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My chosen name "Stockgod" was something I used when I was quite young and I've used it on various sites and chatrooms for a long time. I don't think I'm a "god" of anything at all. I am an entrepreneur, investor, strategy & brand expert. I've been investing in the stock... More
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  • My Discussion with Bill Zima of NEP
    I spoke with Bill Zima last night, I posted this blog over at BullsOnWallStreet.com and I wanted to share it with other NEP longs. I am posting this to share ideas and generate future questions with other long term investors on NEP.

    I received a call from Bill Zima last night, he’s in China.  First let me start by talking about Bill and his job.  I know many of us are frustrated by their lack of communication, lack of updates, lack of a conference call, etc.   The bottom line is NEP is completely aware of the frustration amongst retail investors.  Their communications team is in touch with all their institutional investors on a regular basis.  He’s basically in regular communication with people who hold 95% of the stock.

    If you read the press releases, especially as of late, you’ll notice a level of detail that you normally would not see from a China company. I imagine his job isn’t an easy one.  

    For example, imagine if you were Bill, and you were given updates every now and then from a foreign company and you had to craft such updates into press releases and communication.  Imagine getting emails from people he’s never spoken to, who might own 500 shares, asking “when is the next press release coming...?” or asking  “where’s the news??”     Let’s face is, most of these retail investors are not long term, they don’t give a shit about the company, they just want a pump so they can dump.  

    It’s probably not as easy as some of us think, so I can understand his challenge especially when the company halted --- he could not really say anything during that quiet period as they restructured and reorganized.

    I’m certainly not defending their lack of communication --- but I can’t point the finger at one person, especially someone who is NOT an officer of the company.   I will say that I did appreciate the call, he spent a good hour with me going over every detail of my questions. In fairness to him he has been responding to my emails -- although some of them he doesn’t respond to since they are more comments rather than questions.  

    While I’d love for Bill to put out a blog on behalf of NEP they aren’t prepared to do that, especially since there are still some outstanding lawsuits from the halt.  There are many people watching the stock, he would much rather get on the phone and discuss what they can while using the regular new channels to distribute news on NEP.

    My suggestion to any of you long term investors:  If you’re looking for answers from NEP, rather than sending comments/suggestions/bitching, ask specific questions, think about them, draft them in advance, and send them over to Bill Zima.  It might also be cool to post all your questions in the comments here so we can share and make sure no one is asking duplicate questions..    As I am a long term investor I always prefer collaborating with others, and I will continue to do the same as long as I’m a shareholder of the company.

    So here are the questions I asked him and the answers I received --- keep in mind I worded these answers in MY words, these are NOT exact quotes, but this is representative of the spirit of the discussion.

    1) Is the 800k deposit for land use rights on the balance sheet for another lease or acquisition?  

    The $800,000 is not for a new lease or acquisition.  It has to do with Tiacheng and their current office location and lease arrangement. At some put this will be moved over to a long term asset classification.  

    2) What about new acquisitions and why didn’t they have a conference call this quarter?

    As far as new acquisitions though, if you read the 10Q you will see references to a potential new deal or acquisition that the company has been working on.  They are not ready to discuss it.  They certainly did not want to have a conference call yet since there would be many questions around future growth prospects, what they’re doing with their cash reserve, etc, and they simply aren’t ready to talk about it.

    3) In the past NEP would release it's production numbers ahead of the quarter.  This time they didn't do that, is that because of the major drop in production?  

    This quarter they decided to roll it all into one press release and create a unified communication.  

    4) Does management feel production will be at "normal" levels in the coming quarter?

    The drop in production is mostly tied to weather issues.  The rains were incredibly heavy, causing the fields to be boggy and muddy, they could not get trucks in or out.  They DO NOT expect this situation going forward. This coming quarter they fully expect to go back to “normalized” production numbers.  As in the past, they will likely release their normalized production numbers in January.

    5) Why didn’t they drill more on their existing property as expected?

    The simple answer is the company is building a cash warchest for a new growth opportunity.  They feel it’s best to invest in new growth opportunities while continuing to maintain their current property which still has plenty of reserves for the future.  Take a look at the 10Q and the are details pertaining to this in it.

    6) As I read it, the 10Q stated the company need not raise money to support the existing oilfield.  The problem is, this oilfield seems to be depleting, not to mention the royalty will increase soon.   So with that said, the company clearly needs to raise money in order to close on new oilfields or pending acquisitions - does the company feel raising money at these deflated levels is ideal?

    The company feels comfortable with its current business and using existing cash to support it.  I was reading the standard risk factors. There is still no way they will commit to anything on this question since they cannot discuss future acquisitions or deals, or how they will be structured.  

    I personally think they will raise money at some point, but I believe it will be accretive, similar to the Tiacheng deal.

    7) Does the company plan to do any road shows this quarter?

    It’s already December.  They don’t want to go out and start telling the same story.  Everyone wants to hear about new leases or a new acquisition, or new growth.   The bottom line is the company will go out when there’s something new to be talked about, otherwise why waste cash on a road show telling everyone what they already know?

    8) Any chance of getting some coverage from analysts?

    Well they already have one analyst covering them, Rodman … (this is me laughing hahahaha).  

    I personally believe there will be more coverage in the future, we just need to be patient.

    9) Are things started to feel stable at the company?  Are they comfortable with the accounting as it was and going forward?  Any chance of getting some permanent staff soon rather than 'acting' staff?


    As the CFO is fairly new, the goal is to make him permanent.  The company is evaluating his capabilities, and if they and the auditors feel he is capable to take on this huge task then they will formalize things.   They are treating their accounting procedures very carefully.  

    Disclosure: Long NEP, very long!
    Dec 03 1:35 PM | Link | 1 Comment
  • An Update on China, RINO, NEP, and Accounting



    My Background on NEP


    Many people have asked great questions on NEP, and the Yahoo Finance forums are good for a laugh most of the time since 99% of the posts are from pumpers or shorts.  I thought since we’re getting some clarity on North East China Petroleum I would share a blog on it.

    As many of you know I am a long term shareholder of North East China Petroleum.  I started accumulating this stock under their previous symbol at just over $1, and I sold a good part of my position between $10-$11.  I then bought it all the way from $9 down to when they halted and here we are today.  

    I know this company well, I have studied their business model, their customer relationship, and their strategy.  I had no problems sleeping easy over the summer when the stock was halted because I knew their management team still ran the company like it was a small business --- they needed this halt to blow up the management team and force them to take their U.S. stock exchange listing seriously.

    This is not a mom and pop shop anymore, it’s a real company, with an incredible business model.


    RINO vs NEP


    Let me start by saying the halt of NEP over the summer of 2010 should in no way be compared to the recent halt of RINO.  These are two completely different companies, one of them basically admitted to fraud, and the other one didn’t.  

    While many people have accused NEP of fraud, they didn’t bother to read the filings in detail to understand what was really going on.   NEP did not admit to, nor were they proven guilty of any fraud whatsoever.  

    Since reading the recent filings from RINO and the astonishing reaction from their CEO I don’t believe for a second that RINO will rebound like NEP did once it re-opens, although I hope for the shareholders of RINO that this isn’t the case.
      

    It’s unfortunate, I feel sorry for the RINO longs, since when RINO put out their press release “defending” themselves against the Muddy Waters accusations I told people in our chatroom to swap any RINO they might have had for NEP because I believed that NEP would one day cross RINO.  

    I had no idea it would only take a week for that to happen, and the only reason I "knew" it was going to halt was because of their reaction to Muddy Waters.. 


    Back to NEP

    So since the summer we’ve watched NEP recover from $3 to $7, and we were all waiting for the latest quarter filing to get some clarity of the business.  

    The reason I’m giving you the above background is to demonstrate that I have a long position, I know lots about the company.  I am an active shareholder since I personally own an institutional sized position. I am not a promoter, nor do I take payment from any of the companies I own.  I simply take very large positions in extremely undervalued companies and sell them when they're high. I rarely invest in the same company "twice", but since NEP is so volatile I made the decision to do so. 


    So before I get into their latest quarter, I want to say that many Chinese companies have face some serious accounting challenges, and I always get asked why I bother investing in Chinese companies?  Well, truth be told, many Canadian small caps have had similar issues with GAAP accounting, and over the years I have found by trial and error that there are some great hidden investments out there, you just have to look for them.  

    Clearly it’s not just about the auditing and GAAP, RINO may likely be the first China Small Cap listed on the Nasdaq to be guilty of fraud, and this should be of concern to anyone who invests there.  Even with great auditors it seems to easy for these guys to make stuff up.  The reason I like NEP is because their business model is simple.  Up until now they’ve had one customer, PetroChina.  This relationship is undisputed, it’s strong, and it’s been around for years.

    So since this thing went down with RINO I’ve decided to stick with what I know best.  I love investing in energy, and therefore the only two China stocks I hold in volume are PetroChina and NEP.  I sold the remainder of my CCME at $20, sold my LIWA, and PUDA.   


    Let’s talk about NEP’s Latest Quarter

    The typical after hours reaction is to look at the earnings, decide if it’s a miss, then start selling.  Unfortunately, today that strategy did not work for all the sellers after hours.  I was on a dentists chair getting a procedure done, and while he was drilling my teeth I was reading the 10Q on my iPad in detail.  

    In the meantime I noticed the stock went down to $6.50, then shot up from there.    
    Why did this happen? ..because people didn’t read the nuggets of information in the 10Q.


    Highlights from the latest quarter are:

    • Revenue increased 38.8% to $20.0 million from $14.4 million  
    • Gross profit increased 37.1% to $12.7 million
    • Operating income increased 31.8% year over year to $10.7 million
    • As of September 30, 2010, the Company had $50.5 million in cash and cash equivalents, compared to $28.7 million as of December 31, 2009.  
    • In the third quarter 2010, three new oil wells were drilled in the Company's oilfields, bringing the total number of producing wells to 292 compared to 259 in the third quarter of the prior year period.
    • Tiancheng has additional contracts under negotiation which we expect will result in the full utilization of its rigs and steady sales growth for the next several quarters.

    Drop in Production

    Keep in mind there was a significant drop in production - which was explained in detail:  “This decrease was primarily due to unexpected severe flooding that washed out roads disabling the passage of oil delivery trucks.  Oil production was also slightly impacted by the natural depletion of production output among existing wells.”  Most people focused on this, but there were is more detail in the 10Q that these people missed.

    "There are now 292 producing wells within the four oilfields in which we operate, which represents less than half of the total number of wells we believe can be drilled in these four oilfields."  

    "We continue to view these four oilfields as viable growth opportunities for our business however, we have decelerated our well drilling plan year-to-date to instead focus on potential acquisition opportunities."

    "We have identified several potential targets and believe that if we are successful with our acquisition efforts, it could result in significant contributions to our overall operations." (Significant information here, since if you read the 10Q you’ll see that there was a deposit paid for acquisition of land use rights of $810,678.)

    Also, NEP currently pays a 20% royalty for these wells, which will increase to 40% in 2012.  By decelerating and reallocating resources to new opportunities they can still generate great income from these wells while cranking up production with a much higher rate of return.

    "We remain focused on minimizing our operating expenses and growing our cash position for the time being and look forward to updating our investors on any developments related to our acquisitions opportunities in the near future."  


    New Customer

    NEP recently put out news that they landed a contract with Beijing Junlun Runzhong Technology and are in the process of drilling 100 new wells in Inner Mongolia.  It’s quite an accomplishment since NEP’s only customer up until now is PetroChina!  It’s quite possible that this is the area that they are looking to gain new leases.


    Accounting Issues

    One of the most important part of the 10Q and news was just getting clarity on the current state of affairs in regards to the financial controls.  If you look at the chart from the past few months you’ll see there hasn’t been any significant volume selling.  There are currently 1.5M shares short of NEP, and most long term investors are just looking to see that the company is back on the right track in taking their accounting controls very seriously.   

    I think the fact that they immediately engaged Ernst & Young shortly after the halt was over shows how seriously NEP is taking their accounting controls.


    Here are some of the stand out points that I pulled from the press release.

    "With respect to our financial disclosure controls and procedures, the management team is actively working to improve the control environment and to implement procedures that will ensure the integrity, accuracy and timeliness of our financial statement preparation process going forward."   

    "We have utilized an outside consulting firm with specialized knowledge in financial accounting and specific knowledge of oil industry accounting to assist us with the review and restatement of past financial statements."

    "We have also engaged Ernst & Young (China) Advisory Ltd. to assist us with SOX 404 compliance. Ernst & Young will also provide recommendations to our management for instituting necessary additional controls to enhance the risk management capability of our internal controls over financial reporting."  

    "In the third quarter, we also implemented financial reporting training programs for specific staff members, particularly with respect to accounting for non-cash items.  We are making the effort to support these endeavors to ensure that our previous reporting delays do not recur."

    "As we look at our business in the fourth quarter and beyond, we continue to evaluate opportunities to expand production, increase our scale, drill more wells, and expand into new regions.  Through our efforts today, we believe China North East Petroleum can play a larger regional role in China's oil production and services industry in the future."


    So were all my questions answered with the latest 10Q and PR?  No, I still want a conference call or shareholders meeting --- but I have to say, I’ve been incredibly critical of these guys and their PR team.  I have sent Bill Zima more angry emails than anyone, I’m sure I am no longer on his Christmas Card list.  Either way, I have to commend them for being as crystal clear as possible with their latest filings.  

    Here’s another interesting link I just caught, it shows the Top 10 US Listed Oil & Gas Production stocks with the highest return on equity (I know nothing about any of these companies, nor do I own any of them except for NEP).

    FYI the annual meeting of the stockholders is on December 15th in China, I might be attending - I haven't decided yet.

    Latest NEP Press Release is here in full.


    Disclosure: Long NEP, PTR

    Nov 20 1:09 PM | Link | 15 Comments
  • China's Appetite for Oil Does Not End in China



    As a Canadian living in Calgary, it’s hard to ignore the power of the oilsands in Northern Alberta.   While there are many critics of oilsands, often referred to as “Tar Sands”, the process in which it’s removed from the ground has advanced significantly in Alberta.  The environmental effects may look bad on TV when people like James Cameron go around and spread their heavily one-sided views, but the reality is it’s not as bad as it looks.

    There are multiple processes to remove the oil from the ground, some of which create important manufacturing jobs for Americans (such as Caterpillar).  More importantly there are large investment in environmental renewal in Alberta as they replace the dug out ground with forests, parks, and pathways.  There are also multiple efforts to eliminate and renew "tailing ponds" which are some of the worst effects of the old school oilsands projects.  

    The bottom line is the Alberta oilsands is a safe, stable, and reliable source of energy for North America.  It creates jobs in energy, green jobs, and manufacturing.   There are arguments on both sides, no doubt, but when you boil it down there are more for than against. I will certainly share how Alberta is working to keep it’s environment healthy and vibrant in future articles on the oilsands.  There are also multiple ways to play the oilsands on American markets as well. 

    Back in March of 2010 I let slip on BullsOnWallStreet that I was a big buyer of a company called Excelsior Energy (which used to trade in the U.S. as well).  This company has some bitumen sand deposits in two oil sand leases, Hangingstone and West Surmont, all based in the Athabasa oilsands of Alberta. Excelsior uses onsite thermal technologies rather than the traditional model of transporting oil sands to a processing plant using trucks.  

    They were heavily undervalued at around .15, but they needed either cash or a partner to come in and take over their assets. In order for Excelsior to become profitable they would need to raise a large amount of capital to support steam assisted gravity drainage, where they inject steam in the ground in order to separate the oil from the sand and bring it to the surface.  I, like many, was simply investing in the asset - and there are multiple "dormant" properties like this as a result of the costs required to move forward into production. 

    Welcome China

    Back in August of 2010  PetroChina (NYSE:PTR) stepped in to buy 60% in the MacKay River and Dover oilsands project.  Since oilsands projects are very capital-intensive long-term investments and difficult to finance in the traditional equity market Athabasca did the right thing by finding a joint venture partner in PetroChina. 

    After the Athabasca deal, Excelsior and the rest of the oil sands started to heat up. Excelsior recently announced that they were being acquired by Athabasca for approximately $144M, or roughly .37+ cents a share.  Not a bad profit by any stretch, and even though these are “penny stocks” the oilsands of Alberta are filled with many undervalued high asset based companies such as Excelsior. 

    I also own stakes in a number of oilsands companies, including a privately held oilsands company called Sunshine Energy which will be public on both U.S. and Canadian exchanges sometime in the near future.

    So what’s my point?  China is hot on oil.  Their consumption of oil far exceeds their current production, and in January China’s oil consumption jumped by 30% from the previous year.  China is in somewhat of an aggressive run to generate as much oil production and reserves from sources all over the world, not just Canada.

    Yesterday Chinese oil company CNOOC has agreed to pay 1.08B for a 33% stake in a South Texas shale oil and gas field owned by Chesapeake Energy.  Now that’s what I’m talking about.

    So while China continues to swing oil deals from Canada, Texas, Africa, and Inner Mongolia, it’s probably a good time to consider getting your feet wet in energy if you already haven’t done so.  

    In case you didn’t know, PetroChina is one of the world’s largest energy companies, and they also have a significant partner in China North East Petroleum (NYSE:NEP).  In fact up until very recently PTR was NEP's only customer.  Since NEP purchased one of PTR's largest drilling contractor a year ago they have been open to creating similar contracts with other oil companies.  

    I continue to believe that NEP’s partnership with PetroChina is one of the best reasons I was able to sleep easy over the summer while the stock was halted.  After years of investing in emerging markets I have gotten to know how these small companies operate, and I expect there are a lot of great things going on in the background.

    I only hope NEP listens to their shareholders and starts to answer to some of these questions listed in my previous blog.  Look forward to more ways to play the Alberta Oilsands in future blogs (For SeekingAlpha I need to find companies that trade on U.S. and Canadian exchanges, or I would have already put out a list that I know well on Toronto.)


    Disclosure: Long NEP, Long PTR
    Oct 11 1:31 PM | Link | 2 Comments
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