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There are
two developments in the oil and gas world that have initiated a seismic shift
in that business that most investors have yet to fully comprehend:
1) The
advent of horizontal multi-stage fracking
technology has completely rejuvenated a large number of North American
conventional energy plays that were considered finished;
2) Tight
formation and oil-bearing shales have tripled, if
not increased by a factor of 10, the domestic reserves of oil, condensates,
and especially, natural gas, of North America.
The main
takeaway investors need to understand is that high capex/opex plays – like the oil sands – are going
to come under increasing pressure as the cheaper and easier to produce
horizontally accessed and deeper vertical shale plays are brought on-stream.
It also points to the ability for energy investors to capitalize on the
absence of political risk that comes with exploration and production in Canada
and the United States. Who wants to explore in Mongolia or Nigeria when there
are literally billions upon billions of barrels easily accessibly in North
America?
Its going to
take a while, but the trend is definitely going to be away from the sands and
into the shales. Private, pre-producing companies
with substantial land positions in key areas are going to see their
valuations escalate based on land positions alone – especially as these
re-drills and re-completions prove out the formerly “trapped”
hydrocarbons, and fracking starts producing from
the shales.
Case
Study: Stormhold Energy Ltd.
With potentially over 700 million barrels of oil from conventional and
relatively shallow reservoirs in east central Alberta, and somewhere north of
2 billion barrels potentially in Cambrian shales, Stormhold Energy is one of the most valuable private
companies in the oil patch outside of the tar sands. At a dollar per barrel
in the ground, I’ll let you do the math. These are potential resource
numbers, and not reserves by any stretch.
According
to independent consultant Brian Mahood of
Calgary-based Kerrisdale Consulting,
“Our independent (51-101 compliant) resource reports prepared for the
Viking, Mannville and Cambrian zones have
identified, under a most likely case, approximately 25 million barrels of oil
equivalent (BOE) of prospective resources in the Viking, 124 million barrels
of oil equivalent (BOE) of prospective resources in the Mannville
and over 280 million barrels of oil equivalent (BOE) of prospective resources
in the Cambrian across the 295 sections of Crown Lease Minerals Rights held
by Stormhold.”
I
discovered this company in August this year, and after 4 weeks of due
diligence, I am convinced that Stormhold will
either become a major oil producer within several years, or will be purchased
outright by one of Crescent Point Energy (TSX:CPG)
(OTCBB: CSCTF), Apache (NYSE:APA) or some other U.S or Canadian major
company.
According
to an internal company report to the president;
“Stormhold has a total of 266 sections with
Upper Cambrian Deadwood Formation rights, giving a calculation of total
potential ‘Most Likely’ conventional oil resource of 266 X 5.547
= 1,475.5 million barrels of oil.”
Risked at 50%, that equates to a potential resource of 700 million barrels.
The big
story, however, is the deeper oil-bearing shales in
the Cambrian play. My bet is the company will be taken out in the next 6
months. Barring a takeout, the company is negotiating with various groups to
IPO within 12 months.
Too Good
to be True?
Analysts at investment banks were initially incredulous about Stormhold’s representations. How could a tiny
private company, who raised $8.5 million from 85 shareholders who were all
friends and family, possibly hold such a large and valuable position? How
could oil exist right under the noses of the established major producers in
an area that has had over 4,500 wells drilled and produced 900 million
barrels of oil since the sixties?
All without debt, without banking relationships, without any external help?
How could the price of the land position increase from $1.9 million in 2009
to today’s going rate of $54 million?
How is it
that a tiny company with no banking relationships to speak of could be in a
position to become one of Canada’s major oil producers?
The story,
which will certainly become part of Canadian business lore, is emblematic of
the innovative thinking and swift ability to seize opportunity
that are pre-requisites for success in competitive oil patch.
Ed Stelmach, Premier of Alberta from 2006 to 2011,
raised the royalties that oil and gas producers would owe the government from
producing wells in an effort to capture more of the revenue that was being
lost through the tax optimized energy trusts.
The energy
producing establishment banded together to boycott the province’s land
sales in 2009, to attempt to force a revision in the policy by depriving the
government of any revenue from land sales.
Fortunately for Chadd Radke
and Ted K. Cantlon, the founders of Stormhold Energy, they were not part of the
establishment, and so seized the opportunity to acquire a substantial land
position in east central Alberta for just under $2 million.
“We
pissed off a lot of people,” acknowledges Radke.
“But that’s why we’ve got such an attractive and valuable
land package.”
As soon as
the land position was secured, Radke and Cantlon set about sifting through their many contacts
from within the oil and gas business. Radke had
spent 16 years in the service side of the business, and Cantlon
was a thirty year veteran of both energy finance and management. They bought
seismic data and engaged two independent and widely respected engineers to
help them complete reservoir studies and analyze well logs from the many
thousands of wells that had been drilled on their now 295 sections of land.
It
wasn’t long before they convinced several senior petroleum scientists
to join the company, both as shareholders, and as consultants. And at the end
of the day, it was the combined expertise of their own technical team,
verified by two independent reports, that determined a few interesting facts
about the land that had produced so much oil, and that is still producing to
this day.
The first
revelation was that, despite thousands of wells having produced hundreds of
millions of barrels of oil from the Viking and Mannville
plays and Provost pool, the Stormhold team knew
that those formations were not the real source of the oil, which, it turns
out, are present in those formations as a result of seepage through cracks
and faulting from lower formations. The oil actually originates from the
Cambrian shales underlying the Viking, Mannville, and many other shallower formations that
comprise Stormhold’s vast holdings.
The
Cambrian shales are precisely the formation that
the Houston-based oil company, Apache Corporation (NYSE:APA) recently
announced that there may be an estimated 3 billion barrels of crude oil under
land they purchased in America’s Heartland. Its resources such as these
that have already caused oil imports in the U.S. to drop by 550,000 barrels
per day in 2012.
The
estimated 3 billion barrels of crude oil sits under 880,000 net acres spread
across Kansas, Nebraska, and Montana. The two areas of land are known as the
Williston Basin around Nebraska and Montana, and the Mississippi Lime area
around Kansas and Oklahoma, which is already known for its rich oil
formations.”
Apache’s
land holdings in this area are responsible for a significant portion of that
company’s 784,000 barrel per day production. Some of the wells came on
stream at 16,000 barrels of oil per day.
Momentum
is Building
When Crescent Point Energy bought Cutpick Energy
for $420 million earlier this year, what appeared to be a win for
shareholders was in fact a rescue of management’s debt-swollen balance
sheet that was starting to limit the company’s ability to finance
itself. Fortunately for Cutpick shareholders, their
President and the President of Crescent Point were friends. So Cutpick’s shareholders did alright.
The
bankers who back Crescent Point are now very
interested in Stormhold’s land. In fact, a
source who declined to be identified because the discussions are private, has
confirmed that meetings among those companies are taking place.
Mackie
Research Capital Corp, one of Canada’s most respected independent
investment banks focused on energy, resources and technology, has been
retained to advise on takeover offers, which, as
soon as a takeover bid is announced, is expected to generate a flurry of
interest that could easily turn into an auction.
A U.S.
major, that is an expert in the Cambrian production, has been studying the
company’s data since April, and have indicated informally that they are
interested in discussing farm-in arrangements and/or a takeover.
Now
obviously there are lots of things that can go sideways in that process, and
so there is still risk associated with transaction completion. But Radke and Cantlon are adamant about one thing: They won’t consider
less than $4 a share for a takeout offer at this point. That values the
company at CA$300 million.
“When
we start producing from our Cambrian well, that we are in the process of
completing with our JV partners, that price will double at least,” says
Radke. “That will move a lot of our resources
into the reserve category. If we don’t get the price we want,
we’ll just IPO in the next year. We control the company, so are
comfortably in the driver’s seat in determining our future.”
The
company is currently in completion on 4 wells and expects to spud four more
within 6 months. “We’ve got targets picked out, and we’re
looking for partners who want to participate,” said Radke.
“We will finance our own wells.”
A Rare
Find
While there is risk associated with investing in an oil play that is not yet
a proven producer, the third party independent valuations by Brian Mahood, a nationally respected geologist, and equally
well-regarded Chapman Engineering, amount to substantial
“de-risking” of the play.
The
compelling argument about this opportunity from an investment perspective is
that it has “compressed investment velocity”, meaning there are
so many value drivers within this story – the multiple pay zones, the conventionals, the shales, the
re-entry opportunities, the re-drilling opportunities, the farm-in
opportunities, the complete takeover potential – that it is a very
attractive vehicle for risk tolerant portfolios of accredited and
institutional investors.
I think
demand drivers for this company also stem from the fact that the oil sands
are going to be economically non-viable, if oil drops below $70 a barrel. Not
so with the Cambrian play, according to Radke. So
while investors scour the planet for billion barrel plus oil reservoirs, the
premium placed on such reservoirs within Alberta’s borders, from a risk
perspective, will be huge.
Documentation
relative to the company’s farm-in and financing opportunities can be
found here:
http://www.enertechadvisor.com/Stormhold
For more
information, contact:
James West
Midas Letter Financial Group Ltd.
+1 (917) 675 4777
james.west at EnerTechAdvisor.com
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