(a shorter version of this story appeared in the Financial Post Trading Desk online edition on January 6)

How do valuations get set for oil and gas companies?  I ask because I’m seeing very fast-rising valuations in the junior and intermediate oil sector that I cover. I have seen junior oil producers valued at $200,000 per flowing barrel recently – more than triple the peer group average.

Industry statistics concur. A December 24^th report by Peters & Co., a Calgary-based securities firm that is an oil and gas boutique, showed that the average purchase/sale price for oil weighted production in Q4 2009 was $100,000 per flowing barrel. 

This is up more than 50% from the Q3 valuation of just over $60,000. (Oil and gas equivalent is the way the industry puts the two commodities into one valuation, usually at 6:1 ratio of gas-to-oil).

The report showed that valuations for natural gas weighted purchases also jumped up more than 50% in Q4, from $35,000 per flowing boe to $54,700.  These numbers have an immediate impact on junior and intermediate stocks across the board, as you’ll read.

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Junior oil producers with land packages in the Cardium formation are jumping up today after Berens Energy (BEN-TSX) was bought out today by Petrobakken for $2.70 a share. Berens’ stock price had moved up from 50 cents to $2 over the last six months as its Cardium land position became more widely known.

This transaction is significant for a couple reasons.  It’s a huge validation of the emerging Cardium play.  The Cardium has quickly become the next “hot” play in Canada, after the high profile Bakken play in Saskatchewan.  And Petrobakken is one of the top intermediate producers in Canada.  The market has great respect for this management team’s (CEO John Wright and CFO Corey Ruttan) technical and business expertise.

I would suggest that Berens was sold at a significantly higher valuation than people expected – $90,000 per flowing barrel of oil equivalent (boe) based on average December production of 3700 boe/d. 

Part of the reason was Berens land base – Petrobakken indicated it saw 100 Cardium drilling locations there.  One analyst report on the deal this morning noted that even backing out the land price at $2 million per section, the deal was worth $70,000 per flowing boe.

The market is taking this news and immediately re-rating all of the juniors in this play (which is great for our subscriber portfolio!). Many of the juniors are natural gas weighted, with high debt issues – just like Berens was/is – and were/are trading at roughly $35,000 per flowing barrel.  That leaves a lot of upside for investors.

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I’m taking 4 days off before Christmas, and it’s almost going to kill me – there is so much happening in the oilpatch!  The subscribers’ portfolio is heavily weighted towards the new Cardium oil play in Alberta, and I read this morning that one brokerage firm just dramatically raised targets on two of our picks.  The Cardium play has now become the hottest oil play in Canada.

My portfolio addition this week came to me as I was reading a research report on Tuesday morning, and it said Company X had a large Cardium land position.  This is one of the most followed junior producers in Canada, and one quick look at the stock showed that this was not priced into the stock – so I quickly alerted subscribers.  The stock is now up 15% and analyst updates are pouring out touting the latest Cardium play.  I expect this company – with one of the most respected junior teams in Canada – to provide subscribers with great growth in 2010.

I’m also looking at a US listed oil producer that is likely to double oil production – in the next 4 months!  The only issue is its rather large debt position.  There is also an international play – where subscribers have done incredibly well with companies like Petrominerales, and Pan Orient – that has me very intrigued.  It’s well cashed up and has two plays – one for 2010 and one for 2011 – that could see it be a 3-5 bagger or better over the next 24 months with drilling success. (And one of their first wells is twinning an old one that already hit the payzone!)

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The new Cardium oil play in Alberta is rapidly approaching the stature of Saskatchewan’s famous Bakken play – and this is very good news for investors in Canada’s junior oil and gas sector.

The four year old Bakken play has created huge shareholder wealth for investors, as companies like Crescent Point Energy and Petrobank bought out junior after junior after junior to increase their land base and production profile.

The same thing is now starting to happen in Alberta’s Cardium play.  And valuations (read: stock prices) are getting much richer, much faster than what happened in the Bakken.

As an example, TSX listed Result Energy is a Cardium-focused play that was just taken over and re-capitalized by the management team from TriStar Oil and Gas, a Bakken play that itself was bought out in August 2009.

Brett Herman and his TriStar team announced several acquisitions immediately, and one Canadian analyst estimated they paid $275,000 per flowing barrel for them.  As comparison, the average Canadian listed junior trades at about $60,000, the intermediates at $71,000, and if it’s a natural gas weighted producer, it can be as low as $30,000.

Even the leading juniors in the more profitable Bakken play – Painted Pony Explorations would be a good example of this – trade at $140,000 per flowing barrel. 

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One of my portfolio stocks for subscribers is a company out of Houston Texas that has gone from 2000 – 12000 barrels per day production this year.  That’s an amazing growth rate.  The stock has doubled, but I think there is still a great opportunity for investors with this company in 2010.

So I’m going to tell you what it is – for free.  It’s a great example of the type of research and writing I do for Oil and Gas Investment Bulletin subscribers.  Sign up to receive my free blog, and you’ll receive an updated 9 page report that I have just completed.

This company is actually drilling a new set of wells starting mid-December 2009 that could be a huge catalyst for its share price – if they hit.  Their exploration track record in 2009 is 100%, which is a good place to start. But these new wells are in a new field, so it’s not a slam dunk. 

Despite its strong growth in 2009, the company is still trading at a low valuation, which I see as protecting my downside.  Also, this company will be drilling development three wells in March-April, which are much lower risk, and management expects them to be 750-1000 bopd each.

I hope you are enjoying reading my free blog as much as I enjoy writing it.  With all the new technologies creating new opportunities for investors in oil and gas – I’m thinking of Wavefront Technology (WEE-TSXv) which has gone from 70 cents to $3 this year, and all of the new plays opening up in North America because of horizontal drilling, 3D seismic and fracing improvements – it’s a very fun and exciting space to be in.

And the best part is, subscribers are profiting handsomely.  If you want to learn who the leaders are in the new plays in North America, and who is drilling the high-impact wells internationally, consider subscribing to the Bulletin – with a 60-day money back guarantee.

One of the top Canadian oil and gas analysts says this company I am profiling could go from 12,000 bopd to 50,000 bopd in the next 3 – 5 years, creating huge wealth for its shareholders.  To read my free, updated report on it, just sign up for my public stories.

Learn, Invest and Prosper in Oil & Gas

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Berens Energy (BEN-TSX) was up 23%, or 37 cents, on Monday Nov 30,  to $1.95 on much greater than average volume as it reported the highest Initial Production (IP) rate I have ever seen out of the new high profile Cardium oil play in Alberta – 1250 bopd (barrels of oil per day).

I have followed Berens, a 4000 boe producer, since the spring of 2009, but did not include it in my newsletter portfolio because of its high debt and high natural gas weighting.  My bad; the stock has tripled as its large Cardium land position become more widely known, and they had some drilling success.

Despite the debt and the natural gas, I was intrigued with in the spring of 2009 because the team of President Dan Botterill and CFO Dell Chapman had (and have) done a great job at becoming one of the lowest cost gas producers in the Canadian oil patch.  They had to; they hit their debt ceiling two years before everybody else; they could only spend cash flow.

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