13th October 2003
Warren Buffett and Richard Hardman flank FX Energy in Poland
by Kamil Tchorek
The Business Journal has learned that billionaire investor Warren Buffett is prospecting with FX Energy for natural gas in Poland. FX Energy is soon to be given a further boost with the addition of Richard Hardman, the veteran gas hunter responsible for much of Britain's natural gas finds in the North Sea.
Buffett, reputedly the second richest man in America, leads Berkshire Hathaway, which owns MidAmerican Holdings. Cal Energy Gas (Nasdaq: MDPWL.OB), a subsidiary of MidAmerican, closed the partnership deal with FX Energy (Nasdaq: FXEN) in August.
So far, FX Energy has drilled at 15 sites in Poland and through its latest initiative (WBJ, 'FX Energy points to alternative gas supply,' Sep 29) hopes to make its first commercial find. Access to new data, technology and expertise has maximized the likelihood of a lucky strike at last.
The collaboration between Cal Energy and FX Energy is at the so-called "Fences I Project Area", roughly halfway between Poznañ and Wroc³aw. The area covers approximately 265,000 acres, and at some point around three kilometres below the area's surface, there could be the largest field of natural gas to be discovered in Europe for 15 years, according to experts. FX Energy has further interests in adjacent areas that are not as yet associated with Cal Energy, at Fences II (670,000 acres, 49 percent) and Fences III (770,000 acres, 100 percent).
Richard Hardman will join FX Energy's board early next month, bringing 30 years experience of geological exploration with him.
"Intuition is important in this business," says Richard Hardman, speaking from London. "My hunch is that there will be a big find in Poland. The Polish Oil and Gas Company (PGNiG) have done a very good job so far and it would be presumptuous of us to think that we know any better than they do. We can bring a certain amount of technology with us that would help in the search, and of course the vital experience of the North Sea."
Professionals claimed that in the early days of North Sea gas exploration, explorers had to play down the size of their finds for fear of not being taken seriously by high level management. Hardman believes that the right state of mind is crucial to the progress of exploration, and it is as relevant to Poland as everywhere else.
"It may be that in Poland they have not been looking for a big gas field and that is why they have not found one yet," continues Hardman. "There have been major finds, but the best is yet to come. In the UK North Sea about 40 TCF (Trillion Cubic Feet) of gas has been found but in the Polish sector there's only been about 10 percent of that so far, and western Poland has very similar geophysical structures." (See map)
Hardman was approached by FX Energy in London, and invited to visit the geological research center in Toruñ. After several mapping visits to Poland, Hardman committed early this year.
Polish state gas concern PGNiG (Polskie Górnictwo Naftowe i Gazownictwo) retains a 51 percent interest in Fences I, with the remaining 49 percent having been awarded to FX Energy. In order to bring in the massive financial resources of MidAmerican Holdings and the North Sea experience of Cal Energy Gas, FX Energy agreed for its interest in Fences I to be subject to Cal Energy's right to earn half of the 49 percent.
Geological experts have noticed that western oil companies such as Esso, Shell and Texaco were only given concessions in Polish 'wildcat territory', a phrase used by explorers to describe less attractive areas of exploration, outside the Permian zone. FX Energy, by contrast, has won prime Permian sites.
Industry observers of FX Energy notice that the company is getting special treatment from the Polish government, thanks to years of trust that have been built up and a 'cooperative' rather than 'arrogant' attitude towards PGNiG projects, not least thanks to the presence of Polish émigré Jerzy Macio³ek on the board of directors.
Paul Solit, portfolio manager at Potamac Capital Management, says that the interest of Buffett's Cal Energy was the main cause of his interest in FX Energy stock. "Over the past year, we have decided to buy around four percent of FX Energy's shares," said Solit, speaking from Los Angeles. "The association with Buffett, who tends to back winners, was the most important factor in our decision. There were three other good reasons. Unlike other western companies who would like to receive the same concessions, FX Energy was allowed to make two major purchases of potential gas field areas recently. Secondly, the company also has a greater quantity and quality of seismic data that will now be interpreted in a better way. Thirdly, their balance sheet has improved. The addition of Richard Hardman, who is something of a legend in this field, just adds further credibility to the stock."
Analysts predict that with the first find of a commercially viable gas field, FX Energy stock, currently trading at a little over $3.40, could shoot up to around the $6.00 mark. But this 'wild-card' stock has until now remained somewhat under-followed and is considered high risk, with the outside chance of an astronomical increase in price if a North Sea-scale field is found in Poland. In the opinion of Hardman, the old sage of the North Sea, "...it is only a matter of time," with an absolute maximum of ten years.
"We don't follow Buffett everywhere he goes," says Solit, "...but we do have similar interests to him. Yes, we're waiting for the big find as much as he is."
Natural gas was first discovered in Poland's Permian Basin in 1964, one year before the discovery in the North Sea Permian Basin. Since then, only one company has been searching in Poland, compared to 50 in the North Sea. The massive competition in the North Sea is widely seen as the chief dynamo for creating the 40 TCF of supply.
At peaks in early 1997 and mid-1998, FX Energy's share price approached $13; however the lack of commercial finds saw its steady slump. Cal Energy began negotiations with FX Energy when the latter's stock was at an all-time low of around $2, after which it has made a slow and steady climb.
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Above from Warsaw Business Journal. |
