No Random Walking!

Today's news has been expected for months now. However the fact that it's IVAN's CEO personally confirming the negotiation and that the news was released in  Ecuador instead of Canada is very significant, i.e., the deal is almost done. This development also explains the recent strength in IVAN's stock price (see the earlier post). The stock should do well leading to the actual announcement if an agreement is to be reached soon. However the post-announcement reaction by the market will be unpredictable.

Earlier in August 7, Bloomberg reported:

Ivanhoe will invest about $4.5 billion over the 30-year lifetime of the agreement to extract crude from the Pungarayacu oil field in the Ecuadorean Amazon, and PetroEcuador will pay Ivanhoe $37 per barrel of crude, said Camilo Delgado, Vice President of PetroProduccion, in an interview in Quito.

According to PetroEcuador, the field has estimated reserves of 3 billion to 4 billion barrels and could produce 120,000 barrels a day in six years.

Development of the field hinges on Ivanhoe's capacity to transform Pungurayacu's oil from tar-like very heavy crude to light crude.

Ivanhoe plans to modify the oil to 21 to 23 degrees API from the field's 4-to-15-degree API oil, Delgado said.

There are many unknowns in this project --- legal details, technology effectiveness and capability, economics, financing cost, just to name a few. However it sounds fascinating that a single project like this can mean huge revenue for a small company like Ivanhoe Energy: $3 billion * 37 - 4.5 = $106.5 billion before discounting time and risks!!! ... And they are talking with many potential partners worldwide!

[Of all the risks, IVAN's HTL technology is the biggest. They even don't have a field-scale plant set-up and demonstrated yet!]

There are many good-looking charts in recent days, especially in oils and alternative energy plays. IVAN offers an example, as shown in the six-month chart below:

IVAN has been very strong in last three week or so, after coming down from a high of $3.99 with reducing volume as the oil price dropped. Two things to note:

1. Relative strength against oil ETF XLE (the purple line and strength bar). In other words IVAN is refusing to drop further even as oil price drifted down and, when oil recovered, IVAN recovered even more. This doesn't mean for sure that IVAN won't go down further as (1) the story of the company, so far intact, may change for the worse, and (2) the oil price may go down further, resulting in IVAN's price breaking down $2.2, the current support; It is not uncommon for a stock to behave strong before crashing down again. 
2. IVAN held up very well the day after it reported the quarterly earning a couple of days ago. The report was predictably pathetic due to lack of revenue. It's a story stock after all. Still the fact that a very bad report didn't cause any drop in price is sentimentally very good indicator.

The fundamental, or the story, for IVAN is still the same: its HTL oil degrading technology may have significant impact in recovering many heavy-oil/oil sands assets in the world, as seen by the over-whelming enthusiasm from the investing community when the company raised cash in a private placement not long ago.

In other oil plays, the quarterly report by InterOil (IOC) is very good. It reported increasing oil refining/retail revenue and profit even as the oil price was at record high during the quarter. The chart looks great too.

http://www.professorprosperity.com/2008/07/success-quotes-from-warren-buffett/

... with the picture of Buffett's simple house in Omaha, Nebraska

If what the management of Canadian Solar Inc. (CSIQ) predicted a couple of months ago still holds, then the current price at $29 is a compelling buy (it was over 50 then). The company is to report quarterly earnings tomorrow. [Do not buy before earning date (fault line)!!!]

On the other hand, the company's "follow-on public offering" a couple months ago was only priced at $34 per share when the actual price was $39 just before the deal. Very low for such a growth company. Maybe there is something bad that we don't know. The negative perception and other factors drove down the share price to $26.

In related news, LDK Solar Inc (LDK), surged nearly 20% after its blow-out report today.

Oil price aside, there is concern about decreasing production volume, esp. in oil.  Excerpt from the latest 10Q of Georesources:

We estimate that production volumes for the year 2008 will range from 720,000 to 760,000 Bbls of oil and from 2,800,000 to 3,000,000 Mcf of natural gas. The lower ends of these ranges represent an increase of approximately 84% and 64%, respectively, over 2007. Ranges are provided herein because estimates are dependent on the availability of rigs, materials and services, within the industry. These estimates are predicated on the results of operations for the six months ended June 30, 2008, adjusted for production from properties sold, estimated production from properties acquired, and from our drilling and development program. We closed several divestitures of properties situated in state waters and onshore along the Gulf Coast in May 2008 and closed an acquisition in Oklahoma in June 2008. In the opinion of management, the acquired properties have longer productive lives and greater development and exploration potential that those properties which were sold. In addition, the Company reduced its estimated future abandonment expenses. However, in the short term the Company will experience a net reduction in production volumes. As previously reported, divestitures resulted in reduced oil volumes by about 390 BOPD, while the Oklahoma acquisition will initially add about 600 Mcfd. Management expects to replace this net reduction by its drilling and development program, but due to availability of rigs, materials and services the timing cannot be predicted with accuracy.

Nevertheless, the share price has dropped so much that the multiples are very low now. (And I wonder what the fund managers who agreed to shed $1.5m at $23 a share in a private offering a couple of months ago are thinking now.) The estimated production volumes have actually gone up a lot since the previous update three months ago (the numbers were 708,000 Bbls and 2,654,000 Mcf respectively).

If the realized prices stay at $98 per Bbl and $9.74 per mcf, respectively, for the rest of the year, the forward p/e is about 9.5 according to my preliminary calculation. The p/e becomes 17.1 if the prices drop to those seen in Q1, which came at $81 per bbl and $7.73 per mcf respectively. [Need update on hedging ineffectiveness and interest expenses.]

Valuation:

• Market Cap: 614.0M (at $12/share)
• Net cash: 270.9M - 33.5M = 237.4M (or $4.63/share)
• EV: 376.6M (or $7.37/share)
• Avg. Estimate: $1.37/share (Apr-09)
• Forward P/E: 8.75
• Forward EV/E: 5.38

Technical:

• Turning positive with surge above $12 today, holding well as Nasdaq retrieved;
• Recovered all losses suffered after consecutive downgrades by JPM and others in last two weeks
• Vs. competitor MU: positive or neutral

Others:

• Next earning date: late August
• Last quarter: earning at $.17/share, missing street views
• Price was $17 pre-earning and has been down 30% since.
• Concern: customers shifting to lower-end cell phones, cutting margin for OVTI
• Looking ahead: company expects revenue of $170 to $190 mil next quarter.

Negatives:

• Wrong kind of companies to invest money in for long-term
• Products (chips) quickly becoming commodities
• Daily prices still very volatile, consolidation not long enough?
• Too close to earning date (in less than three weeks)?

Summary:

• Money moving into OVTI during last couple of weeks (funds buying on valuation or short-covering)
• Risky for long-term but probably worth buying and holding before earning date due to compelling valuation and technical signals.

Frequent Flier news | If you regularly use frequent flier miles with American Airlines, note that there is a charge to upgrade, effective Oct. 1, 2008. American Airlines has a web page explaining its AAdvantage Award changes. Most notably, if you are trying to upgrade on a flight between the continental U.S. / Canada / Mexico / the Caribbean or between North America and Central America, you will be charged 15,000 miles plus a $50 co-payment. The upgrade charge for travel between North America and Europe, Japan, China, Argentina, Bolivia, Brazil, Chile or Uruguay will be 25,000 miles plus a $350 co-payment.

... is probably way over-done. Many oil companies are reporting earnings in coming weeks. The numbers should be fabulous.

However, if Exxon is any indication, the stocks may still go down further no matter how strong the earnings come out to be. Three factors: (1) slowing production growth (if any growth at all) and/or reserves growth; (2) increasing development cost; and (3) decreasing oil prices.

Strangely several alternative energy technology companies are doing extremely well recently.