East West Petroleum (EW.V): Deafening silence and a standing crowd

03/26/2018

EDITOR’S NOTE: We believe, this year, resources will make a pretty hard move, just as cannabis and blockchain did in 2017, and because many of our investor readers are new to the mining space, we decided to bring aboard a writer who can dig deep into the details and explain what matters and why.

Greg Nolan, AKA Dirk Diggler, is a fount of mining knowledge. His brief: Take a look at mining and oil and gas explorers and producers, and tell us what he feels, positive or negative, with no fear nor favour.

We encourage readers, if they come across a phrase or concept that they don’t understand, to let us know in the comments, as we’re putting together a series of pieces that will explain terminology in greater detail. See more of Greg’s work here.

The longer the base, the higher in space…

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Translation: the longer a stock builds a base (a sideways trading channel confined to a narrow price range), the more significant the move will be when it finally breaks out to the upside.

Even if you don’t study charts, or understand the first thing about price patterns or momentum oscillators, the long (price) base East West Petroleum (EW.V) has carved out over the last 3 plus years should hold your attention, for a moment or two anyway.

Aside from the base formed between late 2014 and now, note the volume spike in late December 2017 (the bar at the bottom right of the chart breaching the 4 million level). Someone wanted in. They wanted in bad. They wanted in to the tune of approx $500K, which is significant when you consider that the company hasn’t churned that kind of volume in years.

If you suspect like me that ‘smart money’ was behind that $500K trade, it could represent only the first of many such salvos from that well-heeled lot… that clique of secret-handshaking A-hole’s. That’s only speculation on my part, of course. That trade could well have been the aftermath of some overzealous trust fund punk who didn’t understand the difference between a limit and a market order. But something tells me there was more to it.

Those who study and trade off charts for a living:

A long sideways base, like the one portrayed above, is sometimes interpreted as pent-up energy. Once this compressed energy is released, via an upside breakout, it can wreak all kinds of havoc.

A breakout to the upside of this variety will also pop-up on the screens of an entire universe of ‘technical traders’. Their trading software is designed to spot this exact type of price/volume action.

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I can already hear the babble around the water cooler: “Dude, did you see the breakout on that one?… Ya, but did you see the base it broke out from?… I say DAMN!”

These technical traders’, oblivious to the fundamental news that might trigger such an event in the first place, often add fuel to the move higher by throwing well-moneyed bids at the trading action.

Resolution?

The long base East West chiseled out over the past three years could resolve itself in a vertical assault to the upside – or it could continue to trade in a sideways channel for another three years. This isn’t exactly a no-brainer, but I’m rootin’ for the former.

It’s every traders’ dream to tag a stock that’s on the verge of a significant push higher. The impact on one’s trading account, not to mention the degree of anticipation and excitement, can be a beautiful thing. If the move higher is powered by a watershed news event, and the stock manages to establish momentum, well… that’s the ultimate trade. And that is something we’re always on the lookout for here at Equity Guru.

The price level to watch:

In East West’s case, a true breakout from its 3-year base would occur on any high volume daily close above $0.20. A high volume weekly close above that level, in my estimation, would signal GAME ON….

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Ultimately, the magnitude of the move higher would depend on the quality of the news event. The coming weeks/months should be interesting for East West newsflow, assuming news is on the way.

Taking a look inside East West Petroleum…

When I first went to East West’s website, I was immediately struck by how lean it was. The design is dated. The information is dated. Their corporate presentation is ‘currently being updated’. Seriously?!

Management doesn’t feel the need to promote the company’s assets either, preferring the solace of the shadows to bide their time. They seem content simply sitting back and letting their JV (joint venture) partners do all of the work. Could this be management’s aim, their intention?

For most experienced investors running dd (due diligence), that’s where their tire kicking would end. “If a company can’t be bothered updating their website, keeping investors informed, they don’t want, nor do they deserve my hard earned investment dollars”.

Under most circumstances, that kind of stand deserves an attaboy (or attagirl). Bravo to anyone championing such a rigid code of ethics.

Here’s the thing though: if the company’s objective is to present an air of uncertainty, a la, “there’s nothing-to-see-here… please move along…”, it might deserve an even closer look than normal. It may just turn out to be a classic read-between-the-lines type company.

Equity Guru’s Chris Parry presents some interesting insights supporting this premise in a very timely, thought-provoking article.

East West’s Game:

It’s no game. East West is a genuine company. It’s also an interesting company with serious assets. There are things going on behind the scenes – developments that are very real and potentially very substantial – that could trigger a significant move higher.

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Romania:

East West’s partner in Romania is Naftna Industrija Srbije – NIS for short – a Serbian multinational oil and gas company with headquarters in Novi Sad, Serbia. This company is a biggy, boasting revenue of 1.556 billion Euros in 2016. Curiously, NIS is 56.15% owned by Gazprom Neft PJSC,  the fourth largest oil producer in Russia. Hmmm… that’s curious.

East West’s JV (joint venture) with NIS gives them a 15% carried interest – a free-ride if you will – all the way through to production. A ‘free ride’ means a FREE RIDE… NIS is picking up all the tabs while East West sits back and ponders potential outcomes.

The project:

The Romanian project encompasses four exploration concessions spread out across 1 million acres in Pannonian Basin of Western Romania.

What’s so special about the Pannonian Basin?

The USGS (US Geological Survey) states the following about the oil and gas production potential in this part of the world (Equity Guru’s Chris Parry deserves a serious attaboy for painstakingly sleuthing this important piece of the puzzle).

Undiscovered resources as estimated for the individual assessment units are shown in table 2. Collectively, these units indicate that between 153 and 631 million barrels of oil (MMBO) and 1.7 and 7.4 trillion cubic feet of gas (TCFG), at the F95 and F5 probability levels, remain undiscovered within the Pannonian Basin Province.

The range between estimates for both oil and gas is large enough to park a planet between, but even the low end of the range – 153 million barrels of oil/1.7 trillion cubic feet of gas – has substantial GAME CHANGER potential.

This region of western Romania is obviously a very strategic oil and gas target for NIS. They wouldn’t be footing such hefty exploration costs unless the potential payoff was huge.

Money spent on the project thus far by NIS:

We’re talking Euros here. $1 Euro = $1.23 USD. NIS has, over the years, spent $16 million Euros (nearly $20M USD) on phase 1 of the project. That aint chump change. Moving into phase II will require expenditures of some $60M Euros – you can run the exchange-rate arithmetic on your own time for that one.

News:

On Dec 19th, to the shock of nearly everyone that has been following the company for any length of time, significant news dropped.

It would appear that project operator NIS has declared a potentially commercial well.

Light oil was tested from two intervals within metamorphic basement with gross rates up to 363 barrels per day (bbl/day) of fluid with water cuts up to 49 per cent (maximum gross oil rate 177 bbl/day). In addition, a total of five intervals were individually tested in Miocene sandstones, four of which flowed gas at gross rates in the range 0.74 to 4.27 million standard cubic feet of gas per day (MMscfg/d). The fifth interval flowed minor quantities of gas and condensate.

The Teremia 1000 well has been completed as a potential future oil producer.

A decision regarding the commerciality of the oil accumulation is expected to be taken when the results of future appraisal wells are known. In addition, as flaring of gas in Romania is forbidden, any oil production will require a technical solution for the use of associated gas together with acquiring the necessary permits and approvals for the infrastructure and facilities.

These are early innings. There’s a hydrocarbon deposit present here. There’s oil (and gas) in this first well, but in order to make the project viable – in order to justify the construction of a production plant – additional wells will be needed.

Look for more news to come out of Romania in the coming weeks/months.

New Zealand:

East West’s JV partner in New Zealand is Tag Oil (TAO.TSX). The JV’s exploration blocks lie in the production fairway of the Taranaki Basin, a primary oil and gas basin in New Zealand. Over the course of their relationship, Tag has successfully drilled off six wells. There are more on the way. Both companies draw revenue from these wells, revenue which will increase over time as Tag continues to drill and develop.

The revenue East West receives from the NZ operations is modest, but it’s enough to run the company, pay management salaries, and keep the lights on. That could change as Tag continues drilling off more wells and works toward increasing production volumes – potential increases are expected in H2 of 2018, according to Tag.

Final thoughts:

For a company that doesn’t seem overly concerned with the wants and needs of its current shareholder base, East West management treats the company treasury, not to mention its cap-structure, with a fair degree of respect. This is a rare thing in the junior arena. Approximately 30% of its current market-cap is made up of cash. Its shareholdings in other companies (Advantage Lithium AAL.V for example) add another layer of comfort to that cushion.

I had to go all the way back to late 2010 to find the last time East West announced a PP (private placement). How many companies currently operating in the junior resource arena can make that claim?

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It’s difficult to predict how things will play out with East West going forward. Increased production volumes out of New Zealand might be expected in the coming months – that would be welcome news. But I suspect news coming out of Romania is what will blow the lid off of this stock, if the lid is destined to blow.

East West has a heavyweight partner in Romania, one that has already spent significant money advancing the project… a project which could turn into a mammoth-sized production scenario. That’s where my focus is.

I think the company is an interesting speculation. As Chris Parry concluded in his recent article on the subject:

We think all the pieces are here for something interesting to emerge in the next few weeks/months. The big partners, the near term revs, the potential for expanded drill results, the fat buying that happened on the last news and broke a five year dry spell… The reluctance of the company to tell its own story to this point.

None of this is accidental. Watchlist.

East West has a current market-cap of approx C$8 million. It’s backstopped by a stable treasury and production revenue. The downside appears limited. The upside, as that old traders provberb at the top of this piece proposes: ‘the longer the base, the higher in space’.

We stand to watch.

END

~ ~ Dirk Diggler

FULL DISCLOSURE: We have no commercial arrangement with East West Petroleum but have purchased stock on the open market. The author does not own shares in East West Petroleum.

 

 

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Comments 3

  1. Steve says:

    I like the article. What are your thoughts on the Cannabis company EW is buying? Do you think this is a positive or negative?

    • Lukas Kane says:

      Steve,
      Thanks for reading the article.
      Your question: is this “pivot” from oil into pot a good thing for EW shareholders?
      Juva Life has two conditional use permitted facilities in the city of Stockton with 62,600 sq. ft of warehouse space projected to produce over 9,445 lbs. of annual cannabis production.
      With that silhouette it is impossible to project what – if any – revenues Juva will generate.
      EW will do a 10:1 rollback, and – after spinning off the oil assets – will have at least $4 million in Cash to fund the acquisition of the weed co.
      The optics of these “pivots” are intrinsically awkward. “I trusted you to find oil, that didn’t work out, so know you want me to trust to you grow pot?”
      That said, being in the California weed business might be a better option than trying to mop up a few stubborn drops of Romanian oil.
      About 7 years ago, I went to China with the CEO of a tiny little oil company that was trading at 11 cents. He was (is) a smart, driven “company-builder”. He pivoted into weed technology, developed some sexy patents, and it’s now a $2 stock.
      Short answer: it’s too early to tell if this is a good thing.
      (too many known unknowns)
      But it’s not too early to pose the question, and stay vigilant in our assessment of how EW moves forward.

      • Greg Nolan says:

        I like your take on Juva Life Lukas. Muchly welcomed. Thanks! I should add that EW’s oil assets are still highly prospective for discovery, especially in Romania. Time is always a compromising factor. EQ is carried by its larger partner. Mgnt really has nothing to do but wait. Why not get into the weed biz in the meantime?

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