No Random Walking!

Very well-written article on the petroleum geology of the North Dakota Williston Basin.

• Major producing unit: the Madison Group of the Mississippi Formation.
• Limestone reservoir.
• Simple anticline structures.
• Paraffinic base oil, with API ranging from 19 to 55.
• Recovery factor: 15-20%.

The State's oil production peaked in mid 1980s at near 150,000 bbl/d. In year 2000, it was down to 90,000 bbl/d.
Right: Producing Counties/Wells

From glumbert.com: Math Lesson: A new (graphical) way to multiply

Certainly there is a lot for me to learn here: Shanda to have road show again to raise money. Forget about stock bayback fore sure.

Below is my response to a friend of mine who asked me why I got into InterOil before last week's breakout even though I don't trust Canadian companies in general. He is an expert in oil and gas development who did an excellent due diligence on InterOil.
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My distrust of Canadian companies is mostly based on my own personal experience and seems consistent with the views of many investors in US. Most of these companies trade on Toronto or Vancouver Stock Exchange and also in one of the US stock exchanges. The Canadian stock exchanges, especially the one in Vancouver, are more lax in controls as you said, resulting in frequent pump-and-dump scams. Many commodities/resources companies are traded in Canada. You probably still remember Bre-X Minerals.
My very first stock investment was a Canadian company (Luminart?), in 1995 or 1996. The company disappeared a couple of years later.
During the last couple of years, I've followed a couple of other Canadian stocks. Why I do I follow them even though I distrust them? ... because they regularly show up in my screening results, and the stock patterns were compelling sometimes, as was in the InterOil case. In these cases the price actions were so obviously pointing to a imminent breakout, I view them as a short-term opportunities but usually cash out when the "official news" is out. [I would say Syntroleum is a similar example: I knew for long time that it IS a risky business but the STORY sells! Now that the price of SYNM is below $3. Should I buy it? No! The trend is not there. The story is over.] Another approach to this kind of companies is to stay aside. But the most important thing is that you should not short it against the trend even though you believe it is a fraud!
On getting into InterOil: I forgot how exactly I became aware of this stock more than a year ago. It could have been the result of my regular stock screening. Or it could have been a big price jump that caught my eyes in a market down day. I have kept it in my "Watch List" since then. During the past year the company has released numerous drilling reports. One time it reported it encountered "gas" and the price shot up $7+ in one or two days. Days later the "gas" is said to be just "background gas" that is commonly seen in wells in that region. The latest well "Elk-1" was drilled six months ago and people have been more cautious about its potential. Now people seem to accept that this is a discovery but, as you pointed out, its economic viability is not certain. Should I short the stock based on the uncertainty ahead? Absolutely no! The company/government/Merill Lynch are all pumping the potential and the up-trend may continue (just as short covering to shares of a bad company can last a long time).
Of course trading on these tricks won't make us a billionaire. However little things (aka "data") and their interpretation can very often mean gain or loss, or whether a trend is about to start. The analogy to oil development is: Using only decline-curve analysis to define a production trend won't make us become another BP or Exxon, but for a small independent oil producer, it may be a critical tool! Note the analogies here:

• DATA: Price/Volume Action =~ Production rate/pressure/etc.
• ANALYSIS: Technical Analysis =~ Decline Curve Analysis
• UNKNOWN: Company Fundamental =~ Geology/Fluid Distribution

In the wake of unknown fundamentals and lack of other data and technical expertise, it is just prudent to use technical analysis or decline curve analysis for short term forecast or for risk management purpose, especially when the cost of action, i.e., the commission, is almost nothing compared to the potential gain or loss.
It has been a while since I came to this observation: baring a sudden market collapse and assuming a portfolio is properly diversified, it is hard for a small investor to loss a lot of money if he/she can identify and follow a trend. [Some day I may want to write a program to "prove" this using historical or simulated data.] Now the question is: Is it easy to pick a trend? Based on my own experience, the answer seems to be "yes if you have the time and inclination to do it".

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Best IPO of the year? That's what some people are saying about eFuture (?????EFUT-Nasdaq?, which went public a couple of weeks ago, raising about $6m dollars by issuing about $1m shares at $6 a piece. Since then the price has reached as high as $48 with heavy trading volume: 14.3m for one day. The float is just 45,000 shares according to Yahoo Finance.
eFuture is a provider of integrated software and professional services for manufacturers, distributors, wholesalers, logistics companies and retailers in China's supply chain front market. The company reported $4.9m revenue and $0.7m next income in 2005, according to its pre-IPO SEC filing.
I just cannot explain how a stock with a float of over 1m shares can be traded with such a high volume (within the lockup period, I assume). The management claimed that they are "unaware of any business information underlying the increase in e-Future's per share price and trading volume". I do not own eFuture's shares (I don't trade any IPOs), but I am really confused, in addition to my concern about the trading volume:

• Why did the company need to go public if all the company needed was just $6m?
• Is it possible that the IPO was severely undervalued, i.e., the company was screwed by Anderson & Strudwick, the underwriter for the IPO? On the other hand, and $6 a P/R of 4 and P/E of 28 (based on 2005 data and $6 per share) was not unreasonable.
• $0.48 of the $6 offering price is for the commission for the underwriter, which is allowed to purchase up to 720,000 shares. I cannot believe that Anderson & Strudwick was willing to be an underwriter for just over $300,000!
• Why does the company have to register in Cayman Islands?
• Why aren't citizens of PRC allowed to purchase the shares (SEC filing)?

As of today, eFuture trades at $33.5 a share, making the company worth about $100m.
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A retired Silicon Valley VC explains this phenomenon as possibly a combination of being a bought deal and short-squeeze to a stock with a very small float and mostly controlled by a single owner(the underwriter). The explanation seems to make sense. Besides, the article offers much else for me to learn on IPO, VCs, speculators. [He has another article specifically on investing in early-stage Chinese companies]

I have been trying to explain the rapid rise of eFuture because the gains in this IPO have been enormous. One explanation for the small float could be that this was a bought deal meaning that the underwriters bought all the shares at $6 per share and therefore were responsible for distributing it. In bought deals, the underwriters actually buys all the stock from the company. That means there are no shares around to be bought - except from the underwriter. That explains the supply side of the equation. How about the demand side? Now, assume you had heard about eFuture from a friend and imagine you really wanted to buy this stock and there is only one seller - Anderson & Strudwick. You the buyer would have to pay whatever the seller asks. If there are large numbers of speculators like you, then demand trumps supply and the stock goes up until it reaches a market cleaning price. Is this rational? Economics 101 says that it is. Is the valuation rational? That is another story.
Another explanation for Efuture's meteoric rise is that there may have been speculators who were shorting the stock betting that the stock would decline. After all, eFuture had climbed inexplicably from $14.98 to $19.89 to $29.49 in 3 days, and any Hedge Fund Hero would have thought, "I'm smart. eFuture is trading at 50x earnings. It is barely growing. No brainier short." This is how things could have played out. Sensing opportunity, our Hedge Fund Hero goes and shorts a couple of lots at $25, then $28, then $31. eFuture just wouldn't stop. Everything would have been perfect - except our Hedge Fund Hero got caught in a short squeeze.

Notes from the conference call:
Elk-1:

• Limestone reservoir
• very high pressure encountered in late May.
• TD at 1850m
• Temp: 186; P: 3580 psi
• DST2: has downhole gauge. limited flow rate of 21.7mcfd, causing only 2psi pressure drop for latest test
• Ran image logs, results being analyzed in Australia service company
• To complete well by running 5in casing.
• To test the well over longer-time.

Current Interpretation:

• Significant finding;
• Porosity: 1-1.5% fracture, Matrix: 8% in nearby cores
• z value: .8 for the field
• GOR: 5bbl/mcbf
• closure size: 32 to 100 sq. km, (gross?) thickness 600m.
• Reasons to believe there is oil: 16km away a well was oil. Mouse1/2 live oil recovered. All oil fields in area has gas cap. Age of HC maturation. gravity?

Next appraisal well:

• To be drilled down-dip in adjacent fault block believed to be in pressure communication with Elk-1;
• To sput in January
• To know more about size, continuity and deliverability e.g., the GWC and/or OWC.
• Aireborne gravity survey indicates another structure along the trend. Seismic to be conducted.

LNG Planning:

• LNG: 4-5 TCF reserve minimum, or double that for single train.
• 680(?) mcfd train capacity. deliverability is key.
• Merill Lynch negotiation: 5-10 TCF as the base case(?).
• How much a purchaser would pay: no comment. pre-Elk-1: 130mm+/tcf?

Having watched the price action of SNDA during the last couple of weeks, I cannot help but laughing:

It's The Market That's Stupid!

The series of events went like this:

• A couple of weeks ago, some analyst downgraded SNDA for whatever reasons, causing the stock to tank to 13s. But the price recovered for the day and held well during the remaining week. [Very Positive]
• Prior to earning report, price spiked $1. [News leaked or shorts is worried]
• After SNDA reported a blow-out earning and with a very upbeat earning conference call, the price of SNDA plunged more than $1. I can attribute this to three reasons:
  • That's what happened to NetEas post-earning a week ago.
  • All news headlines say: SNDA revenues and earnings dropped year/year, irregardless of its Q/Q improvement and the new sustainable revenue model;
  • Shorts manipulating the price: SNDA is thinly traded.
• Now (two days later), the price is going up again:
  • People are starting to realize that the earning report was a great one;
  • Sony's enviable problem - people waiting overnight outside stores to buy its new PS3 game console, is making people excited about the potential of all game companies, SNDA included.

Conclusions:

• The Market is not efficient;
• The Market participants are not necessarily sensible/reasonable. They may be stupid at times;
• Stocks, especially thin-traded ones line SNDA, are manipulated. Stock analysts are crooks.
• SNDA is going up.

Information on the Elk-1 gas/gas-condensate discovery by InterOil:

• Today's Press Release.
• Merill Lynch's View: InterOil Finds Gas at PNG Well, Studies LNG Project
• October 20 Technical Update.

Very funny jokes and quotes on using statistics. These two applies to stock trading:

The 50-50-90 rule: Anytime you have a 50-50 chance of getting something right, there's a 90% probability you'll get it wrong.

In God we trust. All others must bring data —Robert W. Hayden

One of the funniest ones:

A famous statistician would never travel by airplane, because he had studied air travel and estimated that the probability of there being a bomb on any given flight was one in a million, and he was not prepared to accept these odds.

One day, a colleague met him at a conference far from home. "How did you get here, by train?"

"No, I flew"

"What about the possibility of a bomb?"

"Well, I began thinking that if the odds of one bomb are 1:million, then the odds of two bombs are (1/1,000,000) x (1/1,000,000). This is a very, very small probability, which I can accept. So now I bring my own bomb along!"