To OTC Journal Members:

This weekend's idea is my offering in the oil & gas sector. This is an exotic opportunity which takes us to another corner of the world. Five different members emailed this idea to me. While there's nothing wrong with 30% to 40% returns, I'm looking for more. I'm hunting for elephants. Elephant hunting is risky, but can be very rewarding when you hit a big winner. Long term subscribers will remember NetSol (NASDAQ: NTWK) which I first wrote about on January 15, 1999 (then Mirage Holdings). The stock was on the BB at about $3.50 that day. In March of 2000, after making the transition to the NASDAQ, the stock hit a high of $75 (21.4 times your money). I loved it, and so did the members. I hope it happens again. Could this be the next one? I could write 50 pages on this situation, but I tried to condense the story. Read and decide for yourself.
 

Oil & Gas Off the West Coast of the Dark Continent

Vice President Dick Cheney stated the following in the May 2001 National Energy Policy Report: "West Africa is expected to be one of the fastest-growing sources of oil and gas for the American market." In July of this year President Bush's visit to the "Dark Continent" helped highlight the current administration's policy towards reducing US dependence on Middle Eastern Oil.

It is believed somewhere between 6% and 10% of the world's oil reserves can be found off the West Coast of Africa. Revolutions, violence, ethnic unrest and corruption have undermined the growth of the oil industry in this untapped region.

However, development is now gathering momentum. Shell continues work on the massive Bonga deep water development, estimated to contain 700 million barrels of oil and scheduled to come on stream in early 2004. ExxonMobil is developing the 400 million barrel Yoho field in shallow waters, slated to start producing in 2005.

In the middle of this turmoil sits the peaceful Western African nation of the Republic of Guinea (not to be confused with corrupt and unstable Equatorial Guinea). Guinea is a member of the UN Security Council.

An agreement which has its roots in 1995 gives Houston based Hyperdynamics (OTC BB: HYPD) the rights for oil & gas exploration and production on 16 million acres located just off the Guinea coast. Referred to as the "concession", it is showing early signs of having natural gas reserves in the "trillions" of cubic feet, and potentially hundreds of millions of barrels of oil. The stock has been trading up in concert with building evidence.
 

History of Hyperdynamics (OTC BB: HYPD) and the Accord With The Republic of Guinea

Hyperdynamics is a former dot-com (hence, the name). Like some many of its brethren, they struggled with their business model. The company built an IT co-location facility in Houston,Texas, which happens to be the energy capital of the world.

In an effort to expand their business prospects, Hyperdynamics acquired now wholly owned subsidiary SCS Corporation in May of 2001. Along with the SCS acquisition came two seasoned veterans of the oil industry. They led the company in a new direction. Hyperdynamics started using its state-of-the-art digital facility to provide a unique service to the oil industry. The company went into the business of converting the millions of seismic records in the data libraries of the major oil companies from micro fiche to digital media. Under this new leadership, Hyperdynamic's fortunes reversed course.

A major transition came in March of 2002. Hyperdynamics charged after an opportunity, giving the company renewed upside potential. Through long established contacts, Neil Moore, President of SCS, joined forces with USOil Corporation, who had entered into a Revenue and Production Sharing Agreement with the Republic of Guinea in 1995. Moore was able to facilitate new seismic studies in the area as required in the agreement, thereby fulfilling an obligation and keeping the accord current.

In late 2002 Hyperdynamics negotiated an improved arrangement with USOil. In an 8K filing with the SEC on December 20, 2002, it was disclosed that Hyperdynamics, through wholly owned subsidiary SCS Corp, had acquired all the rights for drilling and exploration as defined under the accord with the Republic of Guinea. In short, Hyperdynamics acquired the rights to the concession, positioning the company to go after the potential mother lode. 

The concession, which you see outlined by the purple dotted line superimposed over this aerial photograph, encompasses 64,000 square kilometers. SCS owns 100% of the rights to explore, drill and produce this 16 million acre concession. The area runs 400 kilometers offshore and 300 kilometers along the shore.

The formation is a delta, very similar to those found in the Gulf of Mexico and the Nile River. In the 1970's ARCO did some seismic studies in the area, but abandoned the project due to political unrest at the time.

SCS acquired ARCO's old data, and gathered new data from satellite imagery and seismic readings. The company has determined there is a high probability for finding extensive hydrocarbon assets in this formation.

Here's an aerial photo taken from the space shuttle Columbia. The offshore delta formation is clearly evident.

In a press release, which came out just after the close on Friday, Hyperdynamics disclosed some preliminary findings from the seismic data and satellite photography using an advanced seismic analysis process known as “amplitude versus offset". SCS President Neil Moore stated: "We have now encountered and inventoried large features approximately 3 miles deep with high porosity strata supporting an increasing probability of sizeable and commercially viable hydrocarbon reserves in Guinea."

Another words, they think there's lots of oil and natural gas in this formation which can be extracted and is "commercially viable".
 

Where To From Here?

I interviewed Neil Moore at length concerning the sequence of events which would occur from here forward. Here's what I learned:

Sometime in the next week or two, a boat will begin taking seismic readings in a 100 square kilometer grid within the concession. The existing data has helped then identify this "grid" as a high probability area. It will take approximately two months to gather all the required data.

Once the data is compiled, it will take another month to process. The company will then identify the best area for drilling test wells. The first test wells could be drilled in the first quarter of 2004.

From now until the time the first test wells are drilled, there could be any number of corporate developments. Once the most current seismic data is available, the company could form an alliance with a major name in the oil and gas exploration business for the purpose of financing the next exploration phase. If the company decides to finance the test wells internally, they would have to raise capital. They are working on both possibilities now.

As the seismic data is gathered over the next two months, results will be compiled, then flown to Paris and onto to Houston about every ten days. I am informed that from time to time, Hyperdynamics intends to formally release the seismic data to the public. If it's highly technical, I won't understand it, but the market will and the price movement in the stock will tell you all you need to know.
 

Valuation and Upside Potential

As you can see from this chart, shares of Hyperdynamics have already had an exciting year as news of the Guinea concession found its way into the investing community.

The stock started appreciating in early June, and then made a breathtaking run from $.30 to a high of $2.09 on July 15th. The stock has since traded sideways for about seven weeks at the high end of its support range, suggesting it could be poised to make it's next major move.

The catalyst for the next potential surge came out Friday after the market closed. Hyperdynamics released news detailing the results of the latest data. Investors will have their first opportunity to respond when the market opens on Monday. The stock was up about 10% on Friday and traded three times its normal volume, indicating someone had an inkling this news was coming.

It's tough to put a target price on this stock, as the upside potential is virtually unlimited. Hyperdynamics has about 24 million shares issued and outstanding. Based on the closing price ($1.76), the market is placing a $42 million valuation on the company.

The closest comparison I could find is Environmental Remediation (OTC BB: ERHC). This Houston based company's only asset is a concession in the Gulf of Guinea in the Joint Development Zone between Sao Tome and the Federal Republic of Nigeria. The company has no revenues and carries a market value of over $200 million.

Therefore, if Hyperdynamics achieves an equivalent market valuation to ERHC, the stock would trade at $8.33 (375% return).

Another comparison is the nearby offshore Alba gas field. Originally discovered in the 1980's, this off shore project was developed by CMS Energy (NYSE: CMS). After establishing operations, CMS sold the ownership in 2001 to Marathon Oil (NYSE: MRO) for $993 million.

An event of this magnitude could be years away and certainly would involve a major partner, so it's impossible to put an associated value on Hyperdynamics. Let's just say you would make a whole bunch of money.

We're on the front end of a lot of exciting potential. If this becomes a major find, the upside potential in incalculable. There is also significant risk. If the seismic studies are weak, the project could fizzle out. However, the stock is trading as if the market believes this concession has considerable merit.

For the risk end of your portfolio, accumulate anywhere you want and set your stop loss at whatever percentage you are comfortable risking. I expect to report on this company at least through the first half of 2004, if not longer. For the remainder of the year, the stock will trade up and down on seismic results and corporate events. If the concession contains significant assets, the current valuation offers exciting upside. Today's $42 million market cap is a microscopic starting point in the oil & gas exploration industry.
 

More Information

To understand the size and scope of the Guinea Concession, I have provided a map of the State Of California. The dotted line replicates the size of the area over which Hyperdynamics owns the right for oil & gas exploration and production.

The two men who run SCS Corp on behalf of Hyperdynamics have impressive resumes in the oil and gas exploration field. The following bios can be found on the company's web site:

Neil Moore, President

Mr. Moore has over 42 years of experience in offshore oil and gas exploration in all parts of the world and has pioneered several seismic techniques and systems during his career. During the 1960’s, Mr. Moore was instrumental in formulating the Geohazard/Engineering survey criteria for the U.S. Department of the Interior still required today for offshore development in the United States. Mr. Moore spearheaded the introduction of digital processing into high-resolution marine seismic procedures in the 1970’s, operating and managing up to six vessels around the world. In 1980, he co-invented the “Slanted Seismic Array” for marine exploration and engineering surveys and still maintains exclusive rights to this amazing technology. In 1986 he co-founded Seatex Service, Inc. in joint partnership with Houtex Seismic Inc. to develop a new patented exploration technology for offshore areas. Mr. Moore is a graduate of California Polytechnic College with a Bachelor of Science in Electrical Engineering.

Robert E. Bearnth, Executive Vice President

Mr. Bearnth has over 49 years of experience in the oil and gas industry. From 1953 until 1980 he was employed with Exxon Corporation in exploration at various locations including Louisiana, Texas, Alaska, California, Spain and Madagascar. During the 1970’s, he was loaned to Aramco as Assistant Chief Geophysicist in charge of Interpretation and Processing for all of the offshore area of Saudi Arabia. During his career with Exxon, he also occupied various management and technical positions at the Exxon Research Center and Exxon Data Processing Center in Houston. Mr. Bearnth is a member of the American Association of Petroleum Geologists, Society of Exploration Geophysicists, European Association of Exploration Geophysicists and the Houston Geophysical Society. He is both a Registered Geologist and a Registered Geophysicist in the state of California. Mr. Bearnth holds a Bachelor of Science degree in Geology from Oklahoma State University.

Investor Relations is handled by Ashland Capital. You can call 800-277-9081 for more information or email ashcap@adelphia.net.

Here is the complete text of Friday's News Release for your review:
 

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