Iran's "Oil Show" Just Revealed a Huge Opportunity

Let's face it: Iran isn't at the top of anyone's list when considering all the profit opportunities out there in the world. At least, not yet...

You see, Iran is changing - and quickly.

Its new political regime at least appears to be increasingly open to the West.

Its old-style buyback contracts with international oil companies have long been considered high-risk with little or no flexibility; they essentially allowed Iran to own the oil company assets and allow the company a stream of profit.

But the isolated nation recently announced the introduction of a new generation of oil contract, one that promises to be considerably friendlier to foreign partners.

Companies with a long history in the Middle East are already well-positioned for the change.

And, with the play I'm about to show you, you can be the first to profit.

The IPC: A (Very) New Game in an Old Oil Market

Thanks to a decade of sanctions, Iran lost many of its international oil markets to other OPEC members who've been more than happy to pick up the slack.

Economic embargos against the country's nuclear program have taken their toll and are partly responsible for Iran's currency, the rial, losing nearly 70% against the U.S. dollar in the past five years. That's sent inflation soaring and caused considerable suffering with a surging cost of living.

But there's been somewhat of a rapprochement lately. Iran's olive branch is a new oil agreement called the Integrated Petroleum Contract (IPC).

The IPC should be formally unveiled in London later this year. It's expected to allow for the transfer of ownership of hydrocarbons (though not project assets) to the foreign investor at predetermined milestones. For years the United Arab Emirates and Iraqi Kurdistan have successfully exploited their oil fields with production-sharing agreements of this type.

In early May, Iran held an "Oil Show" that was attended by more than 600 foreign companies. Delegates came from Europe, the U.S., China, Russia, Japan, South Korea, Malaysia, Turkey, and the United Arab Emirates.

Iran is telling oil producers to "be ready" for upcoming work as contract terms are updated. Some are taking the advice to heart.

The Likely First-Mover

Based in France, Total SA (ADR) (NYSE: TOT) is the world's fifth-largest public integrated oil company. Thanks to its European roots, the company has long had operations in many highly productive regions, like Africa and the Middle East, and could be a "first-mover" as Iran opens up.

With a market cap of $139 billion, a P/E of 12, and a current yield of 4.7%, Total has plenty of upside in the tank. And CEO Christophe de Margerie recently indicated that, if sanctions are lifted, he sees the potential for his company to return to producing oil in Iran.

The country needs partners like Total because decades of limited investment and aging technologies have weighed profoundly on output.

Unlike Myanmar or Africa, both more recent destinations for oil and gas exploration and production, Iran has one of the world's most mature oil sectors, with production dating back to 1908.

And still it holds the world's fourth-largest proven oil reserves and the second-largest natural gas reserves, which clearly have been underexploited for decades.

Should Iran truly open itself to foreign oil interests, the investment potential could be dramatic. It may not rival the North American energy boom, but it will spike.

A Perfect "Profit Storm" Shaping Up

A dramatically weakened rial and strict sanctions have conspired to make imports to Iran very costly and extremely restricted.

Oil exports represent 80% of the country's foreign revenues and about half the government's annual budget, with natural resources considered a "national asset."

Expertise and capital from outside the nation are critically needed. Over the past 15 years, Iran has enticed some $50 billion into buyback agreements. By contrast, tiny Qatar has seen quadruple that amount in the same time.

Even archrival Saudi Arabia, one of the biggest beneficiaries of restricted Iranian oil exports, last week invited Iran's foreign minister to visit Riyadh. Looking to ease tensions, Saudi Arabia is willing to discuss a number of issues. But given their common ground as large oil exporters, it's a safe bet oil will be a main dish on the menu.

A more immediate play on the region, but still outside Iran, is WesternZagros Resources Ltd. (CVE: WZR). It's a $445-million company focused squarely on Iraqi Kurdistan, neighboring on Iran, and that could share some of Iran's oil fields.

It has two significant light oil discoveries and plans to produce up to 10,000 bbl/d in the second half of 2014. Its proximity and existing operations could make it a favored play once Iran finally opens up.

The bottom line is Iran is signaling its willingness to compromise on a number of levels, and that could well mean more oil production from the area.