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Published: February 10, 2010
Uganda, the East African nation sandwiched
between the Congo and Kenya, is blessed with significant mineral
resources. Its rich, fertile land is not prone to drought, and
although agriculture has long encompassed a majority of the
country's economy -- coffee is its most significant export crop
-- the economic base is maturing: Services now account for 52%
of the country's GDP.
Overall, the country is making progress --
inflation, the bane of any unstable country, is in check
while 2010 growth is forecast at an impressive +7% -- but
three-fourths of the population subsists on less than $2 a day,
the international poverty line.
Uganda's economy, however, is about to change -- dramatically.
The country, believe it or not, has never completed a national
minerals survey -- not, one would think, an especially daunting
task, as the entire country is smaller than the state of Oregon.
While the state of its cache of copper and cobalt and gold can
be estimated, the $64,000 question has long been petroleum.
Is there oil? How much?
That question was answered last year, when Heritage Oil PLC
(London: HOIL) announced a large find. One tally pegged the
Giraffe field -- anyone want to guess how they came up with that
name? -- at some 400 million barrels. Heritage's CFO, however,
suggested that the wider "Giraffe-Buffalo" field, which
encompasses some 3,420 square miles, could contain several
billion gallons of crude.
The find is the largest in Sub-Saharan Africa in at least the
past 20 years. Previously, the largest onshore fields discovered
in sub-Saharan Africa were at Rabi-Kounga in Gabon, where 900
million barrels were found in 1985, and at Kome in Chad, where
485 million barrels were found in 1977.
Heritage's partner in the project was Tullow Oil (OTC: TUWOY).
Late last week, the Ugandan government approved Tullow's
purchase of Heritage's stake in the project. The government
initially didn't want to have one company in total control of
its oil. So Tullow chief Aidan Heavey and Ugandan President
Yoweri Museveni sat down and Tullow suggested it could bring on
a partner.
So it came as no real surprise, after the Ugandan government
blessed the sale of Heritage's stake to Tullow, when Chinese oil
giant Cnooc Ltd (Hong Kong: 883) -- a unit of China
National Offshore Oil that's listed on the Hong Kong exchange --
said it would buy a stake in the Tullow project for $2.5
billion. That not only satisfies Uganda's concerns but also
brings Tullow capital it needs to pursue the massive project.
Now, nothing in the oil business is over until it's over, but
Heritage says the deal is "imminent."
Big oil companies have the cash and the
engineering expertise to find oil and bring it to the surface,
but typically only governments can engage in deals of this size.
It's a win-win, though. Tullow and Cnooc will reap a king's
fortune -- a billion barrels of oil is worth $75 billion at
today's prices -- and the find has the ability to remake the
Ugandan economy and improve the standard of living in one of the
world's poorest countries.
This long-term growth is clearly not priced into Tullow, whose
shares are primarily traded on the London exchange but are
accessible to U.S. investors through
ADRs, which represent half a share. These shares are at a
52-week low and represent a tremendous buying opportunity.
Tullow and its Chinese partners have the rights to one of the
largest fields in Africa, if not the largest, and Tullow's stock
can be had at a steal.
Note: Tullow's shares, at more than 70 times earnings, might
seem expensive. But one has to remember how that metric is
calculated: by dividing the stock price by previous 12 months'
earnings. Tullow's trailing earnings are light -- $0.04, a
fraction of the 25 to 30 pence a share the firm has proven it
can earn. The firm achieved those earnings without the Ugandan
wells it will be drilling in the next few years as this major
new field continues to be developed.
Oil isn't a game for the risk-averse or faint of heart. But for
growth-oriented investors with a wildcat streak who can stay the
course through the oil patch's persistent ups and downs, few
companies in the industry have the potential Tullow has.
Investors who buy this stock not for what the company has done
but for what it will do -- in Uganda and elsewhere in Africa --
are likely to see a very rich reward, one that would have been
impossible without the action of the Ugandan government.
-- Andy Obermueller
Chief Investment Strategist
Government-Driven Investing
P.S. If you're familiar with any of my recommendations at all,
you know I tend to skew my investments towards companies that
profit from government action. That's why I like this Uganda-oil
opportunity. But the truth is, I've discovered a government play
that makes the profit potential of Tullow look like peanuts.
Get the full story here. |
