It’s hot in Kurdistan. The sun beats down relentlessly, the sand shimmers and the camels plod their weary way across the dunes.
But it’s really not the climate that’s of interest to us as investors. It’s not the sand either. It is what lies underneath.
Suddenly, one small corner of the stock market has exploded into life, and there is every reason to get excited.
Triggering things off was this announcement from Heritage Oil (ticker: HOIL): ‘The MiranWest-1 exploration well encountered oil shows over an interval of 1,100 metres and good quality light, sweet oil was recovered to surface.’
That is industry code for ‘We’ve struck oil!’ And the story has been building for some time. The share price of Heritage has nearly doubled in the past couple of months.
A new stock market phenomenon arrives
But this will be no isolated incident. There could be other oil “doublers”. In fact, this could be the start of a major oil industry and stock market phenomenon – the exploitation of the massive oil wealth of Iraq and in particular this one area…
The Miran West field, you see, is in Kurdistan, the autonomous region of federal Iraq. Miran is a huge license area, covering over 1,000 square kilometres. It is close to the giant Kirkuk oil field and, Heritage believes it could contain ‘multiple billion barrels of oil.’
This is not fanciful. Think about it. Kurdistan is in the heartland of the Middle East, the home of the world’s biggest oil fields. It would be surprising if there wasn’t plenty of oil here… and throughout Iraq. But until now, it has barely been exploited…
This, of course, has much to do with politics. Saddam Hussein did not exactly roll out the red carpet for foreign investors, least of all for foreign oil companies keen to siphon off the country’s prize commodity. But now things are changing, and Kurdistan has stolen a march...
The politics of the region are complicated. The Iraqis to the south and the Kurds to the north do not always see eye to eye. But the Kurds have done things their way. They have their own government and their own Prime Minister, Nechirvan Barzani, and while the Baghdad government has dithered, they have got on with the business of developing their oil fields.
Of course, there is a degree of political risk here. The Baghdad government is not happy with the Kurds. They are not happy that the Kurds have granted licenses to a few brave foreign oil companies. They are not pleased at the prospect of Kurdistan oil flowing out of the country, to the profit and benefit of foreigners and of the Kurds.
Baghdad has very different ideas for the development of Iraq’s oil fields. It knows that the country needs the money for the expensive work of post-war reconstruction, and it knows that foreign expertise is required. But it does not want to see foreign oil companies running off with the lion’s share of the profits.
So, Baghdad has a different plan…
Baghdad wants to increase Iraq’s oil production from 2.5 million barrels per day to 6 million. But, rather than offering production sharing agreements it is offering only ‘production services contracts’. This means that foreign operators would be paid for each barrel of oil produced at a fixed rate, regardless of the global price of oil.
Heritage Oil is the first to strike in Kurdistan – but not the last
Baghdad criticizes Kurdistan for not adopting the same approach, and is also unhappy that Kurdistan licenses have not been put out to competitive tender. It says that it will not recognize the contracts granted by the Kurdistan government, and that any oil revenues raised in Kurdistan must be remitted to the Iraqi exchequer. Now there is a stand-off, and a compromise is badly needed.
But while this rumbles on, investors know that oil is oil – and that it is rarely found in large quantities in any country where the political rules are entirely clear. Junior oil companies know this and know that they must first find oil, and then fight the political battles.
So a few a years ago, a handful of junior oil companies chose to venture into Kurdistan. They were able to take licenses over huge expanses in the world’s most oil-rich region.
Heritage is the first to strike, but it is unlikely to be the last. Two other companies quoted on the London Stock Exchange – Sterling Energy (ticker: SEY) and Gulfsands Petroleum (ticker: GPX) are also in the region. I’ll be following their news carefully for signs that they too have what it takes to be another oil “doubler”. Good investing,
Tom Bulford
For The Right Side
P.S. There is one other company that I know of that is drilling in the region. I have recommended it to readers of my Red Hot Penny Shares newsletter. It leapt this week, on the back of Heritage Oil’s news. But there should be plenty more upside potential. Click here to get my latest issue and discover this possible oil “doubler” share now, as well as my three top “bounceback” shares.
MARKET NOTES
It’s a seller’s market – Don’t miss the window
BY THEO CASEY
Since 10 March the FTSE 100 has rallied 17%. As bear rallies go, this one has had a good innings. But we’ve been here five times before and every time it has ended the same way, further down. It would be naïve to expect something different this time.
Our advice is to play it safe – take advantage of the buoyant share prices this rally has gifted us and sell. If you’ve bought stocks that on second thought look shaky, now is a potentially profitable time to offload them. Why? Well if history is any guide (and it has been so far) we’re about to fall back once again…
The 1930s Great Depression is the downturn the current crisis mirrors most closely.
The chart below maps the many bear rallies in the 1930s stock market. Despite several instances of rising prices, in one case as far as 48%, the dominant trend was downward…
Lessons from history – In the 30’s investors were punished by the bear rallies
You have to remember that despite bullish soundbites from world leaders in recent weeks we haven’t actually seen a turnaround. Industrial production and GDP continue to fall and unemployment continues to rise. Therefore, until further notice, you should sell any bad stocks in your portfolio while the opportunity’s still around…
If nothing else, the above chart demonstrates the danger of buying the index rather than individual stocks. While bearish, I wouldn’t for a second recommend you sell all of your stocks, just the least defensive positions. A good stock picker can win even in a downturn.
Editor’s recommendation: As investment director of The Fleet Street Letter, Theo Casey is currently advocating caution on four fronts. Click here to read his latest report, “What Happens Next?”
The Daily Reckoning – Let the bear market do its work
BY BILL BONNER
San Diego, California
Monday, 6 April 2009
“People in this country don’t realize how bad things can be,” said Richard Russell on Saturday night.
“I lived through the Great Depression. I remember people standing in bread lines. It was hard to get a job, any job, back then. But now, you see the restaurants are still full. People are still spending money. They may be worried and they may be beginning to save, but there’s no sense of urgency. And there’s a rally on Wall Street. You know, every bear market produces a rally. You can expect the market to retrace its steps by one- to two-thirds.
“And every bear market has a surprise. I think the surprise is that this is going to be a lot worse than people expect.”
Richard Russell is 84. He’s been writing his investment newsletter, Dow Theory Letters, for 50 years. This weekend a group of his admirers, including your editor, came together to say thanks.
There are a lot of people with opinions on the economy and the stock market. You can hardly turn on your computer without getting dozens of them. But there are not many opinions with the depth of experience and knowledge behind them as those of Richard Russell. He’s been studying “the language of the markets” for more than half a century. Though no one ever fully masters the language of the market, Richard can at least carry on a conversation with it.
“The primary trend is down,” says he. In the end, he continues, no matter what Obama and Bernanke do, the primary trend will have its way. The bear market will continue until it “has fully expressed itself.”
What does that mean? We don’t know... and no one else does either. But if this market has something to say, it’s probably something it’s wanted to get off its mind for a long time.
And our guess is it’s not a message that people are going to want to hear.
Richard is probably right. After so many years of watching markets, he’s developed an instinct for what is really going on. This is going to be worse than people expect, he says. Because despite all the whining and belly-aching in the press, most people still do not expect the worst. Over the last quarter century, they’ve learned to look for bottoms... and buy. Every time it looked like real trouble was coming, the Fed cut rates... and soon, it was off to the races again. Now, they’re afraid of missing this opportunity for another boom.
But Richard is old enough to be able to look back much further than a quarter of a century. He’s seen the Great Depression. And WWII. And the bear market and stagflation of the ‘70s. He knows that sometimes it pays to be extra cautious. “Cash and gold,” says Richard, are the only investments you should be holding now; we’re a long way from the bottom.
One of the things that makes us think so, is that so many people are looking for the bottom. “Individual Investors Pile Into Citi,” says a headline from last week
“The old Wall Street adage about the dangers of catching a falling knife doesn't seem to be scaring individual investors away from Citigroup Inc.
“Some discount-brokerage firms report a surge of individual, or retail, investors buying shares of Citigroup during the past five months, amid the New York bank's stock-price slide.”
These investors think they see an opportunity. What we see is a trap…
Read on…
To read the Daily Reckoning in full, click here.
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