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The Fat Prophets:

One Very Cheap Small Oil Company

Take the small oil company we initially recommended to our Fat Prophets Australasian Mining Members in July last year when it was trading at 57 cents*.

The company is called Salinas Energy. Today its share price is around 33 cents.

Here is what we like about Salinas Energy, and why we think it is cheap today…

We firmly believe triple digit oil prices are here to stay. In fact, we think oil could trade as high as US$200 a barrel in the not too distant future. Oil is a naturally depleting resource, and almost all of the world's cheap oil has already been discovered. Courtesy of the rapid industrialisation of China and India, home to over 40% of the world's population, demand for oil is going to keep rising whilst supply keeps diminishing. Whether we like it or not, it all adds up to a rising oil price.

We have stated that Salinas Energy is one of the oil sector's biggest bargains for some time now. This is not some speculative fly-by-night oil explorer drilling speculatively for oil in politically sensitive areas of Africa. Salinas is already an oil producer via its North San Ardo field in southern California, an area where oil reserves are potentially significant.

Salinas have recently increased their forecast revenue for calendar 2008 by 25%, based on record high oil prices and record high oil production. Yet since that announcement at the end of June, and despite the oil price going yet higher, it has had little or no impact on the Salinas Energy share price - in fact, the share price has edged down. There was a time not too long ago when such an announcement would likely have resulted in a significant jump in the share price.

We estimate their calendar 2008 operating profits at around $15 million, and estimate their calendar 2009 operating profits could jump as high as around $30 million. For a company worth in total just $82 million, including net cash of around $7m and no debt, this looks remarkably cheap.

But that's not all. On top of their current oil production, Salinas also holds a 50% stake of the Paris Valley oilfield, just 6 miles from their existing North San Ardo site. This field has potential for more than 100 million barrels of oil-in-place, of which Salinas is hoping to target 25 million barrels of recoverable oil.
In summary, we think Salinas Energy continues to demonstrate all of the necessary ingredients for success. There is a sizeable disconnect between the company's market worth and its in-ground oil value in our opinion, with no value ascribed for ongoing exploration achievements.

With its share price trading at just 33 cents*, we think the upside potential is significant. The company obviously thinks so too, as it is regularly buying back some of its own shares.