BigFish disappoints with 2nd post, NEP should be fine

Yesterday a new blogger named Bigfish came out with a very negative report on NEP, which I responded to here. Later he said he was going to come out with something this morning which was even worse, and so he has...or at least tried really hard to. Unfortunately for him, his argument today was much weaker then the one yesterday, and is much easier to counter. At least yesterday he pointed out a couple obvious and specific errors in some of NEP's filings. I pointed out that neither error is in the company's favor.

In any case, yesterday he argued that the drilling business must be a fraud because NEP paid too little for such a successful business. I agreed that the price did seem quite good, but also pointed out that NEP added additional value by buying the company (namely the ability to sign more drilling contracts with PetroChina), allowing it to increase its revenues and profit margin.

So today, Bigfish comes out and argues that NEP is a fraud because they are going to pay TOO MUCH for the rights to explore and produce on the Durimu oilfield over the next 24 years. I guess Bigfish is like Goldilocks and needs every deal to be "just right."

Bigfish does do a good job showing how many companies are going to be between NEP and the original owner, but I don't understand why this is terribly unusual. Yahoo user stinky6987 explained it well in reply on this post:

Not much here, but buying a company (Shengyaun) that owns the right to drill an oilfield doesn't sound the least bit suspicious to me. Also, while the report asserts that Shengyaun didn't pay for the right to drill and is turning around and selling that right to NEP, there are many reasonable explanations for this, none of which involve fraud:

(1) Exploratory drilling is inherently hit-or-miss, once Shengyaun hit oil with their exploratory wells, the value of their contract with Jiangyuan went way up.

(2) As the price of oil goes up, the value of Shengyaun's contract with Jiangyuan also goes up.

(3) "State-owned" Jiangyuan didn't get a good price when making the agreement with Shengyaun.

(4) The people in charge of "state-owned" Jiangyuan wanted to steal money from the government, so they gave a no-bid contract to Shengyaun and took bribes or have an ownership interest in Shengyaun (note this does not affect the actual value of the contract to NEP).

All four of these are great reasons why NEP would pay the $43mil. I can think of a couple more as well:

5. Bigfish didn't show any proof that the previous owner didn't pay anything for the rights. Its possible they didn't, but not guaranteed.

6. Obviously business in China is done somewhat differently then here in the US (although I'm sure not that differently), so I wouldn't be at all surprised if at least part of the $43mil is a bribe to certain people somewhere along the supply chain. Bigfish makes a good point asking why NEP didn't try to get the rights directly from the state owner enterprise. Obviously that would have been better, but perhaps there wasn't any way to do so. The oilfields are located in a different state then NEP, so perhaps only companies from that state were allowed to receive the rights directly from the government. I unfortunately have no idea if my postulations are true or not, but this seems just as plausible as Bigfish's arguments.

The bottom line for NEP stockholders is that this $43mil acquisition would tremendously increase the potential production capacity of NEP, and as such represents an excellent long term direction for the company. The biggest concern in my mind, and one that I can't believe BigFish didn't mention, is that there is the possibility that the field isn't actually close to as productive as NEP tells us it should be. This is a risk that investors take when putting money with any oil company.

Also note that most of the transaction is being done in stock ($10.6mil in cash, the rest in stock when it was trading around $5). Personally, I think this is a good sign because it indicates that the previous owner believes in the strong potential of the field and wants a share of the profits.


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