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  • Stock Of The Year Pick For 2014 6 comments
    Dec 22, 2013 2:38 PM | about stocks: TPNEF

    Last year the stock of the year pick was Cortex Business Solutions (CBX.V). The company did not perform as I expected it to, although I still like the stock and will continue to follow it. My thought was that sales would increase to the point that the company would move to a cashflow positive situation. This did not happen in my forecasted timeframe. Cortex's business continues to grow, albeit, slower than I anticipated. Nevertheless it did not double in the one year time frame which is the criteria for selection as the stock of the year.

    I was criticized by a reader about the selection but one has to remember that these stock picks are speculations on small risky companies that do not conform to normal securities analysis. I am looking for certain events to take place that may or may not end up being material and translate to a higher stock price (quite a few ifs). It should then be obvious that these are not investments and are not for everybody. In addition these are my own opinions and not investment advice. If you choose to follow me into these stocks please do your own due diligence.

    Having reiterated the disclaimers here is my 2014 stock of the year.; Cub Energy (KUB.V). From the company's website:

    Cub Energy has 1.4 million gross acres (760,000 net acres) in three prospective basins in Ukraine and Turkey, and is currently producing ~1,700 boe/d. Both countries have extremely positive demand and pricing environments for natural gas.

    The Company is focused on growing its acreage position in strategic basins the Black Sea Region. Cub Energy is profit-oriented, with a focus on achieving high margins through disciplined spending and de-risking of its assets through the use of western methods and technologies such as fracing, dual completion, and horizontal drilling.

    Everyone here in the US is now familiar with the bountiful amounts of natural gas that have been unlocked in our shale basins. In fact we have been so good at finding natural gas that the price for the product has been severely depressed for several years. This is why there has been a big move to export gas. If gas is between $3.50-4.50/mcf in the US and over $10/mcf in Europe and $15/mcf in Asia it makes sense to capture this price differential via export.

    Cub currently has producing properties in Ukraine and additional prospective acreage in Turkey. These are both areas that are dependent on natural gas imports from Russia. The current turmoil in Ukraine is related to this fact. The Ukrainian government was on the cusp of moving towards a path leading to EU membership. However pressure from Russia along with an economic package that includes lower priced natural gas persuaded the government of Ukraine to change course towards Russia at the last minute. This change in political direction was a big letdown for the people in western Ukraine and has lead to massive protests.

    Without getting into a big history lesson on Ukraine I believe it is the desire of Ukraine to move towards the EU. However the economy especially the eastern industrial areas of Ukraine are dependent on gas from Russia. This gives Russia more influence than it would have otherwise. Russia, for various political, economic, and military reasons would prefer to have Ukraine in its sphere of influence. It thus offered cheaper gas and an economic package to Ukraine.

    Ukraine to its credit understands the energy stranglehold it is under from Russia and has moved in recent years to open up its territory for energy exploration in a bid to lower its needs for gas imports from Russia. That is where Cub Energy comes into the picture.

    Cub has 12 licenses in Ukraine totaling 240,000 gross (180,000 net) acres. The country has around an estimated 39 TCF of gas reserves in both low permeability shales and sands. Current pricing of gas in Ukraine is around $11/mcf with finding and development costs of $1.73/mcf. This leads to some pretty staggering IRR's like 823% in the "O" field and over 1000% at the M-19 well. These type of numbers are leading to well paybacks in three months. The company currently produces 1700boe/d and has an active drilling campaign that will lead to active news flow and anticipated higher production, reserve additions, and cashflow all through 2014. The stock is 40% owned by management, insiders, and board. The CEO is from Ukraine and the company has connections with the current government. The stock was knocked down recently due to end of the year tax loss selling I would guess but traded over $.40/share earlier this year. It is currently trading at $.19/share so it would reasonable to speculate that as they proceed on their drilling plan and if the news flow is positive we could see a higher share price.

    Update: The company on 12/20/13 released news of drilling success and anticipates a 2013 exit production rate of 1900-2100 boe/d. In addition it has a further 275-350 boe/d behind pipe which will ties in during Q1 2014.

    Update 2: There has been some trepidation about the recent deal for cheaper Russian gas affecting ongoing gas development in Ukraine. As I stated in the article it would be the preference of the Ukrainian government to lessen dependence on Russian gas. A recent article in Ukraine Journal seems to confirm this:

    Ukraine to continue shale gas projects despite Russian price cut

    Journal Staff Report

    KIEV, Dec. 18 - Ukraine will continue its shale gas extraction projects, which will not be affected lower Russian natural gas prices, Energy and Coal Industry Minister Eduard Stavytskiy said Wednesday.

    Royal Dutch Shell, Chevron, Eni, EDF and a consortium led by ExxonMobil have been seeking to invest in gas extraction, but analysts raised questions of whether those projects will be profitable enough to compete with cheap Russian gas.

    We'll push gas projects to avoid dependence on Russia, says president

    Journal Staff Report

    KIEV, Dec. 19 - Ukraine will continue developing its domestic gas production projects in order to avoid heavy dependence on Russia, President Viktor Yanukovych said Thursday.

    Ukraine over years has been taking steps to reduce dependence on Russian gas supplies, but that policy has come into question after Russia has agreed to lower by 33% its gas prices next year.

    Yanukovych, in his first televised interview after signing the deal with Russia on Tuesday, said the policy will continue.

    Disclosure: I am long OTC:TPNEF.

    Stocks: TPNEF
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Comments (6)
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  • littletiger101
    , contributor
    Comments (10) | Send Message
     
    how to buy penny stock with low commission?
    22 Dec 2013, 10:20 PM Reply Like
  • John Polomny
    , contributor
    Comments (609) | Send Message
     
    Author’s reply » I use Interactive Brokers. They are cheap and efficient.
    22 Dec 2013, 11:46 PM Reply Like
  • roojoo
    , contributor
    Comments (210) | Send Message
     
    Interesting company. I've been doing a bit of research after reading your article. The inside ownership (management last bought at a price of 0.19) is certainly something that gets me interested.

     

    I am not directly convinced the current political climate is favourable for this company though. Sure Ukraine badly needs domestic supply. Cub Energy will probably have the government's support in their operations, but that doesn't directly improve the bottom line. The gas imported from Russia seems slightly cheaper than the 11USD mentioned. Naftogaz (the state owned gas company) reports December 2012 imports from Russia for a discounted price around 9.35USD/MCF. No idea about the prices after the recent deal with Russia, but I doubt it will be much higher.

     

    Moving towards the EU would definitely support the gas price, but it's exactly because of that reason it's not happening.

     

    As for the political connections, all I can find is Robert Besh, who works as an adviser to both Cub Energy and the vice-prime minister of Ukraine. He also owns 7% of Pelicourt LLC, meaning he owns 2.8% of Cub Energy. An interview with him at the beginning of the year that might be (a bit) interesting:
    http://bit.ly/1cg1eto

     

    Furthermore, it is difficult for me to judge the actual risk of their operations. Exploration companies always report fantastic drilling results. It is hard for me to quantify the risks of cost overruns. How likely is it for instance that they will waste all their Ukrainian income on unsuccessful exploration in Turkey or Western Ukraine? I worked a bit in the oil&gas EPC industry and we are very apt to cost overruns there. Maybe you are in a better position to judge their operational risk?

     

    Interactive brokers charges me 1% when buying on the CVE. Still small as compared to a bid-ask spread on penny stocks I suppose...

     

    Anyway, thanks for bringing it to my attention John. I will have to do a bit more research before maybe taking a small position.
    29 Dec 2013, 06:15 PM Reply Like
  • John Polomny
    , contributor
    Comments (609) | Send Message
     
    Author’s reply » "I am not directly convinced the current political climate is favourable for this company though. Sure Ukraine badly needs domestic supply. Cub Energy will probably have the government's support in their operations, but that doesn't directly improve the bottom line. The gas imported from Russia seems slightly cheaper than the 11USD mentioned. Naftogaz (the state owned gas company) reports December 2012 imports from Russia for a discounted price around 9.35USD/MCF. No idea about the prices after the recent deal with Russia, but I doubt it will be much higher."

     

    You are correct the gas price from Russia will be quite a bit less. That is why Yanukovych backed out of the EU deal at the last minute. Ukraine is/was on the verge of a financial crisis. The deal with Russia buys him time, at least in his mind. In addition, he is a Russian speaker from eastern Ukraine and that is where all the heavy industry is; Kharkiv, Donetsk, Donbass region, etc...That industry relys on relatively cheap gas so I am sure he was being lobbied hard by the industrialists. Anyway the full impact on gas pricing is not known yet. It will decrease for sure but my understanding it is to phased in over time.

     

    I agree with your assessment about the risk of their operations. However this is another reason it is speculative. My view, and I have seen this in other former Soviet republics with oil and gas operations i.e. Kazakstan, Russia, Turkmenistan, is that when western oil/gas techniques get applied to known resource areas the results have been good. The Soviets did not have the capital or techniques that are available now. My best example would be the former Hurricane Hydrocarbons/Petrokaza... that was acquired by CNOOC.

     

    Your points are valid and should serve as further caution that is a risky very speculative play. Thanks for your input.
    30 Dec 2013, 08:21 AM Reply Like
  • roojoo
    , contributor
    Comments (210) | Send Message
     
    This website mentions a price on imported gas of USD 268.5 / tcm, which I suppose should be per 1000 cm. That translates to USD 7.60 / mcf, a 33% discount. But as you said, this price is not guaranteed for the long term.

     

    http://bit.ly/1cQPbca
    30 Dec 2013, 02:36 PM Reply Like
  • Jon Springer
    , contributor
    Comments (4073) | Send Message
     
    Hi John,

     

    I think you'll enjoy this interview with Leopard Capital.
    http://onforb.es/1jgti8N
    19 Jan 2014, 10:12 PM Reply Like
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