Unearthing Lucrative Investments

Unearthing lucrative investments sometimes means following the money. In this interview with The Mining Report, Etienne Moshevich, editor of Alphastox.com, describes how juniors—and investors—can capitalize on the valuable resources the majors recognize in the vast shale oil fields of Argentina, Canada’s glowing Athabasca Basin and elsewhere. Moshevich discusses companies equipped with both the management and resources to hitch a profitable ride on the majors’ gravy train.

The Mining Report: You cover oil and gas companies in North America, Latin America and Europe. Which are benefiting from the current instability in oil and gas pricing, and how are they benefiting?

Etienne Moshevich: Not only are investments in the oil and gas sector made more risky by the instability in the oil price, but loans for developing countries become a lot tougher to obtain and are sometimes severely reduced. As the price of oil increases, it threatens oil-importing nations, which must continue to pay interest on their debt. As the price of oil decreases, it makes it harder for oil-exporting nations, like Mexico, to continue their interest payments. Savvy investors look for every opportunity to decrease their risk, therefore as oil prices fluctuate, many look to stable jurisdictions like Canada and the U.S., as North American oil explorers and producers don’t have the same worries as explorers and producers in countries with riskier credit ratings.

TMR: Argentina acts the bad boy of international finance. How does it manage to continue to attract foreign investment?

EM: The market seems to be overlooking a massive opportunity in Argentina. Argentina’s Vaca Muerta could be the biggest shale play in the world, and some of the biggest oil companies are flocking to the area to get a piece of the action.

According to a Reuters article by John Kemp published on July 21, 2014, “Argentina is thought to have more shale oil than the United States—which could potentially push it into the ranks of the world’s biggest oil producers. Nearly all this shale oil and gas is contained in the Vaca Muerta and Los Molles shale formations. The Neuquen basin, therefore, ranks as one of the most highly prospective shale plays in the world and one of the most likely to be developed outside North America.”

“Madalena Energy Inc.’sacquisition in Argentina provides a sizeable footprint in arguably one of the biggest shale plays in the world.“

Majors are paying as much as $11,000/acre for a piece of the play; if the majors aren’t afraid of being expropriated, neither should investors. The Reuters article even addresses the issue of political risk: “Argentina’s history of political and economic instability, serial debt defaults, devaluations, and expropriations of foreign property. . .make[s] outside investors wary. But the prize is enormous, too big for international oil companies to ignore, and the country’s politicians, from the president downwards, show a strong awareness of the need for foreign capital and expertise to develop what could be a transformational national asset.”

The only expropriation in Argentina happened to its state-owned oil company YPF. . .no one else. That was an isolated incident, which shouldn’t deter investors.

TMR: Can you talk about the benefits for a smaller company entering the oil sector in Argentina? What is the upside?

EM: For example, Madalena Energy Inc. (MVN:TSX.V; MDLNF:OTCPK) acquired Gran Tierra Energy Inc.’s (GTE:TSX; GTE:NYSE.MKT) Argentina business unit, which was very accretive for shareholders, as it provides Madalena with a solid foundation and sizeable footprint in arguably one of the biggest shale plays in the world. Post-acquisition, the company has a large portfolio of opportunities across 14 concessions, with multiple horizontal development plays, an extensive exploration portfolio on high-impact conventional exploration assets and a multibillion-barrel asset base for unconventional shale and tight sand plays.

If we look at the acquisition based on fundamentals, Madalena got the asset at a huge discount. The company paid just $9.67 per barrel of oil equivalent for Proved and Probable reserves, or just $19,000 ($19K) per flowing barrel of production, which is extremely cheap compared to transactions with similar production levels. With this acquisition Madalena triples its production, and could dramatically increase its cash flow in 2014 and 2015 respectively.

TMR: Has Jagercor Energy Corp. (EM:CNSX; JAMTF:OTC) succeeded in finding and financing a Argentinean good asset yet?