Grifco Inc (GFCI)

[Been_Burned_Before]

What is going on with the share price?!?

What most fail to realize is that it is my very strong opinion that there is a tremendous amount of shorting and flipping going on in this stock. Money doesn't just flow in (or out) and fail to dramatically raise (or lower) pps, save in exceptional cases where there are willing and able-bodied buyers, scooping up millions of shares and either: 1) An enormous amount of naked shorters dumping their fake shares into the market; or 2) An unscrupulous member (or members) of management dumping his (or their) shares into the market; or 3) A set of unscrupulous market makers flipping shares back and forth to each another through different brokerage houses, creating fake volume, while dropping the share price in the process.

Given the fact that management has worked very hard to put all the deals into place to grow this company into a worthwhile investment for all shareholders, it strikes me as a remote possibility that a member of management is willing to dump shares, especially when one considers that this company is right in the middle of a move to merge with an Over-The-Counter Bulletin Board, fully SEC-reporting company. I just don't buy it as any possibility! Not even a remote possibility! Thus, I lean over to the side of reason, believing in the far greater likelihood that there is both a tremendously HUGE shorted position and market makers are unscrupulously dropping the share price, using tactics undetectable to the general market.

I know of 63 investors -- in fact, I know them at some personal level; I know their real names; I know their phone numbers, and I also know their addresses. All 63 investors (including myself) collectively own over 30 million shares. You must recall that there are supposedly a total of 697 shareholders in all, so one is forced to consider – and with good reason – that there has got to be an enormously HUGE number of entitlements out there that MUST be covered soon. The shorts will be scrambling to come up with all of these shares that have been mercilessly shorted.

As for the meaning of today's PR: I am highly encouraged by it for many reasons, but allow me to share just two. First, there's no doubt in my own mind that Dial has worked hard to put together one exceptional deal that should (and will) benefit all shareholders, who have all had the gumption to continue to hold by rewarding them for having faith in his ability to grow this company. Second, one must consider the willingness of Dial to share the wealth of these oil & gas leases with shareholders, catching all the shorts with their pants down in the process. Believe me. These shorts will have to pay BIG! In my own personal opinion, this warrant dividend is a strategic move to get Mr. Shorty. Way to go Mr. Dial! It may look bad today, but these guys have until December 25, 2006 to get down to business and cover. Go get ‘em, Mr. Shorty!

Think about this very carefully. I’ve gone over this once before, but allow me to go over it once again for those who easily miss it: If that 56.5 million share block issued to UERI is represented by 11 million shares of UERI, it necessarily means that 5.14 (or roughly 5) shares of GFCI are represented by 1 share of UERI. Also, do recall that UERI will soon merge with TTII with a 1 for 1 exchange of shares. Now, if we know that 5 GFCI shares exchange for 1 UERI share, which will then exchange for 1 TTII share, we can infer that 5 GFCI shares must then exchange for 1 TTII share for the remainder of shares (those not comprising the security pledge of 56.5 million shares). Have I lost anyone?

Let’s see, we have the owners of the oil & gas leases – they are represented by Universal Energy Partners I, LP (UEPI). UERI is a general partner of UEPI, so it takes on the bulk of the liabilities, should anything go wrong. UERI is about to have a new subsidiary that is being spun-off from Grifco, Precision Drilling & Exploration, Inc. (PDEI). PDEI will move along with that 1 for 1 share exchange between UERI and the TTII Merger Sub as an asset, as will the UEPI partnership. If you can recall, TTII’s Merger Sub is Universal Energy & Services Group, Inc. (UESG). So eventually – very soon, in fact -- UESG will take possession of those 11 million UERI shares, as well as also take possession of PDEI as its subsidiary and be a general partner in UEPI. Further, UESG will also exchange the remaining shares of Grifco – those not belonging to the security pledge, that is. My best guess is this exchange will involve the same ratio that Grifco had with UERI, which was a 1 or 5 exchange, such that the exchange will essentially complete the second half of the total number of shares that currently exist in Grifco. In other words, Grifco currently has X number of shares, 56.5 million of which are already set to make their way into UESG, by way of UERI. So, the remainder of the Grifco shares (X – 56.5 million) is now set to make its way into UESG, by way of the FVF exchange. Therefore, I cannot envision the FVF ratio being anything other than a 1 for 5. Have I lost anyone?

Allow me to explain: Grifco has X shares in all; 56.5 million shares of X shares are also held in UERI via the “1 for 5” exchange; these will be exchanged (1 for 1) for shares of UESG; (X – 56.5 million) Grifco shares (the remainder of the shares) will be exchanged (1 for 5) for shares of UESG. Now, if Dial is now prepared to deliver a grand total of 20 million warrants for PDEI shares to ALL Grifco shareholders in each of 3 tranches, one must believe with an exceptionally high degree of probability that there must ultimately be 20 million shares in UESG, such that each UESG share should get 1 warrant. And if 11 million of these shares are already coming by way of the UERI/TTII exchange, it can only mean that the 9 million that still remain are set to come from the Grifco/TTII, FVF exchange. In other words, 9 million shares of UESG will some day represent the entire ownership of Grifco shares, save the security pledge. Therefore, with the same “1 for 5” exchange, it can only mean that there are but only 45 million shares in Grifco right now that are beneficially owned by Grifco shareholders, save UERI. Actually, seeing as how the ratio is really 5.14, there are 46.3 million shares. Did everyone get that?

Maybe if I put my “funny math” to work, you’ll see what it is I am saying. Grifco now has a total of 102.8 million shares right now – 46.3 million o/s and 56.5 million that are held as security pledge for oil & gas leases in UERI. I could be slightly off, but I really believe I am there between the pitcher and the guy at bat – in other words, I am not just inside the ballpark, or inside the diamond, but much closer, I think. If Dial is giving out 20 million warrants, they must be given on the very same 1 for 5.14 exchange ratio, the implication being that there are only 20 million x 5.14, or 102.8 million shares, held by ALL shareholders in Grifco, 56.5 million of which are held as security pledge and 46.3 million of which are held by everyone else.

Now, these warrants will have inherent value, as they will represent underlying shares of PDEI that will have some capitalized value. The goal for PDEI is already slotted to drill 7 wells over the next 35 weeks (2 weeks each to drill and 2 - 3 weeks each to commence production), we can fully expect for these 7 wells – producing $3 million each over their economic lifetime – to generate $21 million, conservatively, over that economic lifetime. And the cumulative Net Royalty Interest (NRI) will serve to give their underlying shares some real value. Typically, the economic life of a gas well is conservatively assigned as 10 to 20 years, but many gas wells around Crocket County, TX have been economically producing gas for more than 35 years. Allow me to refresh your memories.

According to the Texas Railroad Commission, a typical gas well in this area produces 10 million cubic feet per year. At a margin of $5.81 ($7.56 - $1.75) per 1,000 cubic feet, we are talking about $58,100 per well, per year. So for 7 gas wells, we are talking $406,700 per year in NRI. With the 20 million shares anticipated (I just went over this), this works out to an EPS of about $0.02, which with a typical P/E multiple for the independent oil & gas drilling/exploration industry (8.8x), we are talking about $0.18 per share of PDEI, for a minimum, or the equivalent of $0.035 per share of Grifco. With the anticipated growth rate, seeing how there is potential for another 201 wells to be drilled in the future, the P/E multiple could be much higher. In fact, with the anticipated drilling schedule of 10 wells per year (inferred by their schedule for those 7 wells), we are talking a 100% increase in income for the second year, 50% for the third, and 33% for the fourth (you get my drift). Of course, I am simplifying, as I am not accounting for the diminishing production curve that is to be expected. Therefore, a much larger P/E multiple can surely be justified early on in the game, as PDEI continues its proposed drilling schedule.

Furthermore, using current pricing, what do those 3 tranches of 20 million warrants mean for ALL shareholders, knowing this? For starters, each tranche considers a grand total of 10 gas wells, or 30 wells for all 3 tranches. So, using typical production averages for this area, we are talking a very likely grand total of $1,743,000 in annual income. Now, if the shareholders – ALL shareholders – get to share in 33 1/3% of this income, we are talking 33 1/3% x $1,743,000, or $581,000 to be given as an annual dividend. In terms of Grifco shares, we are talking $581,000 to be given as an annual dividend to 102.8 million shares, or roughly the equivalent of getting about half a penny per Grifco share. It sure does not sound like all that much, but one must consider the very likely possibility that these wells could ultimately produce much more than the typical. Also, I am not taking into account that some of these shares could be purchased back in the process. Sure, the warrants will have an associated conversion cost, but I am more than sure that the cost will be far more than outweighed by its underlying benefit.

It sure seems like we have a high wall ahead of us, though. I, as well as many others, do consider the recently issued string of PR’s to be quite positive and rather encouraging to ALL shareholders. And the $64 million question, though, is this: From where are all of these millions upon millions of shares coming? I don’t know anyone who’s selling, and it boggles my mind to no end to see such tremendous volume trade throughout the entire day with no dramatic fluctuation in share price. If I am right about all my assumptions above, such that there are in fact only 46.3 million official shares of Grifco in the hands of shareholders (save UERI), then there MUST be a HUGE short position! Using all of my best estimates with my past surveys and current discussions with shareholders that I know, I put the current count – the seeming count, that is – at about 80.5 million shares, or more (for ALL shareholders, including management), and that essentially means that there are roughly 34.2 million extra shares (entitlements) out there.

Check out my updated chart (link below) that shows share price and money flow (15-day average for money flow) for Grifco since coming out public on November 19, 2004); it reveals that money flow has been on the rise recently, and given the latest group of PRs, it will more than likely continue to rise. Something is fishy!

http://img291.imageshack.us/img291/5343/pricemfxv9.jpg

Been_Burned_Before