The Speculator

PORTFOLIO POINT: Here’s an opportunity for a low-cost punt on junior oil and gas producer Golden Gate Petroleum whose shares are now trading at a tenth of their year’s high.

Golden Gate Petroleum can boast some modest success in achieving oil and gas production in the United States, but in the past 12 months its shares have retreated from a high of 45¢ to a low this week of 4.4¢.

A week ago the company sought a suspension in trading of its stock pending an announcement on the completion of a capital raising. Ahead of the suspension the shares traded down to as low as 4.5¢.

When trading was restored on August 25, the company’s 273 million shares drifted to a new low of 4.4¢ on modest turnover of l.5 million. Yet the fund-raising announcement that came with the restoration of trading reads to me as an encouraging boost for a turnaround in the company’s fortunes.

The company announced yesterday it would place 40 million shares to sophisticated investors to raise $1.4 million. The shares will be issued at 3.5¢ together with a 1-for-2 free option exercisable at 8¢ before August 31, 2012. The shares will be placed with clients of broker Novus Capital Ltd.

Following that, Novus will underwrite a non-renounceable rights issue to remaining shareholders on the basis of one new share for every three shares held at 3.5¢ a share, together with an attaching 1-for-2 free option also exercisable at 8¢ before August 31, 2012.

The rights issue, plus the private placement, will inject about $5.4 million into the company. Together with cash on hand, Golden Gate will then have net cash of $A6.5 million and total issued shares of 417 million. At just 5¢ a share, market capitalisation will be $20.85 million.

Golden Gate has oil and gas production from its 33.25% share in two wells on its Bullseye project in Louisiana, yielding the company revenue of $450,000 a month. That, together with the new funds, will cover the company’s plans for at least six months, including the drilling of three new wells in the next three months.

Those wells have the potential to transform the company. They are planned for a new target in Louisiana in which Golden Gate will be operator and hold a 20% interest. The targets are shallow, low-cost wells (estimated at approximately $1 million each) with a potential resource estimate of seven million barrels of oil and 24 billion cubic feet of gas.

Golden Gate will pick up 20% of the tab, but as operator will collect 10% of the drilling cost. The wells will each take about 25 days to drill, with the first planned to start early October.

If, in the lucky event the drilling confirms the resource estimate, the potential value of the resource would be about $US500 million on the oil alone (with oil yesterday at a $US75 a barrel). Golden Gate’s 20% would represent a gross $US100 million. Discounting that by, say, 60% would deliver a net present value of $US40 million to Golden Gate. That would be worth about 10¢ a share to GGP’s expanded capital from the new project alone.

That ignores the remaining potential of the Bullseye project and its producing Jumonville 1 and 2 wells, from which Golden Gate’s current average gross share of production is 265 barrels of oil a day and 840,000 cubic feet of gas. Those wells were drilled through four targets. The bottom one in the Jumonville No 1 well, entered at a depth of 14,100 feet, was a barren “duster” but the well is now producing from the third myogip stratum entered at 12,400 feet, with two discovery zones higher up the well yet to be tapped.

The company has interests in several other prospects in both Louisiana and east Texas. The Melbourne-headquartered company’s three-man board comprises petroleum geologist Sam Russotti, accountant Frank Petruzzelli and California-based managing director Steve Graves.

Graves enjoys a reputation for having enriched investors in Orchard Petroleum after he became managing-director in 2004-05, when the shares were trading at 5¢. Within two years it was taken over by hedge fund Crosby Capital at 81¢ a share.

Golden Gate shares are still trading “cum” the issue entitlement but intending purchasers should check with their broker for the “ex” date.

nThe Speculator portfolio, at August 25, 2009
Company	ASX	No of shares	Bought	Purchase price	Current price	Current value
Laserbond	LBL	20,000	4/07/08	$0.10*	$0.095	$1,900
Robust Resources	ROL	25,000	13/02/09	$0.155 avge	$0.660	$16,500
Quicksteps Holdings	QHL	20,000	16/03/09	$0.165	$0.325	$6,500
Cortona Resources	CRC	20,000	14/04/09	$0.150	$0.130	$2,600
A1 Minerals	AAM	43,077	12/05/09	$0.135	$0.145	$6,246
Gage Roads Brewing	GRB	40,000	26/05/09	$0.050	$0.058	$2,320
Image Resources	IMA	12,000	2/06/09	$0.645	$0.700	$8,400
Blue Energy	BUL	40,000	9/06/09	$0.215 avge	$0.240	$9,600
Trafford Resources	TRF	30,000	16/06/09	$0.185	$0.225	$6,750
Citigold Corporation	CTO	26,250	19/06/09	$0.152	$0.160	$4,200
Scotgold Resources	SGZ	20,000	22/06/09	$0.100	$0.130	$2,600
Viralytics (ops)	VLAO	100,000	3/07/09	$0.010	$0.010	$1,000
Hillgrove Resources	HGO	20,000	28/07/09	$0.235	$0.235	$4,700
Emmerson Resources	ERM	20,000	4/08/09	$0.190	$0.200	$4,000
Golden Gate Petroleum	GGP	100,000	25/08/09	$0.044	$0.046	$4,600
Total value of portfolio						$81,916
Plus cash at bank						$1,950
Total						$83,866
Portfolio change since January 2, 2009 (started with $40,000)					109.67%
All ordinaries change since January 2, 2009 (then 3655.7)					20.84%
*These shares were carried over from the 2008 portfolio, hence the 2008 purchase date. However this price is the "beginning of year" value not the original purchase price. Disclosure: The author's family holds shares in Laserbond Current value based on last sale August 25, 2009

The scandals roll on for James Hardie

Former asbestos fabricator James Hardie won shareholder approval to shift the company’s domicile from the Netherlands to a new bolt-hole in Ireland last week – but the move won’t stem the emergence of further corporate scandals.

On September 1 a new book, Killer Company: James Hardie Exposed, goes on sale, alleging about 20,000 Australians have been “poisoned” through asbestos-induced lung afflictions. It also alleges many thousands more have been unwittingly exposed through asbestos waste dust distributed from Hardie plants in all mainland capitals for use in the driveways of suburban homes.

The book, by ABC 7.30 Report journalist Matt Peacock, published by HarperCollins, carries a recommended retail price of $35.

David Haselhurst writes a monthly column for Money magazine.