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Mainland a Main Player


Natural Gas may have found its next giant.

Small natural gas play Mainland Resources (MNLU) could be a giant in the space in a short period of time. The stock has been coming on as more investors learn about the company's potential in the super exciting Haynesville shale region (see sidebar). Discovered in March of this year, Haynesville is said to be one of the largest domestic on shore natural gas fields - ever. According to Energy and Capital the field could conservatively hold 168 trillion cubic feet of natural gas. Chesapeake Energy (CHK) has declared Haynesville the most important find in its 19 years history.

There was always a notion a big find was in the space the company currently owns (2700 acres) but when it was first explored back in the 1950 oil prices were a lot lower and there was no technology to get to the natural gas. Recently the company announced a joint venture with Petrohawk (HK), which until recently had the hottest stock in the entire market.

Most folks don't realize there is a gold rush in domestic resources going on right now in part to new technologies to find and drill oil and natural gas. This has created a fantastic problem of no rigs and too few pipelines. This makes the deal with Petrohawk so special. Another element to the arrangement is the fact Petrohawk will pay all expenses associated with respect to drilling the first well. The financial arrangement will be 60-40 with Mainland getting the latter. That is a very favorable ratio for a junior resource company and means it may not have to go to the public for additional funding that would dilute present shareholders. There are some analysts that think this is a $9 stock but I think it could be a $13.00 stock by the end of this year. I interviewed the CEO of Petrohawk in June when I anchored "Cavuto" on the Fox Business Network and natural gas is going to play a prominent role in our energy play for decades to come.

In fact I spent time with T. Boone Pickens last month in Wyoming and his plan is more about natural gas to run our cars than wind mills to power our electric grid. I also spoke with the CEO of Mainland and his optimism is clear. Of course this is a small cap play, and cash flow may not begin until late in the year, there are greater than average risks. That may explain why the shorts have been on the attack. Right now I'm told there is a 2.0 million share naked short position. That is a significant amount of folks that may have to cover in a hurry. (Isn't it a shame the SEC only felt it was appropriate to stop naked shorting on 19 financial companies while these small players that carry on the tradition of American innovation are left to fend for themselves? Be that as it may this could be a massive short squeeze real soon.)

Technically the stock has room to $8, through there I think the short will begin to cover and the stock should rally to $10 fairly quickly. Our longer term target is $13. Nervous investors should consider a stop loss at $5.30 although we would more than likely be buyers on weakness unless there was a material fundamental change in the company and its potential.

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No positions in stocks mentioned.
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