by 2016. I added that an immediate debt restructuring was a Must-Do, given that Quicksilver was kicking the can down the road for many months.

    Global Hunter Securities showed up and downgraded the stock from "Accumulate" to "Neutral" in August 2014. Yes, you read this correctly. I have been heavily bearish on Quicksilver since April 2014, while Global Hunter was telling her clients to "Accumulate KWK" from April 2014 until August 2014.

    Moody's was also very late in joining my bearish club. Moody's downgraded Quicksilver Resources and its debt last week. This is from Moody's: "The downgrade to Caa3 reflects our view that Quicksilver Resources' risk of default has further increased," said Pete Speer, Moody's Senior Vice President.

    Where were Global Hunter and Moody's in April 2014, when I was heavily bearish on Quicksilver at $2.83? They hire highly paid analysts who supposedly have the experience to foresee these risks and warn the investors about the upcoming storm in a timely manner. Why didn't they show up to let us know about these risks, when the stock was at $2.83? Where is their competence and their analytical skills?

    And please do not get me wrong but I have seen this movie many times. I am full of those investors and SA readers who even laugh at me when they first read about my calls (bullish and bearish). They often end up joining my "camp" with a few months delay.

    Quicksilver's stock currently lies at approximately $0.60, and my continued bearish articles about Quicksilver are here and here.

    B) If you thought that ATP Oil and Gas (OTC:ATPAQ) was another great company for you to invest in just because it traded higher than $5 per share, you were grossly mistaken again, as shown at the company's chart:

    (click to enlarge)

    ATP Oil & Gas was just another energy company that plunged because of its high Net Debt to EBITDA ratio.

    C) If you thought that James River Coal (OTCPK:JRCCQ) was another great company for you to invest in just because it traded higher than $1 per share, you were grossly mistaken once again. The company was heavily indebted company, became a penny stock a few months ago and filed for bankruptcy recently, as shown below:

    (click to enlarge)

    D) If you thought that Lone Pine Resources (OTCQB:LPRIQ) was another unique buying opportunity just because it traded higher than $1 per share, you were delusional, as shown at the company's chart:

    (click to enlarge)

    Lone Pine Resources was a spin-off of Forest Oil that began bankruptcy proceedings in H2 2013 under Chapter 15 of the United States Bankruptcy Code. Obviously, Lone Pine Resources was another non-penny stock that fell into the penny stock category, because the company was heavily indebted.

    E) If you thought that Shoreline Energy (OTC:SHGCF) was another "Strong Buy" just because it traded higher than $1 per share, please see the company's chart:

    (click to enlarge)

    F) If you decided to buy A123 Systems (OTC:AONEQ) just because it traded higher than $5 per share, you made a huge mistake, as shown at the company's chart below:

    (click to enlarge)

    G) If you jumped aboard Pinecrest Energy (OTCPK:PNCGF) just because it traded higher than $1 per share, you made another huge mistake, as shown at the company's chart below:

    (click to enlarge)

    H) If you bought big Houston American Energy (NYSEMKT:HUSA) just because it traded higher than $5 per share, I am sure you regretted it big time, given the company's chart below:

    (click to enlarge)

    I) And if you thought that Plug Power (NASDAQ:PLUG) was not a stock for you because of its penny stock status in late 2013, you were grossly mistaken. This is how Plug Power has soared in less than twelve months, transitioning from a penny stock to a non-penny stock, thanks to a noticeable fundamental improvement:

    (click to enlarge)

    K) And if you thought that Rock Energy (OTCPK:RENFF) was not a stock for you because of its penny stock status in late 2012, you were grossly mistaken. I recommended the obscure Rock Energy at approximately $1, when it was hovering at the threshold between a penny stock status and a non-penny stock status. My bullish article is here.

    Given that Rock Energy was fundamentally sound when recommended, this is Rock Energy's chart over the last twelve months:

    (click to enlarge)

    3) The $1+ price does not mean anything about the fundamental health of a company, given that a stock can easily get rid of the penny stock status with the help of a reverse split: The reverse split changes nothing on the fundamental front. The reverse split is not "the Midas touch", and the balance sheet will not become healthy overnight just because the company stopped being a penny stock. For instance:

    A) GMX Resources (OTCPK:GMXRQ) made a reverse split in January 2013, transitioning to the non-penny stock category, as shown below:

    (click to enlarge)

    So what? I remained bearish on GMX Resources in March 2013, when the stock was at $3.4, as shown here. Finally, GMX Resources went broke in April 2013.

    B) As shown here, I was very bearish on ZaZa Energy (NASDAQ:ZAZA) in June 2014, when the stock was at $0.89 (pre-reverse split). In that article, I wrote that ZaZa Energy was on the ropes, because its balance sheet was in dire shape with few options for improvement. I also noted that it would not surprise me if ZaZa's stock went to a tailspin by year end, tumbling significantly from $0.89 per share (pre-reverse split). A bankruptcy would not surprise me either.

    In August 2014, ZaZa made a reverse split (1:10) and stopped being a penny stock. ZaZa's stock was at $7, pro forma the reverse split. So what? Given that the company's financial position is horrible, the stock has dropped almost 50% in just one month, as illustrated below:

    (click to enlarge)

    C) In May 2013, Pacific Ethanol (NASDAQ:PEIX) was a penny stock (pre-reverse split), trading below $1 per share. Pro forma a 1:15 reverse split, Pacific traded at approximately $3.5 per share in June 2013. The stock has surged since then, as illustrated below:

    (click to enlarge)

    But this surge was not the result from the new price per share. The surge was the result from a gradual fundamental improvement, as reflected by the company's balance sheet.

    The Assets

    Petrodorado is an asset-rich company that holds more than 500,000 net acres in 4 blocks in Colombia and a small producing property in the US, as illustrated below:

    (click to enlarge)

    Let's see some important details about the company's Blocks:

    1) CPO-5 Block: This Block lies in the Llanos Basin and is on trend with multiple producing light to medium oil fields, as illustrated below:

    (click to enlarge)

    and below:

    (click to enlarge)

    and below:

    (click to enlarge)

    2) Talora Block: This Block is located in the Magdalena Basin, as illustrated below:

    (click to enlarge)

    And according to Petrodorado: "Oil seeps throughout the area". This Block straddles the arbitrary boundary between the Upper and Middle Magdalena Basins and is flanked by "Middle Magdalena" oil fields to the north and "Upper Magdalena" oil fields to the south, both consisting of light and medium gravity oil and totaling to more than 150 MMBO recoverable, all within about 25 kms of Talora, as illustrated below:

    (click to enlarge)

    and below:

    (click to enlarge)

    And here is some additional key information about this area:

    A) In December 2012, Petrobras (NYSE:PBR) drilled the Guando SW-1 well on the operated Boqueron block, on which 12 years ago the company discovered giant Guando field, one of Colombia's largest discoveries in recent years, at which oil production continues, as shown below:

    (click to enlarge)

    This new discovery from Petrobras in the Upper Magdalena Valley flowed at the rate of 500 bbls/d of 23.9° gravity oil.

    B) Just to the west of Guando lies the Abanico Field which lies immediately against Talora's northern block boundary this includes the Toqui-Toqui Field discovered in 1986 (4-7 MMBO) and the Puli Field (10-13 MMBO) discovered in 1991, as shown below:

    (click to enlarge)

    C) Thanks to the aforementioned significant oil discoveries, there is already a lot of oil infrastructure, as illustrated below:

    (click to enlarge)

    3) Tacacho Block: This Block is located in the Putumayo Basin close to the border with Ecuador, as illustrated below:

    (click to enlarge)

    It is noteworthy that this Block is adjacent to block with highest onshore bid made in Colombia (CAG-5) and to several world class plays, as illustrated below:

    (click to enlarge)

    4) La Maye Block: La Maye is located in the Lower Magdalena Basin, as illustrated below:

    (click to enlarge)

    This Block is on trend with several large oil & gas producing fields. For instance, Cicuco and Boquete are adjacent fields with ~ 67 MMBBLliquid and 230 BCF gas of total cumulative production, as shown below:

    (click to enlarge)

    5) California: Petrodorado owns 13.5% interest in the Kreyenhagen heavy oil Project in California, that covers 800 gross acres, as illustrated below:

    (click to enlarge)

    As also shown above, the company has already identified optimal monetization strategy. In other words, more news on that front will be out soon.

    The New Management Team

    The former CEO ran this ship into the ground by following a completely wrong business plan. He focused on the US assets (the Kreyenhagen Heavy Oil Project), while ignoring the company's highly prospective properties in Colombia. Fortunately, Mr. Krishna Vathyam resigned from Petrodorado in late 2013, and the new management team took over in early 2014. Here is the new management team:

    1) Robert Cross (Chairman): He has more than 20 years of experience as a financier in the mining and oil & gas sectors. Mr. Cross is a co- founder and Non-Executive Chairman of Bankers Petroleum (OTCPK:BNKJF), Non-Executive Chairman of B2Gold (NYSEMKT:BTG), and until October 2007, was the Non-Executive Chairman of Northern Orion Resources Inc. Between 1996 and 1998, Mr. Cross was Chairman and Chief Executive Officer of Yorkton Securities Inc. From 1987 to 1994, he was a Partner, Investment Banking with Gordon Capital Corporation in Toronto.

    2) Gregg Vernon (Chief Executive Officer): He has 35 years of oil and gas experience with 20 years international experience and 12 years in Latin America. He was the co-founder of Petro-Andina (TSX: PAR) which was acquired by Pluspetrol in 2009, Chairman of Prospero Hydrocarbons which was acquired by PetroMagdalena (former Alange Energy) in 2009, and CEO of PetroMagdalena (TSX-V: PMD) that was acquired by Pacific Rubiales (OTCPK:PEGFF) in 2012. Since 2010, he has been a director of Petrodorado and a director of Hemisphere Energy (TSX-V: HME).

    3) Brian Smith (VP of Operations): He has 25 years of oil and gas experience with Petrominerales (TSX: PMG) that was acquired by Pacific Rubiales in 2013, and Schlumberger (NYSE:SLB).

    4) Arturo Lara (Chief Geoscientist): He has 30 years of oil and gas experience in South America with Pacific Rubiales, Gazprom (OTCPK:OGZPY), Total (NYSE:TOT) and the Venezuelan state-run oil company PDVSA.

    The High Insider Ownership And The Key Changes

    Several key things have been improved since early 2014, thanks to the new management team:

    1) New business plan: The new management team concluded an extensive review in early 2014 and decided to focus on Colombia, putting the US operations up for sale.

    2) Arbitration settled: In May 2014, Petrodorado entered into a settlement agreement regarding the arbitration with Sintana Energy (OTC:DRFLF), in connection with the Talora Block. In accordance with the settlement agreement, the parties have terminated the arbitration process and all present and future claims related to the arbitration have been settled in full.

    3) High insider ownership and additional purchases from the new CEO at C$0.04: It is always encouraging to see the CEO buying at the ask and increasing his stake into the company. This shows confidence.

    As shown here, the new CEO purchased almost 2 million shares on the open market at C$0.04 in H1 2014. Apparently, he does not see significant downside risk from these levels, and pro-forma these purchases, the insider ownership currently is 10%.

    4) Stock options issuance at C$0.07 and C$0.10 per share: In February 2014, Petrodorado issued a total of 4,000,000 options to an officer of the company. The options are exercisable into common shares in the capital of the company at an exercise price of $0.10 per share. The expiry date for all options is September 9, 2018.

    Petrodorado also awarded a total of 21,075,000 options to certain directors, officers, employees and consultants of the company. The options are exercisable into common shares in the capital of the Company at an exercise price of $0.07 per share. The expiry for all options is February 2019.

    The bottom line is that they were getting a 7-cent and a 10-cent strike price with the stock at C$0.04 per share. That positive event shows that management believes the strike prices of 7 and 10 cents are an obtainable goal.

    The Balance Sheet

    Just because a penny stock is a micro-cap and/or transformation stage company doesn't mean we can't apply some of the same techniques we use for larger companies to identify risks and determine if a given stock is worth our investment dollars.

    First, the stock currently trades for less than the working capital surplus. This is a very good starting point. The working capital surplus is C$15 million (June 2014), and the company has fully funded operations for the remainder of 2014.

    Second, Petrodorado has zero debt which is another very positive parameter. So there is not any creditor who will knock Petrodorado's door to ask his money back in 2015.

    However, the company will have to look for capital in order to satisfy its CapEx needs in 2015. In other words, the future operating ability of the company will be contingent upon the asset disposals (i.e. US operations) and/or farm-down deals. On that front, the successful identification of hydrocarbons on its exploration blocks during 2014 definitely helps the company's efforts in completing a farm-down deal.

    Here are some key points that Petrodorado can exhibit to lure the potential JV partners:

    1) The company's properties are surrounded by many oil producing fields, as illustrated at the previous paragraph. For instance, it must be noted that Petrodorado's CPO-5 Block borders with LLA-34 and Cabrestero Blocks, according to the map above.

    GeoPark (NYSE:GPRK) and Parex Resources (PXT.T, PARXF) own the LLA-34 Block where both companies have excellent drilling results thanks to the Tigana and Tua oilfields.

    Parex Resources (PXT.T, PARXF) owns the Cabrestero Block where it has excellent drilling results from the Akira wells.

    These facts obviously make PDQ a primary takeover target for both companies.

    2) CPO-5 Block (Loto-1X): Petrodorado reported a pump-restricted test rate of 453 bbl/d of 22 API oil from the Loto-1X discovery well on the CPO-5 block in Colombia in July 2014. An extended well test of the Loto-1X well is ongoing, which is expected to yield higher rates (20% to 30% increase versus the measured 453 bopd rate, according to the company) with a larger electric submersible pump. The results from this well will be announced soon.

    3) CPO-5 Block (Kamal-1X): The Kamal-1X well tested rates of 100 bopd to 300 bopd from the Upper Mirador Formation, as illustrated below:

    (click to enlarge)

    4) Talora Block (Verdal-2X): In early 2014, Petrodorado announced the successful drilling of the Verdal-2X well and the running of casing to 6,204 feet Measured Depth. Petrodorado submitted declaration of commerciality for the Verdal well to the regulator along with an application for a 24 year production license.

    5) Talora Block (Dorados): The Dorados-1X exploration well commenced drilling operations on July 31, 2012 with a planned total depth for the well of 9,500 feet with the Cretaceous Caballos and Tetuan formations being the primary objectives. While drilling in the Cretaceous Cenomanian section above these objectives, the well encountered a younger and exceptionally thick sand-prone sequence.

    This sand-prone section, currently named the "Dorados Sands," was encountered from about 5,160 feet to below 7,000 feet, or around 1,850 feet thick (gross). While drilling, this section (5,160 to 6,035 feet) yielded excellent wet gas and oil shows as measured by both Gas Chromatography and Mass Spectroscopy.

    The hydrocarbon-bearing characteristics of the "Dorados Sands" which the Dorados-1X well revealed, showed approximately 876 feet of excellent wet gas shows between 5,160' and 6,036' as defined by Gas Chromatography and Mass Spectroscopy and an estimated 316 feet of oil shows based on the mud logs between 5,720' and 6,036'.

    With a possible hydrocarbon column of over 800 feet, the Dorados-1X discovery interval is likely exceeded by only the nearby Guando Field with an original gas & oil column of over 2,100 feet. Petrodorado also added that Dorados sands presented better pressure regime than the nearby Guando Oil Field (126 MMBO recoverable) located 40 km to the southeast of the Dorados-1X well.

    In other words, the conclusion was very encouraging and the partners concluded that a new undamaged wellbore was needed (sidetrack or twin well) to further evaluate the Dorados structure, a large thrust anticline in which the Dorados-1X well data revealed this new thick sandstone reservoir with significant recoverable hydrocarbons potential.

    If the company does not sell its US assets and/or does not manage to complete a farm-down deal on one of its Blocks, it will have to make a financing to continue its operations in 2015.

    The Valuation

    When it comes to evaluating explorers with zero or small (less than 500 boepd) production, the typical key metrics (i.e. EV/Production, EV/Reserves, EV/EBITDA) do not make sense. In this case, an investor has to focus on other parameters and metrics like the location of the properties, the net acreage, the company's long term debt, and the company's PBV.

    Petrodorado's market cap currently is ~C$12 million. Given that the company's stockholder equity is $87 million (June 2014), the stock currently trades at ~PBV=0.14 times, which is the lowest PBV among all the publicly-traded energy explorers in Colombia, as shown below:



    Long Term Debt

    ($ million)





    Baron Oil


    2.5 (*)


    Houston American









    Energy (TSXV: PZE)







    (*): Pro forma the offering of August 2014.

    In other words, even if a liquidation scenario occurs tomorrow, the buyers at the current levels will most likely get their money back. However, a liquidation scenario is not likely, given that Petrodorado is well-positioned in Colombia, owning 500,000 net acres surrounded by many producing oil fields, as shown at the previous paragraphs.

    The Catalysts

    Thanks to the new management team, the company is starting to head in the right direction, although it is not reflected in the stock price as of yet. This is why, the current price is a buying opportunity. Here are the catalysts that can trigger a significant price appreciation by year end:

    1) CPO-5 Block: Based on the preliminary CF forecast for the wells in the CPO-5 Block, these wells have a very quick payout of just 4.5 months, as illustrated below:

    (click to enlarge)

    This is obviously a very good starting point. In addition:

    A) Loto-1X: Thanks to the successful results from the Loto-1X well, the company is pushing to exit the year with production from the CPO-5 Block. An extended well test of the Loto-1X well is ongoing, and the results from this well will be announced soon.

    B) Loto-1 offset well: The company is also planning Loto-1 offset well to spud this year, and the results are expected before year end.

    C) Acquisition Target for GeoPark and Parex Resources: As mentioned above, Petrodorado's CPO-5 Block borders with LLA-34 and Cabrestero Blocks, according to the map above.

    GeoPark and Parex own the LLA-34 Block where both companies have excellent drilling results thanks to the Tigana and Tua oilfields.

    Also, Parex owns the Cabrestero Block where it has excellent drilling results from the Akira wells.

    Therefore, GeoPark or Parex can announce PDQ's acquisition anytime.

    2) Talora Block: Thanks to the successful discovery of the Verdal-2X well, Petrodorado (the operator) entered into the second Post Exploration Phase with ANH (the National Hydrocarbon Agency of Colombia). Currently, the partners (Petrodorado and Sintana) are finalizing the Verdal Area Production License and are preparing a data room for farm-out of the Verdal development area. Any farm-out news will definitely increase the interest for the stock.

    Based also on the latest corporate news:

    A) The JV partners (Petrodorado and Sintana) will drill one additional exploration well by July 2015.

    B) The JV partners will drill the Dorados-1X twin well that will re-test the "Dorados Sands" discovery mentioned above.

    3) Tacacho Block: The company is looking to farm down this Block. Given that Pacific Rubiales has already a stake in this Block (please see "the Assets" paragraph), a JV with Pacific Rubiales is very likely.

    4) The sale of the US properties: Given that the monetization plan was announced in April 2014, and the company has already identified potential monetization options for the Californian assets, a sale announcement is estimated to be a matter of weeks, if not days.

    My Takeaway

    First, Petrodorado drills in Colombia where the pro-business environment and the openness to the foreign investments are indisputable facts. Actually, Colombia is a Latin America country where no contract was breached by State authorities in the last century. Apparently, Colombia is not Argentina or Bolivia or Venezuela, where the nationalizations often scare away the foreign investors.

    Second, a share consolidation is in the cards, as shown here. The shareholders recently gave ratification and approval for the Board to perform a consolidation of the issued and outstanding common shares of the company on a basis of up to twenty pre-consolidated shares for one post-consolidation share.

    But again, the reverse split will not change anything on the company's balance sheet. The potential buyers need to focus on the following key points instead:

    1) Petrodorado has an experienced management team with a lot of skin in the game, who completed an asset review and re-prioritized activities for value creation.

    2) Petrodorado is well capitalized for 2014 to execute strategy.

    3) Several ongoing catalysts can provide Petrodorado with significant cash and help it continue its operations in 2015 without the need of a financing.

    4) All Petrodorado's Blocks in Colombia have significant exploration potential, being on trend with significant oil discoveries. For instance, Petrodorado's CPO-5 Block borders with LLA-34 and Cabrestero Blocks, according to the map above.

    GeoPark and Parex Resources own the LLA-34 Block where both companies have excellent drilling results thanks to the Tigana and Tua oilfields.

    Parex Resources also owns the Cabrestero Block where it has excellent drilling results from the Akira wells.

    These facts obviously make PDQ a primary takeover target for both companies.

    5) A first test of meaningful volumes on the CPO-5 block is a significant achievement for the company's new management. Thanks to this discovery, Petrodorado is targeting near term production and cash flow (Loto-1X), while drilling an additional high impact exploration well (Loto-1 offset well) to potentially grow production by year end.

    6) Of considerable note is the fact that Petrodorado is partnered with world class oil companies. The JV partners are Pacific Rubiales and ONGC, which is the national oil company of India.

    7) Given that the new CEO has participated actively in the M&A activity of the energy sector in Colombia over the last years, a legitimate bid for Petrodorado is very likely. Although this is a speculative scenario, the company's JV partners (Pacific Rubiales and ONGC) are high at the list with the potential suitors.

    8) Petrodorado has tax losses that could be of value to producing companies in Colombia.

    9) Based on its intrinsic value, Petrodorado is currently the cheapest energy explorer in Colombia.

    10) TD Securities has set a price target at C$0.10, which is ~300% higher from the current levels.

    That being said, Petrodorado should be on the radar for all investors out there, because it represents the shift from solely an explorer to being a producer and developer. Therefore, if it turns it can turn wildly and the price can skyrocket. Given also the aforementioned key points, I believe the risk reward here is very compelling, but only for a diversified portfolio.

    Disclaimer: This article covers a stock 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.

    The opinions expressed here are solely my opinion and should not be construed in any way, shape, or form as a formal investment recommendation. Investors are reminded that before making any securities and/or derivatives transaction, you should perform your own due diligence. Investors should also consider consulting with their broker and/or a financial adviser before making any investment decisions.

    Disclosure: The author is long PTRDF. 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: Petrodorado Energy was recommended to my newsletter subscribers at C$0.025 on September 18, 2014.

    Oct 01 12:29 PM | Link | 26 Comments
  • These Two Facts About USA And China Deserve A Deeper Consideration


    Two important events during the last few days have made me try to read under the lines in order to decipher what the next phase of the relationships between USA and China will be and how I can benefit from this. The following two occurrences took place simultaneously and it could be a mere coincidence. However it might not be just a coincidence and it may be more moving parts behind the scenes. The goal of this article is to identify both incidents and provide a way for the investors to make money in case these facts are related.

    The first event is the recent Apple's (NASDAQ:AAPL) move which show that a new trend is emerging and we are experiencing the initiation of a wave of in-sourcing as some major American producers bring part of their production back in USA. The "Made in America" logo is strengthening while the "Made in China" one starts to fade. The migration of the American factories back home has started.

    The second event is the dispute which arose between the US Securities and Exchange Commission (SEC) and its Chinese counter part, China Securities Regulatory Commission (CSRC) few days ago and sent lower several US-listed Chinese stocks.

    Apple shows the way

    According to the news that hit the wire a couple of days ago, Apple's CEO Tim Cook brings part of the Chinese production back to USA although he was the one who oversaw Apple's shift to China in the 1990s when he was the company's head of operations.

    It is an undisputed fact that Apple's proprietary product portfolio has been the flagship of innovation in the technology sector and it has created a quite new trend on how the cell phone has to be.

    Apple is likely to show the way again leading a new trend. Apple may be opening the road for something new like Caterpillar's (NYSE:CAT) Motor Graders do.

    Several factors have contributed to the last week's change on Apple's strategy. The death of cheap labor as the Chinese wages have climbed significantly during the last years, the domestic cheap energy as a result of the shale gas boom, the elimination of risks such as the currency risk or the political risk and of course the potential leak of Apple's intellectual property. The possibility for supply chain disruptions due to China's problematic infrastructure is also another concern. Thailand was hit hard by the floods last year and this caused huge delays to the biggest names of the Japanese economy. China can be next as the Chinese bridges are collapsing like they are made of sand.

    Few other companies have also said they would shift their production back to the U.S. from overseas like Caterpillar and General Electric (NYSE:GE). General Electric decided recently to invest $60M in new high-efficiency washing machine facility creating 150 new jobs and boosting business for about 40 domestic suppliers. The company also plans to upgrade by 2014 all of the product lines and revitalize several facilities of its Appliance Park in Louisville, such as the GeoSpring hybrid water heater and the bottom-freezer refrigerator which is an $800M investment.

    The US-listing of the Chinese companies

    Just few days ago, the SEC threatened to de-list all China-based, US-listed companies if the internal, auditing work papers are not made available to the SEC for inspection. The China Securities Regulatory Commission (CSRC) has stated that such work papers might reveal state secrets, thus it will not allow such exposure. This being said, the billions of dollars invested in Youku Tudou (NYSE:YOKU), Sina (NASDAQ:SINA) and several other US-listed Chinese companies are at risk and these companies may leave the US markets soon.

    Youku and Sina have dropped almost 20% and 10% respectively during the last 3 days and this could be a once in a lifetime opportunity for an investor to make easy money by shorting several US-listed Chinese companies during the next days.

    Owning a position in a China-based company through an offshore entity would be like backing a stock touted by Madoff. In addition, the SEC charged the Chinese affiliates of five of the world's biggest auditing firms with violations of U.S. securities law, raising fears that it could go further and ban the affiliates from working on audits of companies listed in the United States.

    Caterpillar is one of the American companies with major Chinese operations which may find it difficult to find accountants. The construction equipment maker said in an e-mailed response: "As this issue revolves around differences between U.S. and Chinese regulators, Caterpillar hopes each side can work to resolve this issue while demonstrating mutual respect and understanding for the laws and regulations of each country".


    The sun is setting on offshore manufacturing and the outsourcing looks rather outdated. In addition, it remains to be seen whether the CSRC will back down on the State Secrecy Law and cooperate in order to find common ground and reach a consensus with the SEC.

    I personally will keep a close eye on both events above to see how they unfold during the next weeks. Are they related or not? Is it the beginning of a Cold War between USA and China? If yes, then the downward pressure on the US-listed Chinese stocks will go on and I believe the investors could make some money by shorting these Chinese companies whose accounting methods are highly questionable, to put it mildly.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Dec 10 1:31 PM | Link | 8 Comments
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