Dear OGIB Reader,

Today’s story comes from guest writer Cory Mitchell, who gives us an in-depth look at Bankers Petroleum — one of the most widely followed international junior oil companies in the world.

– Keith

Bankers Petroleum Stock (BNK – TSX) Disappoints – Is it still a Buy?
By Cory Mitchell, CMT

Bankers Petroleum (BNK – TSX) provided an update on second quarter (Q2) operations after the market close on Tuesday, July 5 – causing a huge down-spike in price on big volume. This former OGIB pick has become one of the most highly followed junior oil producer in the North American markets – covered by 16 analysts and owned by many Canadian, US and European small cap energy funds.

Bankers’ is developing Europe’s largest onshore field, which is in Albania. Three things have made the market very excited about this field, and therefore Bankers’ stock:

1. This huge field (called Patos-Marinza) has over 7 billion barrels of Original Oil in Place

2. Horizontal drilling has dramatically improved production rates per well, so that wells pay out in 6-11 months. (Anything under 24 months is considered good)

3. Production declines much more slowly out of these horizontal wells than the light oil wells of the Bakken and other horizontal plays around the world.

It was originally a stock based on the huge reserves in the Albanian fields, but now is becoming a cash flow growth story as well – especially as heavy oil has been getting a better price around the world.

Yet, while the company did increase production handily over last year, it did miss the production estimates it gave to the market and downgraded its own expectations for year end production volumes.

The disappointing current and forward looking guidance dropped the stock to its lowest level in 16 months. Based on the fundamental data of the company and technically analyzing the stock performance I will look at whether buying (or holding if already owned) at the 16 month lows is likely to be a profitable endeavour.

Was the Sell-Off Warranted?

BNK reported below expected production and sales levels, producing an average of 12,973 bbl/day, a 7% improvement over Q1, but missing the company’s own forecasts by 1200 bbl/day. Current production is at 13,150 bbl/d, which is up 44% from the same quarter last year.

The company could had have actually come closer to hitting the target (would have missed by about 500 bbl/d) but shut-in production was 60% higher than normal. Shut-in production is when the company pulls out less oil than what the available output is.

Bankers’ management gave three reasons for this:

1. Several wells required service rigs

2. Others were in proximity of new drilling

3. Wells were also shut in because they couldn’t get rid of all the water for wells with high water production.

The company has sourced another service rig which should arrive in Q3, and one or two more in Q4.

Service rigs are required to maintain producing rigs and complete new wells. Wells require regular maintenance including pump changes, with re-activation wells often needing additional work due to deterioration over time. These service rigs should bring the shut in production down to normal levels of 1050-1100 bbl/d but service rig requirements will continue to grow as more production comes online.

Wells being shut in due to proximity to new wells – they are draining the same area of the reservoir and the new wells are modern and do a better job. This is common in the global oilpatch and largely considered good oilfield management.

Water disposal wells are being equipped to handle additional water volumes which should alleviate this issue.

With oil prices higher, especially Brent crude, BNK was able to get better pricing with the average price received increasing 13% over Q1. Despite this increase in revenue per barrel, overall sales lagged. One key factor for this is a major order which was delayed and will be included in Q3 results instead – this accounted for about 600 bbl/day leaving 221 bbl/d unsold.

With increased oil production, Bankers now has the critical mass that it can get several refineries to bid against each other for their heavy crude. Between this competition and overall higher oil prices, its profit per barrel (called the NETBACK) has increased year over year from $20.98 per barrel to $37.22 per barrel – a 77% increase.

Company oil inventory levels went to 239,000 barrels, up from 168,000 barrels on March 31. This is not an issue if it is short-term, as new site and storage tanks required certain operational minimums. If inventories continue to climb, affecting sales, this would have a dampening effect on financial and stock performance.

Several analysts dropping price targets also likely played a role in BNK’s stock value decline, yet ultimately shouldn’t have, as analysts continue to like the stock. According Thompson/First Call, the 16 analysts covering the stock hold a median and average price target of $11 and $12 respectively.

New Projects with Promise

Successful new projects on different areas of Patos-Marinza field will be major factors driving Bankers’ oil production higher.

New test wells in the northern Gorani area of the field is one such project where the company is looking to expand production–if those well tests continue to produce good results. Gorani has heavy oil which is accessed by vertical and horizontal wells.

A third Gorani well is awaiting completion in (Area-1) with the first two wells already producing 170 and 180 bbl/day. Canadian brokerage firm Raymond James says this is a big positive, as those rates are higher than what the independent reservoir engineer used to calculate reserves here. The company stated in their Q2 (2011) Operational Update:

The success of these two wells has now validated primary productivity from the Gorani formation in the northern area of the field and the Company intends to further develop this formation with the addition of a large number of horizontal wells to access more than 220 million barrels of oil in place.

BNK also maintains plans to drill six to eight Driza and/or Gorani wells in another area (Area-2) of this field which, according to Raymond James, could allow for even further reserve potential. Successful results will lead to a much larger program with expectations in the 50-100 well range over the next several years, saysDundee Securities Ltd. “Driza” wells refer to the vertical or horizontal drilling of the area below the Gorani formation where the oil is less heavy, or lighter.

As mentioned, the company plans to drill 82 re-activations of old wells, and to drill 79 horizontal new wells. Bankers’ says 34 horizontals have been drilled through Q2 making it possible to hit the 79 target, yet they are currently behind. Well re-activations are well behind management’s projections, with only 22 so far this year.

That said, they have many re-activation candidates as the company announced in April it would be acquiring 140 active Albpetrol (former sole-operator in the Patos-Marinza field) wells. So the number of re-activations could increase quickly.

NEXT STORY: Part 2 — The technical outlook and conclusions for Bankers Petroleum’s stock.

— Cory Mitchell, CMT

Disclaimer: The information provided is as of the date above and subject to change, and it should not be deemed a recommendation to buy or sell any security. Much of the fundamental information is based on company statements and therefore are dependent on company honesty. Trading involves substantial risk and may not be right for everyone. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete.

Cory Mitchell owns zero Bankers Petroleum. Keith Schaefer owns zero Bankers stock. Neither the author nor the publisher have any affiliations or associations whatsoever with the company.