One Very Speculative Oil Stock

Hurricane Ivan was, at times, a Category 5 storm. It tore up Grenada. Stock symbol "IVAN" belongs to Ivanhoe Energy (Nasdaq: IVAN  ) -- and it was on a tear Thursday. Up 25% for the day, the stock rose after the company's announcement that its Dagang China oil project had posted "record sales and volumes."

Holy Toledo. China! Wow, that's where the hot money is. Oil! What could be hotter than that -- and right inside China to boot?

Here is the detail: "The Dagang operation posted gross oil sales of $1.2 million for August, recording its first million-dollar month in oil sales." So, sales of $1.2 million for a month increased the market capitalization by almost $102 million. And oil production hit 1 million barrels -- after years of production.

So how much is Dagang worth? Ivanhoe recently sold a 40% working interest for $20 million. The company knows the potential, right?

For those thinking big times are ahead, try this. The one analyst who follows the company expects it to lose $0.28 a share in 2005.

Ivanhoe Energy was on Bill Mann's radar after it was up more than 900% last year. At the time, Bill questioned why the stock was trading north of $6 and the company had valued "its own equity at substantially below $4 per share" only two weeks before. It was a good question. The stock fell from a 52-week high of $7.55 in November to a $1.22 low in July.

Bill's right-on call didn't win him any e-mail buddies. Neither will my assessment.

For its recent $510 million capitalization, shareholders had a company with $11 million in trailing revenue that, besides China, was drilling holes in California, Wyoming, and Texas, too. With net cash of $30 million, the company looks cash rich until you realize it plans $42 million in capital expenditures in 2004. There will be more equity sold in the future, adding more shares to the already 170 million outstanding.

With oil prices robust, why should anyone be concerned? When you have Royal Dutch (NYSE: RD  ) and Unocal (NYSE: UCL  ) pulling out of a Chinese gas project because of "commercial reasons" you know everything is not golden in the Chinese energy industry. Then you have the super-majors like ChevronTexaco (NYSE: CVX  ) and BP (NYSE: BP  ) , clearly benefiting today's from high oil prices, selling for low multiple to earnings.

Ivanhoe is a speculation -- nothing more and nothing less. It has yet to prove that its $500 market capitalization is justified.

Fool contributor W.D. Crotty owns stock in ChevronTexaco.