D.O.G on Oilpods

WARNING: VERY LONG POST

For those thinking about Oilpods, here is some information that may prove useful.
1. Oilpods is a project of OL&M, Business International Pte Ltd, a company registered in Singapore. OL&M's website is: http://www.oilpods.com.

2. OL&M sells shares in oil and gas production leases, known as "working interests" in industry jargon.

3. Investors in working interests buy a percentage of all current and future oil and gas revenues for a particular project. An upfront payment is made, in exchange for a revenue stream tied to the sale of oil and gas from that particular project.

4. Revenue stops when that project's oil and gas is exhausted or uneconomic to extract. If the upfront payment is less than the NPV of the future oil and gas revenues, a profit is made. A loss is made if the converse is true.

5. The working interests are sold to OL&M by Powder River Basin Gas Corp, a company quoted under the code "PRVB" on the OTC BB in the US. OL&M in turn sells these working interests to investors. The websites for PRVB and the OTC BB are: http://www.powderrivergascorp.com http://www.otcbb.com

6. PRVB's business has 2 arms: a. Purchase of marginal / non-producing oilfields with the aim of increasing or restarting production; and b. Sale of 25% working interests in the above oilfields to generate working capital.

7. PRVB currently owns working interests on about 8,000 acres of land, in either 100% or 75% proportions.

8. According to the Form 10-K (available at the OTC BB website) filed with the SEC, for the year ended 31 Dec 2005, PRVB booked revenue of US$4,643,965 and net income of US$699,335.

9. The revenue breakdown was US$622,882 in oil and gas revenues, and US$4,021,083 from the sale of working interests.

10. The commission paid to outside investors of the working interests was US$482,500.

Some lay analysis:
PRVB sells working interests to OL&M, which then sells them to investors. Investors' funds flow to OL&M, which passes a portion of the funds to PRVB, which in turn books these as revenue.

As PRVB develops the oilfields and sells oil and gas, a portion of the revenues are paid out to OL&M, which in turn pays the investors. Therefore, the investors' income streams are dependent on the oil and gas production at the PRVB fields where they own a working interest.

However, we can see that PRVB sold only US$622,882 of oil and gas. Since it only sells 25% working interests and retains a 75% stake, the commissions paid to investors in the working interests should be at most 25% of oil and gas revenues i.e. US$155,720.50. However, the actual commissions paid were US$482,500. The extra US$326,779.50 paid out appears to simply be a return of capital.

In other words, it seems that PRVB may actually be operating an elaborate Ponzi scheme. For as long as it can sell working interests, it can generate cashflow, from which previous investors can be paid, regardless of whether it is actually selling any oil or gas.

Evidence:
FY05 administrative expenses were US$1,181,374, and lease operating costs were US$258,662. These expenditures supported the production and sale of oil and gas, yet the company only sold US$622,882 of oil and gas. The story is the same for FY04: adminstrative expenses of US$513,854 and lease operating expenses of US$97,025 were used to generate US$248,328 in oil and gas sales.

Clearly, the current cost structure of PRVB makes it impossible to actually earn any profits from selling oil and gas. It is deriving all its "profits" from selling working interests. These working interests appear to be overpriced with respect to the value of the oil and gas they appear to be producing. It is possible that PRVB is deliberately misrepresenting the true value of the recoverable oil and gas i.e. fraud may be occuring.

Implications:

So, back to Oilpods. If someone was to invest with OL&M, he would be buying a working interest directly from OL&M and indirectly from PRVB, and his future cashflow would ultimately depend on the sale of oil and gas from the corresponding field being operated by PRVB.

As shown above, the cashflow being paid out is coming from other new investors purchasing working interests as well as from the sale of oil and gas. For as long as PRVB can find new investors, current investors will be able to receive an income stream.

If, however, PRVB is unable to continuously sell additional working interests, based on its current cost structure, its oil and gas revenues alone will not suffice to pay the investors their due commissions. PRVB will then default on its payments to OL&M.

If OL&M is not able or willing to make good the payments out of its own pocket, it too will default. The investors can then choose to either write off their investment, or sue OL&M for misrepresentation, fraud, etc. Of course, their legal choices may be limited by any waivers that they signed when purchasing the investment in the beginning.

As usual, YMMV. The analysis above is based on public information only. It may be flawed and is not conclusive. IMHO anyone interested in Oilpods should visit the 3 websites (OL&M, OTC BB, PRVB) and do some reading, so that they can make an informed choice