There is a fine line between insider trading and a company using the market to meet a PP objective.

The most obvious insider trading is where the company receives good or bad news and the insiders start to buy or sell as a result before the news becomes public. This is jail time.

The less obvious is a private placement which is negotiated well in advance of the announcement date. The company will get opinions on what the local supporters are willing to invest based on the date known by everyone at that time. Unfortunately we do not classify as local supporters (players) given that these are large funds that can provide up to $100 million without much of a blink.

In the case of the last PP, these players were willing to risk .70 cents. As the stock was trading in the .50 cent range, this represented a false premium of 40% but a premium nonetheless. Example, the company has issued 200 million shares that are trading at .50 cents. The market cap in that case is 100 million. They issue a PP for 100M shares at .70 cents bringing in 70 million dollars and the stock price jumps to 70 cents. They have now issued 300 million shares trading at 70 cents for a market cap of 210 million.

The original longs receive a bit of a premium in this regard but their future earning power has been reduced by a factor of 3:2. What I mean is that if the company somehow made a profit of 300M dollars before the PP, the shareholder value would have increased by $1.50 per share with a float of 200M shares. After the PP, that increase is only $1.00 as the float is now 300M shares. The larger the future profit, the larger the theoritical loss for the original longs.

I say theoritical loss as company's (most of the time) will issue a PP in order to raise capital to keep the company and on-going concern (solvent). Without the influx of cash through the issuance of 100M shares at 70 cents, the company would have run out of cash and folded. As an exploration company without any production assets, the company is worth whatever another party is willing to pay for the land leases and the ticker symbol. In other words, likely less than 50 cents which was what the company was trading at before the PP. In market cap terms, that is the original 100 million (200 million x .50 cents).

In CGX Energy (OYL) terms, the company needed money to fund a two well exploration committment. One well in a joint venture with three other parties and the other a 100% owned well. If this money had not been raised in the markets the company would be worth the value of the land leases and office equipment.

Should both wells somehow come up to be dry holes, the company is effectively back to a market cap of 100 M which is what the market priced this company out at before the October PP and the drilling extensions. If this should happen this stock could go back to a market cap of 100M which divided over 300M shares (more or less) is not .50 cents but .33 cents. I have offset the value increase in regards to the lease extensions against the discount that not finding Oil in two of the 16 targets would bring to the remaining targets and consider this a wash.

So the extreme downside is .33 cents. But in reality, the availability of the claims could produce a bidding war among the larger companies with deeper pockets to continue drilling which would likely increase this valuation. Based on the recent option of one of the Suriname blocks to Murphy for $150M, I could see the company getting $300M for the current claims. This brings in a realistic downside of $1 per share.

The company is trading at $1.17 which represents a 17% premium over this estimate. This premium has ranged from 5% to 55% over the past three months.

Now back to the game... CGX knows that two dusters = incredible future dilution (more risk thus a cheaper future PP to incent market to accept increased risk). In order to offset this risk without giving up control of an area like Eagle Deep over to a JV partner, the company will need to raise money to drill Eagle Deep. Unless they can produce and sell oil or gas from either Eagle shallow or Jaguar, there is no other option but to find money through a PP or JV. Nobody gives away money for free except the US Government, but somehow I do not believe we would qualify.

More times than not I have seen a rising stocked bullied down to just below the price of an upcoming PP. The reason for this is that the time it takes to plan and execute a private placement is a few weeks to a few months and the market can do crazy things during that time.

As the price is usually negotiated between the players in advance based on what is known during that period of time, it is in the company's best interest to see the price at a level somewhat less than the PP price. The reason for this is so that shareholders do not revolt and accuse the company of giving away shares cheaply to their friends and industry connections.

For example, let's say that since December CGX has been shopping a new PP to raise funds to drill the 2.5B P50 resource at Eagle Deep. The stock had a base at $1.05 during that month. So they find a group willing to pay $1.20 or $1.30. While not $1.55, it is still a good price given that all that has changed since the last PP at .70 cents was that the leases were extended, drilling started and possibly some insider info leaked from Inpex about the Block 31 results in Suriname).

But based on enthusiasm or Inpex leaks or the full moon the stock rises to $1.55 in the meantime. What CEO is going to announce a PP at $1.20 when the stock is at $1.55? So they beat it down to a level that will keep the shareholders from having a revolt. Seen it many many times with exploration companies.

If I had to make a guess I predict an announcement of a 100 million share PP at a strike price of $1.25 soon. My guess is that it will be filled within a week as it will have already been pre-negotiated and the only check left is to have the market regulators rubber stamp the deal.

The company at that point will have balanced the potential risk of two dusters with the abililty to recover with a fully funded drilling of their most promising 2.5B barrel target. The PP guys get in cheaper than $1.55 or higher as an incentive to take out a 125M dollar risk and based on what was known when the PP was first shopped.

Both have risk in the deal as CGX may have sold too cheaply should they find Oil through the current two drill campaigns and the market players may have overpaid should CGX not find oil in the first two drilling campaigns. The balance is about right. Both sides are taking on a share of risk in this case. Should they find oil, the market cap should jump to 1 billion. That is about $3.33 a share at the current float and $2.50 a share on the float + 100 new shares). A miss on two wells = .33 cents a share. $1.25 is somewhere near the middle and takes into account the risk of the unknown.

Before some of you get your panties in a bunch, I have used a 1B market cap based on the fact that Eagle Deep is still an unknown. Should they find even half of the 2.5B reserves there, this stock goes to crazy retirement levels. I won't even venture to guess what that news will do to the share price but at that point all future drilling programs will not involve any further PPs or even JVs as the company will most likely be able to acquire cash by taking on debt secured by assets to finance the production of those wells and turn around and invest the profits from production into future discoveries.

They key here from a risk perspective is to get the $$ to drill Eagle Deep. The question is do they take less of a potential profit now by diluting the current share base to raise the funds or wait until the results of one of the other two wells and then try to raise the money at a higher strike price but risking not being able to raise money at all.

At this point given that nobody knows if Oil is in the ground or in the nearby area (inpex block 31) I would prefer to see the PP money in the bank and shoot for the biggest target (Eagle Deep) this summer at which is 100% owned by the company. From there they can JV out all of the other small properties to those like Anadarko who waited too long to get in the game.

For me, it is Go Deep or Go Home or Die Tryin.

M1.