One of the Largest Oil Discoveries in 20 Years

Uganda, the East African nation sandwiched between the Congo and Kenya, is blessed with significant mineral resources. Its rich, fertile land is not prone to drought, and although agriculture has long encompassed a majority of the country’s economy — coffee is its most significant export crop — the economic base is maturing: Services now account for 52% of the country’s GDP.

Overall, the country is making progress — inflation, the bane of any unstable country, is in check while 2010 growth is forecast at an impressive +7% — but three-fourths of the population subsists on less than $2 a day, the international poverty line.

Uganda’s economy, however, is about to change — dramatically.

The country, believe it or not, has never completed a national minerals survey — not, one would think, an especially daunting task, as the entire country is smaller than the state of Oregon. While the state of its cache of copper and cobalt and gold can be estimated, the $64,000 question has long been petroleum.

Is there oil? How much?

That question was answered last year, when Heritage Oil PLC (London: HOIL) announced a large find. One tally pegged the Giraffe field — anyone want to guess how they came up with that name? — at some 400 million barrels. Heritage’s CFO, however, suggested that the wider “Giraffe-Buffalo” field, which encompasses some 3,420 square miles, could contain several billion gallons of crude.

The find is the largest in Sub-Saharan Africa in at least the past 20 years. Previously, the largest onshore fields discovered in sub-Saharan Africa were at Rabi-Kounga in Gabon, where 900 million barrels were found in 1985, and at Kome in Chad, where 485 million barrels were found in 1977.

Heritage’s partner in the project was Tullow Oil (OTC: TUWOY). Late last week, the Ugandan government approved Tullow’s purchase of Heritage’s stake in the project. The government initially didn’t want to have one company in total control of its oil. So Tullow chief Aidan Heavey and Ugandan President Yoweri Museveni sat down and Tullow suggested it could bring on a partner.

So it came as no real surprise, after the Ugandan government blessed the sale of Heritage’s stake to Tullow, when Chinese oil giant Cnooc Ltd (NYSE: CEO) — a unit of China National Offshore Oil that’s listed on the Hong Kong exchange — said it would buy a stake in the Tullow project for $2.5 billion. That not only satisfies Uganda’s concerns but also brings Tullow capital it needs to pursue the massive project. Now, nothing in the oil business is over until it’s over, but Heritage says the deal is “imminent.”

Big oil companies have the cash and the engineering expertise to find oil and bring it to the surface, but typically only governments can engage in deals of this size. It’s a win-win, though. Tullow and Cnooc will reap a king’s fortune — a billion barrels of oil is worth $75 billion at today’s prices — and the find has the ability to remake the Ugandan economy and improve the standard of living in one of the world’s poorest countries.

This long-term growth is clearly not priced into Tullow, whose shares are primarily traded on the London exchange but are accessible to U.S. investors through ADRs, which represent half a share. These shares are at a 52-week low and represent a tremendous buying opportunity. Tullow and its Chinese partners have the rights to one of the largest fields in Africa, if not the largest, and Tullow’s stock can be had at a steal.

Note: Tullow’s shares, at more than 70 times earnings, might seem expensive. But one has to remember how that metric is calculated: by dividing the stock price by previous 12 months’ earnings. Tullow’s trailing earnings are light — $0.04, a fraction of the 25 to 30 pence a share the firm has proven it can earn. The firm achieved those earnings without the Ugandan wells it will be drilling in the next few years as this major new field continues to be developed.

Oil isn’t a game for the risk-averse or faint of heart. But for growth-oriented investors with a wildcat streak who can stay the course through the oil patch’s persistent ups and downs, few companies in the industry have the potential Tullow has.

Investors who buy this stock not for what the company has done but for what it will do — in Uganda and elsewhere in Africa — are likely to see a very rich reward, one that would have been impossible without the action of the Ugandan government.

P.S. If you’re familiar with any of my recommendations at all, you know I tend to skew my investments towards companies that profit from government action. That’s why I like this Uganda-oil opportunity. But the truth is, I’ve discovered a government play that makes the profit potential of Tullow look like peanuts. Get the full story here.