How I'm Going to Buy Iraq's Oil
By Matt Badiali
January 27, 2010
The gain was a fraction of what I'd hoped for.
Last May, I wrote a full issue of my S&A Resource Report advisory on an investment that sounds absolutely crazy to most people. I recommended buying a company with significant oil assets in Iraq.
Addax Petroleum got us a slice of what will be the greatest resource story of the next few decades: the development of Iraq's oil resources. Here's why you should be interested in this story...
Today, Iraq is officially credited with about 115 billion barrels of proven oil reserves, the second-largest total in the world. This number alone will make any Texas wildcatter drool. As remarkable as that sounds, that analysis is almost 10 years old and based on 30-year-old data. Exploration and drilling technology has made an incredible amount of progress since then.
A recent review of that data by consultants for the Iraqi government indicates another 45 billion to 100 billion barrels exist under the western and southern deserts. All told, Iraq could have more than 400 billion barrels of oil. It's no wonder George W. Bush and his neocon buddies chose to "democratize" the place... rather than invade North Korea or Zimbabwe. But let's get back to Addax...
I wanted to hold Addax, a midcap oil company, for years... It had plenty of drilling to do on its leases. And I expected hundreds of percent gains from the deal. But there is a global bidding war going on between the U.S., Korea, China, and India to develop Iraq's awesome potential. So our Addax investment lasted exactly six weeks before giant Chinese oil refiner Sinopec announced a takeover bid and handed us a quick 55% gain.
Now my job of finding plays I can recommend to thousands of people is much harder.
You see, one of my favorite ways to "buy" oil is through oil-service stocks – the guys who sell "picks and shovels" to the industry. But the trick to a great Iraq trade is finding a strong, well-managed company that is putting all (or most) of its chips there. We're not there yet with the oil-service companies...
Take, for example, Foster Wheeler. It's one of the oldest petroleum-engineering firms in the world. It has 70 years of design and construction experience in refining, 60 years in petrochemical work, and nearly 80 years in the Middle East.
The company first worked in Iraq in the 1930s at the giant Kirkuk field. The company engineered some of the most difficult feats in the world, like the world's longest sour-crude pipeline (sour oil is highly corrosive due to high sulfur content) and the world's longest underwater multiphase pipeline.
The company has two contracts in Iraq right now – a $128 million deal to draw the plans for an oil refinery in southern Iraq and another multimillion-dollar deal to design a massive 4.5 million barrel-per-day oil export facility in southern Iraq.
The company's early work in Iraq likely will generate more and more opportunities there down the road. I'd be shocked if Foster Wheeler didn't get a billion dollars out of it eventually.
Sounds great. But Foster Wheeler is a $3 billion behemoth. Its work in Iraq will cause barely a ripple in the company's $7 billion in global annual revenues. I'm going to keep an eye on Foster Wheeler. Right now, though, it's a little too early to buy it for its Iraq work.
Weatherford International, the giant international drilling company, is in the same state. The company won a $224 million contract for drilling service in Iraq. That's about 3% of the company's trailing 12-month revenues... not enough to justify investing in the company as an Iraq play.
However, now that super majors like ENI, British Petroleum, China National Petroleum Corp, ExxonMobil, Lukoil, and Statoil have all signed contracts to develop fields in Iraq, more and more service contracts will be let out. And while there are no sure-fire winners so far, I'm sure some small-cap and midcap Iraq plays will turn up over the coming years.
It's a huge story that's just getting started. I encourage you to keep it on your radar. It sure is on mine.
Good investing,
Matt |
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