MCF ENERGY (MCF-CSE) is first out of the gate developing a domestic natural gas supply for Europe.
They’re drilling (at least) two high-impact, low-risk plays in Europe in 2023.
The urgency is high – because February 24 2022 changed EVERYTHING in the global energy world when Russia invaded Ukraine.
Russia supplies the European Union with 45% of its natural gas! But as the world punishes Russia for this war, Russia is retaliating by turning off the pumps.
Europe is now scrambling to replace all of that cheap gas it was getting from Russia. A warm winter so far has brought European natgas prices down from US$100/mcf last summer to US$22/mcf now–which is still 5x North American pricing.
Even the EU’s rosiest projections say it will only replace two-thirds of Russia’s gas. And that leaves the EU with a massive energy shortage.
They’re importing expensive liquid natural gas (LNG) from the US and other countries. Europe is even turning to dirty coal for energy; Germany alone has restarted TWENTY coal-fired plants.
They’re also relying on wind and solar to fill that gap–but that has challenges too.
In short, Europe is doing everything it can to replace Russia’s natural gas. But the easiest, cleanest and cheapest way for Europe to solve its energy crisis is to develop its own natural gas industry.
For investors, timing could not be better. The domestic industry that has been starved for capital for a decade, which has left a LOT of low-hanging fruit—i.e. known gas deposits and favorable geology—for both investors and energy consumers to benefit from.
And like I told you yesterday–European natgas prices are highly profitable–even with a warm winter, full inventories, and a line up of LNG tankers–natgas (today) trades at over US$22/mcf vs. $4/mcf in North America. That’s bullish.
“Europe has been on an energy transition path for a very long time and oil and gas development was discouraged and is capital-starved,” says Jim Hill, MCF Energy’s CEO.
“Many of Europe’s very good projects have gone begging; they really have,” says Hill. “Germany’s natgas sector has been undercapitalized and underexplored for a very long time. And Europe now realizes they must have their own domestic reserves.”
“Russia is using energy as a weapon and Europe realizes this could happen again.”
Despite generating big cash flows, valuations in energy stocks in Europe are cheap. See this chart of the European Energy Index (SXEP) against the overall European 600 Index (SXXP):
Source: Bloomberg, BofA Global Research estimates Dec 16/22
DREAM TEAM COMES TOGETHER
Hill and MCF co-founder Ford Nicholson have a big Rolodex of European projects and operators after successfully re-developing the largest heavy oil play in Europe (Albania).
The stock of that company, Bankers Petroleum, was a huge win for early investors as its market value rose from single digit millions to over $2 billion market cap. Nicholson was also Deputy Chairman of InterOil, an Asian oil play, when it sold to Exxon Mobil (XOM-NYSE) for US$2.5 billion.
Hill and Nicholson also built up European energy producer BNK Petroleum, to a $900 million market cap at one point.
They have now returned to Europe where they have so much success. They recruited MCF Energy Chairman Jay Park, who had just finished a very successful run as CEO and Chairman of Reconnaissance Africa (RECO-CSE). He helped create huge shareholder wealth with an oil discovery in Namibia–taking it from 30 cents in 2020 to $12 in 2021.
The team started planning a new European natgas play shortly after the Russian invasion of Ukraine on February 24.
“I had kept up all of my contacts in Europe,” says Hill. “I’ve been an active member of the Central European Energy Conference Group even after I left BNK.”
“I already had a long list of European contacts. I already knew all of the companies, so we went in and reviewed over 20 different prospects and plays before we actually selected the first two, one in Austria and one in Germany right by the Polish border.”
MCF has just gone public, after raising CAD$8.5 million at 20 cents–most of it done by insiders. Full disclosure–I’m long here.
Hill says MCF is going after high-impact plays in 2023 that require modest up-front capital.
“Really what we’re looking for is elephants. In this early stage, we’re looking for large plays that will really make an impact for our shareholders—plays that we can get into, bring our technical expertise to maybe extract things that others have missed and just drive forward at this time of opportunity.”
“I think we are the first movers in this market and this is why we’ve been able to grab these two compelling assets, and put together an incredible team.”
ADVANCED STAGE EXPLORATION
WITH NEARBY PRODUCTION
The first gas target to get drilled is just 18 km from pipelines. It is a simple, large “foothills” play—similar to what North Americans would see in Alberta or Colorado—in northern Austria, called Welchau.
Hill says Welchau has everything they were looking for in a European gas play.
“When drilling these plays, you’ve got to have a reservoir, you’ve got to have a seal, a source for the gas and you’ve got to have a trap or closure. And Welchau has all of those.”
Think of a large underground dome—so big it covers more than a hundred square kilometers. You can actually see a dome like geologic structure that on surface at Welchau.
One successful well has already discovered high-quality natgas. In 1989, a well drilled on the flank tested at 2.5 mmcf/d with 40 barrels of condensate per a thousand cubic feet—flowing for 16 days. Back then, that wasn’t economic to produce.
But that operator only tested a very small section of the gas bearing reservoir, according to Hill.
The top of the Welchau gas zone is estimated to be only 1150 meters below the surface—quite shallow, and cheap to drill. There is multi-zone potential, as the gas column at the 1989 well was over 400 meters tall.
“The  well, if it has a 400-meter gas column, your seal trapping the gas has got to be pretty tremendous,” Hill explains.
“And if it’s any more than that, now you’re talking surreal. So if I come up with two-, three-, 400 meters of gas column on Welchau this, this thing has the potential to be very large.”
Hill says the reservoir looks to be pervasively fractured—that can mean unlimited permeability with high gas flow rates; a very big well.
“If we get lucky, we’re looking at over a Tcf (trillion cubic feet) of reserves in Welchau,” says Hill.
That would go a long way to filling the 5.3 Tcf/year gap to eliminate all Russian gas.
Their #2 play is also a gas play, this one in eastern Germany—but with one difference. Previous exploration did find gas, like Welchau, but it also found an oil zone higher up in the well—geologists call that “bypassed pay”; with ‘pay’ being any hydrocarbons found above the main producing zone.
Reudnitz has a horizontal well on it from 2019 that hit gas but had some technical difficulty, and didn’t produce at an economic rate. Hill’s team wants to re-enter this discovery well and increase the gas production or alternatively drill a new well.
Reudnitz 2019 well approx 70km from Berlin. Source: MCF Energy
Hill says the potential of a big oil formation above the gas really convinced him that Reudnitz should be part of the MCF starter kit.
“The kicker for me here at Reudnitz was that there’s about 19 meters of oil filled fractured Zechstein carbonate on the way down to the proven gas zone, which was never evaluated.
“It seems to cover a large area from what we can see. That could be bypassed pay, making it low-hanging fruit—from our own internal estimates, we see potential for between five to 20 million barrels recoverable here. And this formation IS being produced from this carbonate zone on the Polish side of the border. We are planning a 3D seismic survey to identify the structure and sweet spots to drill for both the gas and potential oil zone.”
MCF has disclosed they have a number of additional natgas targets in Germany under evaluation and application.
“Germany has been underexplored for over 50 years, and we think there are many yet-to-be-discovered gas fields ” Hill says.
THIS IS JUST THE BEGINNING
The European gas market changed on a dime on February 24, when Russia invaded Ukraine. It is now, and will remain for years, one of the most profitable energy markets in the world.
That’s why Hill, Jay Park and Nicholson went to work finding the highest-quality natural gas plays across Europe.
They have already reviewed more than 20 exploration assets and funded two so far. But Hill says they are not stopping to wait and see how prolific these advanced stage projects are.
“I can’t really talk about them very much but we’re seeing opportunities which have discoveries. But prices at the time made them uneconomic.
“Now, of course, things have changed quite a bit. Things have opened up pretty dramatically. And it looks like those changes are going to hold for quite a while. So we’re very confident in moving forward on these projects.”
CONCLUSION–HOME GROWN ENERGY IS CHEAP, SECURE
Despite volatility, European natgas pricing remains high–still trading at US$22/mcf, more than 5X North American pricing.
MCF Energy has first-mover advantage, a seasoned team with strong technical and financial backing. The stock has just started trading in Canada. The team has a track record of huge successes. Buying into European natgas is now cheap.
When you have a bull market for energy and a team this strong, a large market cap is not out of the realm of possible. Technical success is not guaranteed, but with Europe now encouraging natgas production for the foreseeable future, MCF will be rewarded for exploration success.
Europe desperately needs more natural gas. And MCF is working to supply it with cheap, secure domestic resources. It listed TODAY. TODAY is Day One.
DISCLOSURE–I like this team so much I own stock in MCF!