What Now?

The decision by ExxonMobil not to exercise their two 25 percent preferential options in the second round of the Nigeria-Sao Tome and Principe Joint Development Zone auction has shaken many investors. The news led to an 11 percent sell-off (including after-hours action), a slide of $0.075 from $0.745 to $0.67.

For veteran investors, the selling made little sense, as it leaves ERHC Energy with a much greater probability of getting operatorships with its mid-tier partners Devon Energy, Pioneer Natural Resources and Noble Energy in Blocks 2, 3 and 4. Whether ERHC gets operatorships or not, though, it is guaranteed some 14 percent of the oil that lies in the five blocks of the JDZ now on offer, or about $28 billion worth at current prices. So why is that bad news?

ExxonMobil lends credibility to everything it touches, just as the name of GE would to a new invention or GM to a new kind of car. The loss of credibility that occurred when ExxonMobil turned down participation in the two blocks obviously will not affect how much oil is there, how fast it may be discovered, or the price of oil.

What it will affect is the credibility of the Joint Development Authority created by Nigeria and Sao Tome and Principe, which has been in tatters ever since the third delay in granting awards occurred. We did not witness so much a loss of faith in ERHC as in the auction process in which we are so deeply engaged.

But credibility issues are short-term ones that are most useful as tools for manipulators, and there are many of those working their agendas in ERHC Energy (OTC BB symbol: ERHE). Their earliest line on the decision by XOM was what this means is that there is no oil, or not much, in the blocks we want to explore. Their argument has not progressed very far beyond that because there is little else to argue; the seismic that's been shot shows lots of oil beneath the blocks we have bid for.

The bottom line, then? It's a lot easier to panic people into selling than it is to persuade them to buy. The manipulators had a field day with the ill-defined rumors from Nigeria on Friday (a "rumor" being anything not accompanied by an official JDA or ERHC or XOM press release), and may have at it again tomorrow, as the market absorbs and thinks about the news.

But facts being facts, the price of ERHE will rise again as awards grow near. The incredibly frustrating pattern of seeming delays - events that the JDA said were all due to contractual obligations - will sooner or later come to an end, and ERHC's market capitalization will start to move from the hundreds of millions to the billions.

When will that happen? Not until next Monday is our guess. We expect downward pressure on the share price to continue for several days, and then level out in the $0.61 range. From there, it will start to rise, we think, back to about where it was when the XOM rumor was published by Dow Jones. That should happen by next Monday.

One caveat: There is always the possibility that the Dow Jones story was wrong. You could expect to see a sharp turnaround and a price hike - even though it is illogical - if that occurs.

Update, 9:23am EST, 4/11/05: The bid has fallen to $0.655 and the ask to $0.66 as the price of oil falls below $53 for the first time in weeks. We now see a turnaround level for ERHE at $0.55.

Update, 9:29am EST, 4/11/05: The bid has risen to $0.66 and the ask to $0.67. We now see a turnaround for ERHE at $0.61.

Update, 1:08pm EST, 4/11/05: Instead of dropping, ERHE has gotten determined support from traders this morning, who traded it up to $0.73 on low volume before their drive broke down during the noon hour and the stock tracked back to $0.70. Buys at 12:45pm EST outnumbered sells 494,169 to 286,208 after being 460,069 to 186,790 at 12:09pm EST. The bid at 1:12pm EST stood at $0.70 and the ask at $0.705.

Update, 3:30pm EST, 4/11/05: With half an hour to go, ERHE has clearly defined its direction, and thankfully, it's not down. Now at $0.715, buys outpace sales 574,077 to 380,245 and the bid has remained steady at $0.71 and the ask is at $0.715.
There remains the possibility of late action that has characterized the stock ovver the past few weeks.