Atlantic Canada Oil Shale Projects

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1940bkg
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Analysis on Petrolia, Corridor Resources, and Shoal Point Energy

Dear OGIB Reader,

When I say “Atlantic Canada,” I bet that shale oil is not the first thing that comes to mind.

But as the global shale revolution continues in the energy patch, prospective shale targets – once written off as a waste of time and money – are being dusted off and re-tested everywhere – including Atlantic Canada.

The stock of Petrolia (PEA-TSXv) jumped from 50 cents to $2 in a week in early February 2011, when they announced the results from an analysis of their and Corridor Resources (CDH-TSXv). They’re looking for a partner to develop the Macasty shale on 250 km long Anticosti Island in the Gulf of St. Lawrence.  It looks huge – covering almost 75% of the island.

And Shoal Point Energy (SHP-CNSX) is testing the Green Point oil in shale play at Port Au Port Bay on the west coast of Newfoundland.  What intrigues me about Shoal Point is the potential thickness of the shale formation here.

The Macasty shale on Anticosti Island has been known for years or decades – it is basically the same as the Utica Shale in Quebec, except the shale wasn’t buried as deep.  The deeper shales are in the “gas window,” and the shallower ones are in the “oil window.”

The Macasty shale also sits on top of another formation that has been produced from before – the Trenton Black River (TBR). So the industry has drilled through the Macasty many times to get to the TBR.

“We always knew it was organic rich,” says Tom Martel, Ph.D and Chief Geologist for Corridor.

“We took a core of the Macasty as we drilled for the TBR.  Since last summer we have been having that core analyzed by Weatherford.”

Martel says they take samples of the shale and put it in canister, and see how much gas is coming off rock.  They test the porosity and permeability, and they extract the fluids in the rock – oil gas and water, and do a rock analysis, checking the Total Organic Content (TOC) and the “vitrinite reflectance.”

All these numbers came back with values that suggest the Macasty shale could be a productive zone for oil.

Martel says they took it to Winter NAPE (the North American Prospect Expo, an industry conference in Houston each February) and to London England, and people are excited about the play.

“We have very good results and there is a lot of oil in place on that island,” says Martel.

“You can see that there’s oil in the rock,” he adds, and says the shale is quite brittle which is good for fracking.

“Our next stage is getting a partner.  (This play) is going to take some evaluation and some heavy lifting.  We have to do some testing on these rocks; drill a horizontal well.”  About 20 historical wells have intersected the Macasty on the island, so Corridor and Petrolia have a “fair idea” of what’s there, Martel says.

It has good aerial extent, and is only 1000 m depth.  It varies but is roughly 40 m thick.

“There are no red flags yet, that’s why we’re excited,” Martel says.  “For a piece of land that big and have no red flags is quite exciting.”

Petrolia has 50 million shares out and owns 50% of most of the 35 oil and gas exploration licenses, but only 25% on 6 of them.  Corridor has 88 million shares out.

Corridor was/is the leader in shale plays in Atlantic Canada – but for gas, not oil.  Their Frederick Brook Shale in New Brunswick has been independently assessed by GLJ Consultants to have a best estimate of 67 TCF (trillion cubic feet) of gas – a number so large it is off the charts for anything else discovered (that I’m aware of) in North America in such a small area.  It is roughly 1100 metres thick between the upper and lower shales.

Apache Corp (APA-NYSE) has an option to earn 50% net working interest in the heart of the play – 58,000 acres – but it must commit the next $100 million in less than two months – June 1, 2011.  Given the mediocre results in the second hole, that is not a sure bet.

There are several issues here – the first well was fracked with propane vs. water on the second, and used ceramic as proppant vs. sand on the second, and the first well was vertical vs. the second one as horizontal.

So – like any new shale play – it is taking several wells to run down the checklist of variables to find the optimum fracking method.

At Shoal Point, the management team there was looking over historical data on the Green Point play, which has been around for years and nobody thought much of – and realized something:  “Historically, people were looking for deep conventional targets here,” says George Langdon, President.  “So not much attention was paid to the shallow and intermediate hole data.  We had a thorough look at that data and we realized it had good source rock potential.”

Readers, this is what is happening all over the world right now.

All the oil companies – the juniors, intermediates and seniors – are dusting off all their old files and scouring them for any mention of data that could now be interpreted to be shale or tight sand oil formations.

Follow this link for Part 2: How to play Canada’s Oil Shale Companies, where I share more insights into Shoal Point, along with another company’s developing play in New Brunswick.

– Keith

 

What I Learned at the Calgary Resource Investment Conference – 2011

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1940bkg
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I love speaking at investment conferences.  I learn so much from the subscribers and investors that I meet there.

One of my subscribers is a landman from Wyoming, a former professional rodeo rider who flew up to see me at the Calgary Resource Investment Conference last weekend.  I sat wide eyed across the table as he regaled me with stories of what happens during a highly competitive land rush in a new shale play.  When the Big City Money comes into Small Town Oilville, people get creative – but always above board.

These conferences are a treasure trove of information and contacts.  I’m surprised more people don’t show up – especially the dedicated investors who play the junior markets, either energy or metals.  I’m always trying to educate investors about how the game is played in junior stocks and one thing I can say with certainty after attending these things for 20 years is this:

If you want to be included in the cheap rounds of financing, the non-brokered financings, you have to develop those relationships with the management teams of the companies face-to-face.  It’s very difficult to create that rapport over the phone.

This is much more true of junior mining stocks than oil and gas stocks – mining companies issue a lot more early-round financings to that next ring of investors – let’s call them semi-professional retail investors — than energy management teams do.  (One of the main reasons there aren’t many oil and gas newsletters ;0)).

I love being the only oil and gas guy at these conferences, which are 97% junior mining stocks.  And my message to the (packed) crowd listening to me is two-fold:

1. Investing in junior energy stocks is very similar to that of junior mining stocks—invest with the teams that have a track record in finding big deposits, and don’t have a billion shares out (believe it or not, a couple of them do…)

2. We can now get oil and gas out of rock – shale in particular — for the very first time ever.  Well, it has been happening now since the Barnett Shale in Texas was developed in the late 1990s, but it’s still recent.  And this is creating many new discoveries every year that are making speculators and investors alike very wealthy.

The informal subscribers-only session was the highlight for me.  I never know what will come up in these half-hour sessions, as they control the agenda – they can ask me whatever they want.

One thing I realized is that a lot of people didn’t understand the opportunity that comes along to buy these junior stocks at cheap prices on a regular basis – when they finance, or issue shares to raise money.  Junior companies always have to raise money, to either buy new assets or drill faster to keep the market happy.

When the institutional crowd says ‘yes, we’ll give you money Mr. Oil Company President,’ they generally get to set the price. It’s a dance, or tug-of-war, that brokerage firms do with the management teams to decide on the price at which they issue stock – but almost always, the broker wins. And the market often sells down a stock they think is about to raise money. Even if retail investors are not allowed to buy the stock on the financing, those times and prices are often very good entry points on the stock chart.

Until last Christmas, almost 40% of my subscribers were from the oilpatch – drillers, roughnecks, lawyers and engineers who knew their slice of the energy pie, but didn’t know the market… and didn’t have time to research the juniors.

These people have been a wealth of information for me, and this is the only place I really get to meet them, hear their stories and get some personal feedback. (It’s clear that most people are more apt to give me any negative feedback in an email.) Many of them are very active investors and call up the management teams of the companies in my portfolio, and share their own take on things.

The conferences have turned out to be the most fun part of my business.  Other than these highly interactive days, it’s just me and my laptop and phone (and a small hardworking team) so I LOVE these shows. (Not only that, I discovered that ham is my middle name and that I really enjoy a crowd.)  I will be posting my upcoming conference schedule to the website in the next couple days – and I have three next month in May alone – so I hope you’ll come by and share.

P.S. We’ll be hosting another workshop for OGIB paid subscribers at one or more of these upcoming conferences, so stay tuned for your exclusive invitation.

The Future of Fracking: The “Recovery Factor”

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1940bkg
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A new development in “fracking” will mean lower costs and higher oil and gas recoveries, says Dan Themig, President of Packers Plus, a privately owned completions (fracking) company based in Calgary, Alberta.  This would mean higher profits for energy producers.

Themig’s new product – QuickFRAC® – is part of a new trend in fracking that is moving away from using more horsepower and taking a smarter approach to increasing the amount of oil and gas recovered from a well, i.e. the Recovery Factor (RF). Most wells only recover 5%-20% of the Original Oil in Place (OOIP).

“We don’t believe the sledgehammer approach to fracturing is the way of the future,” says Themig.

“Fracking,” or hydraulic fracturing, involves pumping a mix of sand (proppant) and fluid (water) down a well and into the reservoir at ultra-high pressure to create fractures in tightly packed sand formations, or shale rock formations, to free up the oil and gas to flow up the well.

Fracking has allowed billions of barrels of oil previously thought to be uneconomic to become not only produce-able, but highly profitable.  It has become a global game changer in the oilpatch, and has created hundreds of billions of dollars in capital gains for investors. (And we’re still in the early stages of this growing industry!)

The size of individual fracking operations has increased 10 times in the last decade, as the industry has grown and learned how to more effectively apply the technology.

Themig says the “sledgehammer approach” of more horsepower (in the form of pumping trucks at surface), more fluid and more proppant has been the industry norm for the last five years, but now the industry is getting smarter in order to increase production from wells.

“We want to reduce the amount of fluid used and maybe the amount of proppant. We can reduce the time and number of stages and get a more effective Recovery Factor.”

frack job 2004
CAPTION: This is the size of a frack job in 2004.

frack job 2008
CAPTION: This is the size of a frack job in 2008.

In the new, ever-longer horizontal wells being drilled, fracking is done in multiple stages – often every 100 metres.  Each stage of fracking takes a certain amount of time, from roughly 30 minutes to four hours, depending on how hard the surrounding rock is (the harder the rock or tighter the sand, the more time it takes).

Themig says the new “QuickFRAC” technology is able to frack two to eight of those 100 metre stages at the same time, using the same amount of fluid and proppant.

“We can evenly distribute the fluid and divide it by the number of stages set to open,” he says.

production flowback
CAPTION: QuickFrac can do multiple stages of fracks at the same time

Themig says that completing several fracking stages at once saves so much time, QuickFRAC can save 10% on overall well costs for a producer – often a $500,000 saving per well.

Having several fracks go into the formation at the same time also increases the amount of oil recovered from the well, Themig says.  That’s because the rock holding the oil is being hit by huge pressures and vibrations on different sides at the same time, which creates more fractures in the rock.

“We drilled a $5 million well and decreased costs 10% by doing 24 stages in 10 hours,” Themig says.  “Previously that would have taken 4-5 days using cement liners in the wellbore, and two days with our regular StackFRAC® technology.”

“And we increased the Recovery Factor by 30%-40%.”

Rene Laprade is Senior Vice President Operations of Petrobakken Ltd. (PBN-TSX), and they have used QuickFrac in the Horn River gas play and Montney gas play, both in western Canada.

“We save at least two days over a conventional stack frac system and up to 5 days over a plug and perf system,” he told me in an interview. “This results in a costs saving to PetroBakken of up to 30% over other fracture stimulation methods.”

Themig says they are able to do all this with only a minor increase in horsepower, but also use up to 30% less water per well.

Themig says The Future is using longer horizontal wells, and doing more frack stages per well, and QuickFRAC is positioned to help the industry make the evolution easy and profitable.

“The number of fracks are now far more than we ever thought it was going to be.  In 2001 we thought 5-6 fracks be enough to frack a well. Then the industry moved to 12-15 per well now to over 30.  Some customers want 40-60 fracks – consider how long it would take to do 60 fracks that are 4 hours each.  The future looks like 60-100 stages in a lot of wells, depending on geologic needs.”

The goal, he says, is to increase the Recovery Factor – get more oil or gas out of the ground per well. “You look at the Haynesville (shale gas formation in Louisiana) and they have big initial production (IP) rates but high declines, sometimes a 90% reduction in production in the first year.  We think we can significantly improve on those numbers using QuickFRAC.”

A side benefit of QuickFRAC is that the frack companies like TriCan, Calfrac etc. will be able to do a job in shorter time, so they will be able to do more jobs in a year than previously.  Producers save time and money while increasing cash flow from more oil, and frack companies have less downtime and more revenue days per rig.  It makes the whole industry more efficient.
– Keith

Companies in the Canadian Oil Sands: Steady Investment Profits for Decades

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1940bkg
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Sector Diversification: Target Oil Sands

Just about everybody on Earth ought to know by now about the oil sands are a vast and virtually limitless supply that’s going to backstop North American energy security for a century or more.

But for all the hype and hoopla, surprisingly few investors know how to play the full oil sands value chain.

The thing to remember about a massive development undertaking — a mega, mega project — is that it’s not a single homogenous entity, there’s a whole support network that has to be built around it.

Oil and gas producers are basically procurement houses that go out and buy what they need. Everything from drilling wells to building and operating pipelines — even the catering — is contracted to third parties. By entering specific points in the supply chain, it’s possible to create a surprisingly resilient portfolio that’s diversified while still taking advantage of big growth opportunities in the many, many years ahead.

The first link is the producers. For almost half a century oil sands have traditionally been a game for Majors, Everyone thinks of trucks and shovels, but more than 80 per cent of the resource is actually too deep to be mined. Most of the new production over the decade will come from specialized steam injection schemes.

The past 18 months there have been some high profile IPOs, backed with foreign capital from China. Names like Athabasca Oil Sands and MEG Energy are but two. Given China’s voracious appetite for overseas investment, there will inevitably be more IPOs to come.

On that front, the first half of this year also promises to be active, with Laricina Energy and OSUM Oil Sands hitting the street this spring. Calgary-based Peters and Co. recently did a valuation on both companies and says that they’re going to be popular issues. Laracina could fetch $37/share and OSUM $16/share on their respective IPOs. Call it informed speculation considering they’ll probably be in the underwriting syndicate, at which point they’ll be restricted.

Another bright light is Black Pearl (TSX-PXX) headed by former Black Rock Ventures guru John Festival. You might recall he sold his predecessor company to Shell a couple of years back for a few billion, little wonder the shares have tripled in less than a year.

The real key to this oil sands renaissance is horizontal drilling and steam injection. By now SAGD (Steam Assisted Gravity Drainage) is a relatively mature technology that sees pairs of parallel horizontal wells work in tandem to inject steam and bring oil back up to the surface. This is a sophisticated undertaking that requires the skills of a surgeon and some heavy iron. Enter the drillers.

The coldest winter in a decade means all of Canada’s contract drillers are really hot right now. Precision Drilling (TSX-PD) (NYSE: PDS) is up almost 20 per cent in the past two weeks alone and rivals like Trinidad Drilling (TSX-TDG) (OTC: TDGCF.PK)and Murray Edwards’ Ensign Resource Services (TSX-ESI) (OTC: ESVIF.PK) have had a good run this winter. Both have good exposure to the oilseeds, with Ensign running nearly 300 coring rigs that are used to prove up reserves, while Precision has the heavy iron need to drill the new steam assisted thermal wells.

The best performer of all is Stoneham Drilling Trust (TSX-STG.UN) (STHMF/STHMF.PK)which is fast becoming a player with its share price quadrupling since last October. It’s one of the last remaining oil and gas trusts, but that will change around Canada Day when it converts to a corp. One of the company’s biggest customers is Cenovus Energy (TSX-CVE) (NYSE: CVE)which is the industry leader in the thermal oil sands space.

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They Don’t Make Fracking. They Make Fracking Better (and More Profitable)

This small energy services company’s patent-pending fracking technology is changing EVERYTHING.

Rest assured, it is a profit opportunity not to be missed. (It’s my # 1 trade of the year.)

Get every last detail on this company, its revolutionary fracking process, and what it could mean for your portfolio… here in my new video.

——————————————————————————————————————————————-

Keeping those rigs turning requires a whole support network of its own — where do you go when a reamer or a winch goes down in the middle of the night? That’s where CE Franklin comes in. (TSX-CFT) (NASDAQ: CFK) is the Canadian Tire of the oil patch, supplying literally thousands of products like valves, flanges and drill pipe that are essential to support field operations. The company’s web site boasts that it can fix everything from quads and pick-up trucks to full blown drilling rigs.

In February, the company reported that oil sands accounts for about 15 per cent, or $11.5 million of its fourth quarter sales revenue and the company said it is committed to leveraging its presence in the Fort McMurray area to capture a bigger slice of this pie.

Although it’s firmly rooted in the oil and gas industry, the company’s operating metrics have a retail character, like the oil patch version of Walmart. IROC (TSX-ISC) is another new entrant that has managed to post impressive share price gains while remaining affordable. Higher drilling levels will inevitably translate to higher sales revenue for everybody in the space and IROC is positioned for growth.

In its most recent operational update, the company said its Canada Tech division hopes to start realizing positive returns from a series of products and solutions designed specifically for steam assisted gravity drainage projects in the oil sands.

Up until now we’ve been talking about upstream production. But selling all that oil to American — and possibly Asian — markets is the key to true diversification for investors and oil companies alike. The downstream is the one area where your interests are truly aligned with industry.

Led by pipelines, it’s a whole parallel universe of support services that connect producers with refineries and trading hubs. Canada’s pipes are in an exciting growth period, and we’re talking about some extremely ambitious projects: namely Enbridge’s proposed Gateway to the West Coast and TransCanada’s Keystone to the Gulf of Mexico. When completed, the projects will move more than 1.5 million barrels of oil sands crude for export. To put it in perspective, Libya — an OPEC member — was only exporting 1.5 million barrels a day before it came unhinged.

TransCanada’s (TSX-TRP) (NYSE: TRP) Keystone is banking on the U.S. to get over its fixation with “dirty” oil, but rival Enbridge (TSX-ENB) (NYSE: ENB) has been looking to the West Coast and threatening to break-out to Asia. Both are taking bold steps that will allow Canadian production to get the full world price and open new markets.

Both have had good share price appreciation and it’s hard not to like the steady returns offered by owning a high-yielding dividend. They are also a lot less exposed to volatile commodity prices. Due to the way they’re financed, pipelines are considered lower risk lower reward, but both companies have been showing good near and long-term growth.

Either one is a good hold or place to park when the market turns south. Enbridge will be splitting its shares later this spring, which will make them more affordable to own.

Finally, it’s one thing to throw a bunch of steel into the ground but quite another to keep it up and running. Sometime in the next year or two, the amount of money required to maintain all these pots and pans is going to surpass the amount of new capital investment, which is estimated at around $18 billion this year, according to the Oilsands Review magazine.

Put another way that means almost half of all the spending in the oil patch will go to keeping these oil sands projects going — it’s a staggering sum.

On that front, Flint Energy Services (TSX-FES) (OTC: FESVF.PK)is probably the best positioned to capitalize. Last November it announced a $450-million contract with Suncor to keep its oil sands projects — some of which have been operating for 40 years — in tip-top shape.

Company representatives told the OSR it expects revenue from its oilsands maintenance unit to equal and surpass its oil sands construction division in the next five years.

There you have it, a long and rather exhaustive look at the oil sands value chain. By picking spots along each length of the chain it’s possible to actually diversify within the sector and profit on what will likely prove to be the last big oil rush on Earth, providing even the humblest investor with a steady stream of profits for decades to come.

– The OGIB Research Team

Is This Company Pushing the Bakken Boundary Further?

By
Keith Schaefer
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Editor’s Note:  My subscribers often suggest junior oil and gas stocks to me, to which I reply – convince me.  Write me a story about why I should care about that stock, and use my regular format.

Two subscribers mentioned – and wrote up – Reliable Energy (REL-TSXv). Reliable Energy is NOT an official OGIB stock pick and  I do not own Reliable, but two aspects of the company intrigued me.  One is the high profitability of their Manitoba wells.  While not big producers, they are shallow, low cost and highly profitable wells.

The second item that caught my eye is their new exploration play in Montana – which, if successful, would push-out the known western boundary of the main Bakken area.  This play – already the biggest onshore discovery in North America in decades – keeps getting bigger.  It’s possible Reliable could make some mention of it in  April when they announce their  2010 year end financials.

Their Montana play is a 45% working interest on the Fort Belknap Indian Reserve, just west of the Elm Coulee, oil-producing area. Montana Exploration (MTZ-TSXv) is a partner in the project.

This OGIB report was written by Richard Steed, with a contribution by my colleague and friend Michel Massaad, who writes his own oil and gas trading blog at www.beatingtheindex.com.

Reliable Energy

By Richard Steed
Michel Massaad contributed

Trading Symbol:                      REL-TSXv
Share Price:                             $0.47
Current Production:                600 boe/d (100% oil)
Shares Outstanding:                236.1 million
Market Cap:                            $115 million
Net Debt:                                 $2 million
Enterprise Value (EV)            $118.5 million
Insider Ownership:                  12.4%
EV per flowing barrel:            $193,000/boe/d

POSITIVES

  • Large continuous undeveloped land position prospective for Bakken oil in SW Manitoba, SE Saskatchewan and potentially in Montana.
  • Large development horizontal drilling inventory being accumulated: 250 gross locations to date
  • Most Bakken land is joint ventured with Crescent Point Energy (TSE:CPG) on a 75%-Reliable and 25%-Crescent Point partnership.
  • CPG owns about 19% of Reliable Energy.  As a JV partner, CPG’s technical expertise will benefit REL in the future with secondary recovery techniques (water flood) which has resulted in twice the recovered oil per well for CPG in some cases.
  • Reliable recently acquired 100 000 net exploratory acres in Blaine County, Montana – expect results on the first well in this play by  April or early May

NEGATIVES

–           Lots of shares outstanding reduces leverage

PROPERTIES

Reliable’s Bakken Property


These Saskatchewan/Manitoba Bakken lands (Kirkella Lands) were acquired in 2008 through a farm in with Enerplus Energy for 75 sections. In 2009 Reliable did a joint venture deal with Crescent point Energy; of which both parties pooled their lands for a 75%-Reliable and 25%- Crescent Point partnership. Crescent Point owns 32 million shares of Reliable and Reliable is the operator of the area.

Reliable then acquired Element Energy in October 2009 to further consolidate land in the region. To date Reliable Energy has roughly 77 000 net acres of potential Bakken lands.  Reliable’s Murray Swanson (President and CEO) says that 90% of this land (Saskatchewan/Manitoba Bakken) was purchased for an average of $50 an acre.

Swanson also mentioned at a conference in late 2010 that the Kirkella area is Reliable’s primary focus and there is no intention to be drilling land that Reliable has in Alberta in the Trochu basin (19 200 acres of light oil potential).

Initially, vertical drilling was used by Reliable in Kirkella, with some wells coming on stream at over 100 boe/d.  However beginning in August 2010 horizontal drilling started and 5 of the 6 horizontal wells that were planned were completed by the end of 2010.

Acumen Capital Research has stated that they believe the oil is there (in the Kirkella region) and the only concern in the area will be completion and engineering of these wells… aka: trial and error.

There is really three focus areas in Reliable’s Saskatchewan/Manitoba lands; Kirkella, East Manson and Elkhorn (as illustrated above). The formations that are being targeted here are the Bakken, Lodgepole, Three forks, and Torquay, which all have potential for light oil (38-41 API).

Reliable believes that the primary recovery from this area could be in the neighborhood of 90 000 – 100 000 barrels per horizontal well.  And Reliable has alluded to the fact that secondary recovery (water flooding-which is working well in the area) could result in doubling of reserves.

And while large IP rates (Initial Production) impress the market for a day or two, the big money in the oilpatch wants greater reserves – more oil.  Surprisingly, the market will pay more for greater reserves that get produced over a long period than it will for the much more profitable big gushers that pay out quickly, but also deplete quickly.

Reliable has identified 142 potential horizontal well locations at Kirkella, East Manson and Elkhorn. As of the end of 2010, 2 horizontal wells have been drilled in the Kirkella South pool, 1 horizontal well was drilled in the North pool with 1 more just being completed and 1 more horizontal well in Elkhorn (See map above).

Most recently Reliable’s 5-34 horizontal well was placed on production December 3, 2010 and stabilized at 133 bopd. A Raymond James report in late January stated that this 133 bopd after 6 weeks on production was considerably stronger than the company expected – and the stock showed it as it went from 33-52 cents that month.

Their 6-15 well, which only received 8 or 20 fracs, due to technical issues, produced 75 bbl/d for the month of December (which is encouraging considering the completion was only half done and will be completed in 2011).

Bakken wells in the area cost roughly $1.5 million, but with $75 oil, initial production rates of 100 boe/d and 90 000 barrels recover per well the net backs are $52. With these assumptions the break-even price for Reliable is said to be about $40 a barrel. Reliable will spend $18.7 million in 2011 on drilling 15 (12 net) horizontal wells and 2 (1.5 net) exploration wells on their Kirkella lands.

The market is expecting results soon from five more wells in this play – likely when they report their year end financials they will include an operational update.

At current oil prices Reliable has a recycle ratio of at least 2.5:1.  The recycle ratio is the profit per barrel (the netback) over cost per barrel.  So for every dollar they spend finding and extracting the oil, they get $2.50 back.

Blaine County, Montana

This play is not yet priced into the stock to any meaningful degree.  In October of 2010, REL announced the acquisition of a large tract of land in Blaine County Montana. The company was able to secure 100,000 net acres from a US company in financial difficulties for $10 an acre.  Management believes this land to be prospective for multi zone opportunities including the Bakken. Prior to closing the deal, they drilled an exploratory well which produced similar log characteristics to Elm Coulee (Middle Bakken Play, 350+ wells producing currently at ~150 boe/d). As the Bakken play expands west, this large land package can potentially turn out to be VERY valuable if drilling is successful.

Along with a JV partner and a farmee (REL is a 45% JV partner), 3 more vertical exploratory wells are planned for H1 2011 as part of the delineation process. The first well was spud in March of 2011.

Even though this is still a very early exploration play, the downside is limited because the company picked up the land for such a low cost, and could get their money back by selling it for its Eagle Gas potential. On the other hand, if the play is confirmed for Bakken oil, land in the area might witness the same mania that the Alberta Bakken went through in late 2010.

If the current well being drilled is successful, land prices will increase substantially and one of REL’s options would be to simply sell out their land for a much higher price per acre and walk out with a significant payout.

Proceeds would be reinvested in REL’s core area of SW Manitoba where it has accumulated a horizontal drilling inventory of at least 190 net locations to date.

Or they could develop this large new play.  Reliable said they will be reporting year end financials on April 11, and an operational update at that time may give a 24 or 72 hour test rate.  However, management may decide to wait for a 30 day test rate, meaning no news for investors until early May.

Trochu Basin, Alberta

The Trochu Basin is located approximately 150 kilometres northeast of Calgary between Red Deer and Drumheller, Alberta. In 2007, REL acquired 19,200 acres prospective for Nisku light oil based on a private company’s discovery, TAQA. This land is officially up for sale as REL wishes to keep its primary focus on its high netback low risk operations in Saskatchewan/Manitoba.

Potential Catalysts For Reliable Energy

  • As of the last operational update in December, REL exited 2010 with 600 barrels of oil per day. However, Q1 exit production is expected to come out at about 900 barrels of oil per day since the company completed at least 4 of its 5 Q1 2011 wells. The year-end report due in Aprilwill almost certainly divulge a higher production figure. Update on exploratory vertical well in Blaine County, Montana—possible announcement with the year-end report in early April.

Analyst Coverage

  • Canaccord Adams May 6, 2010 – Speculative Buy (12 month target of $0.55)
  • Acumen Capital Research November 30, 2010 – Speculative Buy (target price of $0.50)
  • Raymond James January 21, 2011 – Strong Buy 1 (6-12 month target price of $0.60)

Conclusion

Reliable is systematically building up an inventory of horizontal drilling locations on their Bakken lands in Saskatchewan/Manitoba; which can make a small oil/gas producer a nice takeout target for a larger player.

In 2011, Reliable expects to increase average production to 1100 bopd an increase of 229% over 2010 and exit the year with production at 1500 bopd. Reliable Energy has roughly 200 000 net acres in Alberta (Trochu Basin), Saskatchewan/Manitoba (Bakken), and Montana (Bakken). Reliable is a small cap oil weighted (100%) energy company that has the ability to produce significant production growth for shareholders on Kirkella alone — and if Blaine County, Montana has Bakken oil like North Dakota, Saskatchewan and Manitoba — then Reliable Energy is just scratching the surface for light oil growth.

DISCLOSURE

Richard Steed owns 5000 shares of Reliable.
Michel Massaad owns 25000 shares of Reliable. (www.beatingtheindex.com)
Keith Schaefer owns no stock in Reliable, and it is not in the OGIB portfolio.

 

How Large, New Shale Oil Formations around the Globe Are Estimated

By
Keith Schaefer
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0

How much oil is there in newly economic shale oil deposits around the world?

We won’t know that for 50 years or more, but it’s not stopping energy companies from publicizing some extremely large prospective resource estimates – like, tens of billions of barrels of oil – with almost no data to back it up, and only one similar play on earth with any operating history.  A prospective resource is an estimate of the amount of oil that might be the recoverable volume of oil in an area.

Investors have certainly made tens of billions of dollars in profits on that one (and only producing) shale oil play – the Bakken in North Dakota/Saskatchewan.

And investors need to understand the risks that goes along with the big numbers they read, says Robin Bertram, Vice President at AJM Petroleum Consultants, one of the Big 4 reservoir engineering companies in Canada.

“They need to know what a lot of the contingencies are in shales and unconventional plays, and not just get excited about big volumes.  When we talk about prospective resources we have to point out that even though the numbers look big and promising, you could end up with significantly less than the estimate.”

All that Bakken wealth creation has both the industry and investors very excited about finding huge new shale oil plays around the globe now.

And they are being found.

TAG Oil (TAO-TSXv) has an independent report that says the “best case” resource estimate on their shale oil play in New Zealand could be 12 billion barrels of oil with a “high case” of 37 billion barrels – and that’s only on a fraction of their land.  There are three historical drill holes here. Oh, and geologically it looks just like the Bakken, and they plan to drill it this year.

The “best case” is also called “P50,” or oil resources that have a 50% chance of actually being in place.

Toreador Resources (TRGL-NASD) has an independent report that says the Paris Basin in France where it is operating has generated 100 billion barrels of oil, 12 billion of which could be on their property.  There are 22 drill holes of consequence here.  Oh, and geologically it looks like the Bakken, and they plan to drill it this year.

PetroFrontier (PFC-TSX) has an independent report that says it could have 26.4 billion barrels of oil in its “best case” at the Arthur Creek shale play in Australia. There are 15 historical wells which may show the oil charged shale.  Oh, and geologically it looks just like the Bakken, and they plan to drill it this year.

Do you see a theme developing in how companies are promoting their early stage projects?

Analysts are getting in on the big numbers too: one analyst said TAG, then $5, could have a Net Asset Value (NAV) of $224 a share in an “unrisked” valuation, which means if they hit oil on 100% of their wells.  Another analyst said PetroFrontier could have an NAV of $168/share “unrisked.”  Most intermediate sized oil producers in this energy bull market trade at 1X NAV or a bit better.  None of these analysts expect anything close to 100% success, but it’s a figure that shows the size potential of the play.

All these big numbers – in potential resources and potential stock values – is causing some large speculative premiums to enter these stocks.  Toreador was trading as high as 6x its NAV recently; TAG trades at least twice its NAV and PetroFrontier is trading just under 3x its NAV.

Now, I own TAG and Toreador, and I don’t want readers to think I’m being negative – I just want everyone to  understand what they’re reading.  I WANT to invest in juniors that have an unrisked NAV many times higher than the current stock price.  That means if they hit on their exploration, the stock is likely to go A LOT higher.

Independent evaluators like AJM take many data points into calculating prospective resource estimates in the early days of a play – mostly from historical drill hole data and any core, that may be available.   There is the obvious estimated length and width, or aerial extent of the formation, and the “pay” thickness – how thick is the formation, and the Total Organic Content, which makes up the oil or gas, and the porosity of the formations – how much room is there between the grains of sand or rock.

All this data and more is given to the evaluator, and they also look at what other geologically similar deposits have produced (in these cases, there is ONLY the Bakken), and how much oil was actually recovered out of these deposits (the Bakken) to come up with an early stage prediction of the resource potential of the shale formation.

“Early in the development of a petroleum reservoir we could expect to see a very broad range of estimates of the volume(s) within the reservoir,” Bertram writes. “Understanding that there is a high level of uncertainty in the early life of a reservoir, it would make sense that companies have large volumes in their resource estimates.  But investors need to be equally aware of what the minimum volumes could be, as those volumes are just as possible as the high volumes in the early life of a reservoir.”

Bertram says one of the questions that all evaluators wrestle with is – how far can you extend a discovered resource from a drill hole?  While these shale plays have shown themselves to be very consistent over tens of kilometres, they can also be patchy and it’s just a statistical guess that will get more refined each passing year with more data.  (Geostaticians in the mining sector do the same thing – how far can you extend the grade of the mineral around a drill hole.)

Remember, the very first shale play was the Barnett in Texas, and that only started producing about 12 years ago.  Getting oil and gas out of rock is the single largest and most important advancement in the energy industry since the age of oil began 150 years ago, and it’s still in its infancy.

What’s more, the technology that is liberating all the oil and gas from the shale – hydraulic fracturing, or  fracking – is still being improved upon every year.  So that creates a moving target for evaluators trying to guess a prospective resource.

Bertram has written a slightly more technical and comprehensive article on some of the factors surrounding this issue and well worth the read.  One of my favourite topics was – how do you quantify an “undiscovered resource.”  It’s a great read and a quick read and here is the link (I read all AJM’s articles):

http://www.ajmpc.com/our-perspective/our-blog.html

– Keith

Want to learn more about investing in junior oil and natural gas stocks? If you have a Facebook account, just “like” this article and a hidden link to Keith’s 10 page how-to on oil and gas investing will appear:

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Oil Exploration in Peru

By
1940bkg
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0

When it gets really cold at home we like to dream of far-off and warmer places we can go to look for oil and gas.

In that regard, Peru is emerging as a real hot spot for Canadian junior exploration companies.

In fact, almost all of South America is hot (literally and figuratively) right now. The International Energy Agency pegs Brazil to be the fastest growing non-OPEC producer after Canada, and Colombia has become a household name after the government there took steps a decade ago to attract foreign investment and reverse production declines at its major fields. In fact, Ecopetrol, the Colombian state oil company has undergone a complete transformation and now trades in both Toronto (ECP-TSX) and New York (EC-NYSE).

In that sense Peru is where Colombia was a decade ago. It has been an oil-producing country since the late 1800s and has seen its oil industry suffer from a lack of investment.

According to the U.S. government’s Energy Information Agency, the country’s oil production fell by half in the two decades from 1984 to 2004 — to a little less than 100,000 barrels a day — and has since recovered to about 150,000 bpd according to the most recent statistics.

In the same period the country’s consumption has skyrocketed as it strives to improve the standard of living of its people. It became a net oil importer in 1992, but it’s not for lack of oil.

According to the 2008 BP Statistical Energy Survey, Peru had proved oil reserves of 1.097 billion barrels at the end of 2007 or a little less than one per cent of the world’s reserves.

It’s also relatively unexplored and offers excellent wildcat potential. American majors like Hunt Oil have had good exploration success and the government is courting Asian investors like South Korea to build roads and infrastructure in exchange for attractive oil concessions.

Many South American countries have governments that make it difficult to operate or actively discourage business, but Peru has made efforts to improve transparency. Everyone knows how volatile Venezuela’s Hugo Chavez can be, and Ecuador and Bolivia have left wing governments modeled on Chavez’s Bolivar socialism.

Following its sovereign debt crisis a few years back, Argentina has a cap on oil prices, though the geologic potential is attracting a lot of attention. Canadian brokerage firm Wellington West Capital Markets just hosted an energy conference the highlighting the opportunities and some of the Canadian juniors doing business there and Peru is definitely in the same league.

According to Business Monitor International, which ranks country risk, Peru holds third place behind Colombia in its composite Business Environment (BE) ratings, which combine upstream and downstream scores.

While Peru’s absolute resource base may be small, BMI says its output growth outlook is excellent, reserves-to-production ratios (RPR) are above the regional average, and licensing terms are “particularly attractive.”

Peru also has a strong position in BMI’s downstream Business Environment ratings, ranking fourth, above Mexico and is on par with peers like Trinidad.

Most financial advisors will tell you that emerging markets offer more exposure to the global economic recovery (if and when it ever arrives) and with international oil prices nearing $120 a barrel, high risk-high reward exploration is an attractive proposition.

Compared to the Middle East and North Africa, South America is a relative haven of tranquility and countries like Colombia have been extremely successful in attracting the attention and investment capital of Canadian juniors like Petrominerales (TSX-PMG) and Petrolifera (TSX-PDP). Peru seems to be the next logical extension for these companies looking to expand beyond their regional base.

International majors have also taken note. Spain’s Repsol is a newcomer and Calgary-based Talisman Energy (TSX-TLM), which is also a major player in Colombia, has spent more than $70 million in Peru in preparation for drilling a series of exploration wells over the next few years.

Even Ecopetrol has announced $2.5-billion joint venture in Peru with the aim of quadrupling production over the next seven years to 50,000 bpd. If successful, it would amount to a third of the country’s overall output.

But several smaller Canadian players have been active too, with a mix of both dazzling and disappointing results.

Calgary-based Gran Tierra Energy (GTE-TSX) last week announced that its latest  Kanatari-1 effort came up dry, sending its shares about 10 per cent lower.

Despite the discouraging outcome Gran Tierra still has three more high-impact wells in the queue that could move the needle in terms of its share price. Despite the setback, the shares have still managed to double since last summer and many analysts still consider it a buying opportunity.

Other Canadian firms active in the region include Canacol (CNE-TSX), Orion Energy (OIP-TSX) and Veraz Petroleum (VRZ-TSX) which Calgary-based FirstEnergy rates a “strong buy.”

Veraz has non-operated interests in three onshore blocks in Peru along with a substantial amount of two-dimensional and three dimensional seismic data to bring to the table.

Following a farm-out deal with Petrominerales, the company has had to double its outstanding float to to come up with its share of development costs via an equity issue, but analysts including FirstEnergy said it wasn’t as dilutive as first feared.

The companies plan to drill three exploration wells in the second half of the year, any one of which could have a meaningful impact on its share price.

Veraz is currently trading in the middle of a 52-week range of 50 cents and $1, so its speculative rating is probably apropos.

There you have it: Peru, an oily basin with more than a century of production, some world-class exploration prospects and a diversity of large and small companies staking out prospects. Not to mention wonderful beaches and some tropical weather we can only dream of back home.

Happy hunting.

– OGIB Research Team

How the “Reserve Report” Can Tip Investors off to Junior Oil Stock Profits

By
1940bkg
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0

Editor’s Note:  In my last story I explained how lower gas prices could affect reserves, as reserve reporting season is underway.  Below, here’s a look at how some junior oil companies might fare.
– Keith

Part 3 of a 3-part Series

Reserves redux:

Last time we talked about reserve reports and how natural gas producers could have their credit lines and valuations cut because of the low carrying value of their reserves.

This time we’re going to talk about how the same phenomenon is going to have the entirely opposite effect for oil producers, especially heavy oil that makes up the majority of the crude stream coming out of Western Canada.

If you’ll recall, we talked about how oil and gas companies have to file an inventory statement effective Dec. 31 that details the net present value of their reserves based on future projected cash flows (which in turn are based on independent price assumptions for the next 12 to 24 months).

Then we talked about how any drastic change in the valuation of those reserves was akin to lowering (or increasing) the net worth of your house against the balance of the mortgage on your home. We also talked about how a 20 per cent decline in the price of natural gas was going to bite into the NAVs of several high profile gas producers and possibly send them scrambling to shore up balance sheets, by jettisoning unprofitable assets, selling equity and paying down debt — or else.

The good news is that oil-weighted producers are going through the same exercise with a different conclusion. The really good news is that most of them are going to see their net asset values and credit lines increased, given where crude prices have been for the past 12 months and given where they’re likely to stay thanks to all the trouble in places like Libya and Egypt.

And the best news of all is that it means we’re probably looking at a round of upgrades — and higher stock prices — for the entire sector. This, even though the rising Canadian dollar essentially wiped out any oil price gains in 2010; Canadian-denominated crude prices were actually down about two per cent year over year.

But nobody wants to hear us crash the oil price party with mundane things like currency valuations. Much better to party like it’s 1992 — the last time the Middle East looked like it was set to explode. Back then, if you’ll recall, Saddam Hussein had oil prices pushing the then unheard-of heights of $75 with George the Elder banging at his door in Desert Storm I.

Then, as now: peace sells. The problem is that nobody’s buying.

According to a recent report by Peters and Co., the oil-weighted guys are going to be flush with cash which will drive consolidation within the junior heavy oil space. The start-up of Keystone into the U.S. Gull is going to change the market no matter what happens in places like Cairo or Tripoli.

The North American market is too localized to really be affected. The upshot is that tensions in far off places like Libya and Egypt only increase the role for Canadian oil, as the U.S. tries to diminish its dependence on Middle East crude.

Based on geography alone, Canadian producers hold an almost insurmountable advantage.

But before we go any further, a note of caution. The geopolitical risk trade is the worst trade you’ll ever make. Just because the world seems to be going up in a hand basket doesn’t mean oil is going to hit $150 any time soon. Or stay there for more than a few weeks if it does. Don’t get sucked into what MIGHT happen. More often than not, it doesn’t happen and you’ll be left holding the bag.

Think about WHAT’s going to happen when everything settles down.

Take some time, dig into the financial statements and look for that reserve report. Then take the forecast price of oil used in the financial statements, and knock it down 15 or even 20 per cent.

Anybody that’s showing profits at $50 a barrel is going to be doing just fine at $70 or even $80. Assuming prices do spike above $100 you’ll be in a good spot to reap big rewards — just don’t be banking on the sky to fall for it to happen.

A couple names to consider: Black Pearl Resources (PXX-TSX). Here you’re getting proven management in addition to oil price exposure. These were the guys behind Blackrock Ventures before it was sold to Shell for mega-billions a couple years ago.

Black Pearl is a new stage entrant, but they’ve got some good production history — 7,700 barrels a day and rising — and a lot of expertise working their main assets near Peace River. But a big chunk of their meteoric rise in stock price over the last few months is vastly (and fastly) growing reserves (sense a theme emerging?).

In January, the company released its 2010 reserve reconciliation showing they added 7.5 million boe in reserves, but added almost 750 million barrels in a more risky category – contingent resources – and about 98 per cent of it oil. That’s a staggering sum; we’re talking resources to production of almost 300 years at current rates.  Most of these resources come from its Blackrod SAGD heavy oil project (Steam Assisted Gravity Drainage).

As CEO John Festival said in the news release: “Our objective over the next few years is to get these barrels reclassified from the resource category to reserves.”

In doing so, the company will be adding real value that will inevitably translate into higher share price multiples. Think about what that family room addition will do to the resale value of your house.  And like I said, this management team has sold a company before for a lot of money.

Likewise, consider Twin Butte Energy (TBE-TSX). They started off as a gas company but quickly shifted to oil around 2006 when it became clear the Katrina Premium on gas prices was just a figment of the imagination.

Earlier this month the company reported a23 per cent increase in total proved plus probable oil and gas reserves, which rose by 6.9 million barrels of oil equivalent to 37.5 million boe.  That reserve addition was nearly quadruple 2010 reserves it produced.

Finding, development and acquisition (FD&A) including future development costs came in at $10.48 per boe on a proved plus probable basis and $14.28 per boe on a proved basis, which is right up the fairway and a chip shot to the green as far as industry-wide performance goes.

In other words, these guys will do quite well even if oil prices come down from current levels — which they probably will, if past events like the first Gulf War are any guide.

But the increase in reserves combined with the low operating and development costs will ensure a steady stream of cash and higher valuations for you, dear investor, dictators be damned.

It may be the end of the world as we know it, but as long as you’re long on oil, we’ll all be fine.

– Keith Schaefer
Publisher, the Oil & Gas Investments Bulletin

Editor’s Note:  Ever wonder how companies can estimate tens of billions of barrels of oil on their property before they drill it?  I explore that here in this report: How Big Shale Formations Get Estimated – All Over the World.

The first two parts of the above series:

Part 1: How To Use the ‘Recycle Ratio’ To Invest in Oil & Gas
Part 2: Unconventional Oil & Gas Plays: What I Look for in the “Reserve Report”

 

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