Where Will the Next Cardium Oil Opportunity Be?

By
Keith Schaefer
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0

The Experts Weigh In:  The 2001 Outlook for the Cardium Oil Formation

PART II – what did we learn in 2010 and where is the next Cardium?

Improving economics, higher oil prices and exploration that pushes the boundaries are three factors that could create even higher valuations in the Cardium play, industry executives say.

The Cardium oil play has turned into Canada’s second biggest tight oil play, after the Bakken in Saskatchewan.

Economics improved in the Cardium during 2010, as producers refined their completion techniques (i.e. they found continually better ways to frack the formation) which has generally meant a $500,000 reduction in cost per well.  Most wells are now completed for just under $3 million.

“Completion techniques are improving, leading to higher production profiles over the initial months,” says Kevin Shaw, an energy analyst at Wellington West Capital Markets in Calgary. “Costs are coming down as the industry connects ‘more wellbore to more reservoir’.   (The producers) have shifted from 600-1000 m horizontals legs to 1100-1400 m laterals with some looking to test 2000 metre plus horizontals.”

“With longer horizontal legs, the industry has moved from six to eight to 12 plus frack stages.  And both the longer legs and bigger fracs are being executed for less cost.”

Midway Energy (MEL-TSX) CEO Scott Ratushny gave me a technical talk on how they reduced costs and improved economics in the Cardium in 2010.

“We learned some big lessons in our frac(short for fracturing) spacing, and what types of fracs to use.  We started off very conservative and generic, doing 1000 metre horizontals, putting in ten stages of fracwhich is easy to manage.”

“Then we start to push on it and increased the number of fracs.  When someone puts in 20 stages of frac, there is more of a chance of error.

“And we got faster with each drill as we learned what muds and (drill) bits work best. We’re doing a well in 12-13 days now, down from 18 days, and a day of drilling is worth approximately $50,000 plus ancillaries.

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“We are still finding little efficiencies that are worth $5,000-$10,000 per improvement but nothing major.   (The formation) is overpressured so it has lots of ‘energy’ and the wells will flow on their own after the frack.  We try to encourage them to flow as long as possible before putting on pump jacks.”

“We would get an IP at 1000 barrels equivalent a day then have it drop to 150 because of pumping problems.  We used to go to a pump jack right away, but we found the oil was trying to flow past the pump.  Now we let them flow until they die and then swab  to get them flowing again, and continue to do that over and over until the well loses its energy, and then put the pump jack on.”

(Swabbing a well is like having a plastic cup, or buckets on a string, that pulls the oil up and encourages it to move up the well bore.  Then the oil will start flowing on its own for awhile).

Everybody agreed that the Cardium in 2011 will separate the haves from the have-nots – who has the highly productive property…and who doesn’t.

“It’s very variable,” says Doug Bartole, CEO of Vero Energy (VRO-TSX). “Within a mile you can have a good well, and a mediocre well.”

“There are definitely sweet spots,” agrees Shaw.  “Not all areas are created equal in-terms of the ability to “blanket drill” and get solid results.”

Shaw says several areas in the Cardium are outperforming:

“Garrington has done well for Midway (MEL-TSXv) and NAL (NAE.UN-TSX).   Going back to reserves per well being booked, these guys are seeing about 220,000 bbls per horizontal well.

“Willesden Green and South Pembina, or the entire “West Trend” as I like to call it, running from Willesden Green up through the Ferrier and Brazeau areas and ending up near Big Stone have been very good to bigger players like PennWest (PWT.UN-TSX), Daylight (DAY-TSX) and Petrobakken (PBN-TSX), as well as smaller-cap names like Bellatrix (BXE-TSX) and SkyWest (SKW-TSXv) who both have premium land positions in these areas.

“Willesden Green, for example, has seen repeatably some of the best Cardium horizontal wells with some of the thickest gross pay, and higher GORs (Gas to Oil Ratio).  This is considered a good thing given the gas helps drive more oil to surface – achieving higher oil rates – which is a big deal in tight resource plays like the Cardium.”

Producers have now pushed out the edges of the Bakken far beyond what people thought realistic when its development started in earnest several years ago.  Could the same thing happen to the Cardium, or is its geological edges well defined?

The answer, says Bartole, partially depends on the price of oil.

“We’ll continue to see it step out if the price of oil is good. “There are thin sections (in the Cardium).  We target five to six metres of pay, but there is a lot of ground with three metres of pay” which could become economic at a certain oil price, he says.

“The Bakken is laid out in a larger area,” says Ratushny.  “The Bakken is more continually laid out.  The Cardium is found in more defined pools.”  He adds “It will be interesting to watch the guys who are pushing the envelope (of where the Cardium is productive) in  2011.”

Shaw says areas like Brazeau and Lochend in the Cardium are relatively new areas that weren’t really considered productive when the Cardium started to open up a couple years ago, and these new areas could conceivably continue to be discovered.

Of course, everybody wants to know, where will the next Cardium be – the next big oil play that a basket of junior explorers can develop big reserves.

“Source rock oil might be the next Cardium,” concludes Ratushny.  “It could be Crescent Point (CPG-TSX) in the Alberta Bakken or the Nordegg (formation) in Peace River Arch, or the Duvernay.”

“But it will be somewhere that hasn’t produced economically before.  And if you think you have a good zone that’s been overlooked you can’t tell a soul.”

Follow this link for Part 1 of my Cardium Oil series.

Publisher’s Note:  Many of my readers have emailed me to ask what my # 1 energy trade is.  That’s an easy one to answer at the moment.  It’s a little-known Canadian company with an extraordinary new technology… one that will shape the oil & gas hydraulic fracturing (fracking) market for decades to come. This company’s proprietary process is proven to increase production in wells by 40% or more — while it literally “pays for itself.”  I’ve put together a video that details this trade in full. Watch it by following this link.

The Cardium’s Junior Oil Producers

By
Keith Schaefer
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0

Why “Time Is on Their Side” in 2011

PART 1 OF A 2 PART SERIES…

What mergers and acquisitions will happen in the Cardium oil play in 2011?

In the last half of 2009 and the first half of 2010 the Cardium was the hottest play in Canada.  Valuations moved up quickly through late 2009 and the buyouts started with Daylight Energy (DAY-TSX) buying Highpine.

Then valuations exploded into 2010 as Petrobakken (PBN-TSX) announced – on the very first day of trading, January 4 – the first of its three takeovers of junior Cardium players, which would happen over three months.  Daylight would also buy one more company, West Energy (which was an 80% win for OGIB subscribers in just a few months..)

The reason for all the excitement was that the Cardium has produced more oil than any other formation in Canada – it’s BIG, arcing over 1000 km along the Rocky Mountains in Alberta.

And the oilpatch just realized that a well known but previously unproductive, tight zone in the Cardium – the A Zone – was now economic, thanks to horizontal drilling and multi-stage fracing.

Here was a well known zone that had no exploration risk – it had been drilled through many times as producers went after the deeper B Zone, which was easier to produce from with regular vertical wells.   The Cardium A Zone quickly became Canada’s second big tight oil play after the Bakken in Saskatchewan.

There was a Cardium mania for the first three months of 2010 as the BIBA machine – Brokers, Investment Bankers and Analysts – and investors, remembered the billions of dollars they made off junior and intermediate producers in the Bakken as it was developed in the last decade. Cardium stocks soared.

And now, in December, the market can say that well results have borne out earlier investor enthusiasm.  But there was a lot of scepticism in the markets through the spring and summer.  (Alberta Bakken investors take note!)

The word on the Street – rightly or wrongly – was that Petrobakken overpaid a lot for those companies, and its stock was hit hard.

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Between the Petrobakken hangover and the soft market for junior oil stocks in Canada during the spring and summer, most of these junior Cardium producers didn’t see their stocks get back to the levels they hit during the January mania until late in the year.  And there has been no M&A activity since Petrobakken’s buying spree ended.

Scott Ratushny, CEO of junior Cardium producer Midway Energy (MEL-TSXv) says 2011 could see more corporate activity in the Cardium, but it depends on what the buyer is looking for.

“I think some of the trusts coming out of the “trust mode” are looking for a focus, but most companies in the Cardium aren’t pure Cardium players, or even a pure oil player,” he says.  “They might be 30% oil or 20% weighted to Cardium.  That may be too much ‘noise’. I think all the pure plays will eventually get bought up.”

Energy analyst Kevin Shaw from Wellington West Capital Markets in Calgary says that junior Cardium producers aren’t in a rush to get bought out, as “all the players are seeing the play getting better as improvements / technology evolve.”

“And for those players holding key acreage positions, time is on their side to get higher takeout prices, not lower.  Some guys have had the ability to sell but have decided not to because time is on their side.”

Shaw adds that M&A activity will pick up in 2011 because companies can’t get big land positions in the Cardium unless they make an acquisition with existing land holdings.  Buying land from crown land sales is not really an economic option with prices through the roof, nor is there enough crown land available within the play, he says.

“Skywest (SKW-TSXv) Midway, Bellatrix (BXE-TSX), etc. – these guys will all be candidates for takeouts and I fully expect the Cardium to attract top tier takeout valuations,  given that it is a repeatable oil play which the bigger players like, and require, for longer term sustainable growth,” says Shaw.

Vero Energy is one of several gas weighted juniors who discovered they had dozens of sections of Cardium lands as the play got popular.  The new Cardium oil play literally saved a lot of gas producers in Alberta from an ugly 2010.  CEO Doug Bartole said much of the Cardium has “been held for years; it’s in the heart of the old oil patch.”

He said they recently bought one section, but that no big land packages are left – which lends credibility to Shaw’s contention that any new entrants will have to buy their way in.

Read Part 2 my Cardium Oil series here.

Editor’s Note:  You may have caught my Alberta Bakken story from a few weeks ago, in which I explained why this underrated play could soon make headlines in the financial press.  I’ll be sharing more on this emerging play in future OGIB Free Alerts, but in the meantime, check out what the Edmonton Journal had to say about my Alberta Bakken coverage.

2011 Outlook for Canadian Natural Gas, Part 2

By
Keith Schaefer
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0

Canadian pipeline companies transporting western Canadian gas are slowly get squeezed out of the North American market, says a new report by Bentek, an energy analysis company based in Denver, Colorado.

“The utility of certain pipelines in Canada – of pipelines that are traditionally considered as export pipelines – that utility will drop,” says Jack Weixel, Director of Energy Analysis for Bentek.

Bentek’s report – titled The Big Squeeze – states that “planned pipeline expansions in the U.S. will unleash more supply from shale and other unconventional formations in the coming years.

“There is nearly 10 Bcf/d of capacity planned for pipeline expansions or new builds designed to support the growth of the Marcellus and other supply from unconventional plays in the Southeast/Gulf and the Rockies.”

Weixel says there are two squeezes going on for western Canadian gas.  One, outlined in my story here – https://oilandgas-investments.com/2010/natural-gas/2012-outlook-for-canadian-natural-gas/ – is that gas from western Canada is being displaced by fast growing US shale gas production in the Marcellus shale of New York State in the east and Rocky Mountain gas in the west.

The second Big Squeeze, says Weixel, could have major impact on pipelines companies, particularly TransCanada Pipelines (TRP-NYSE, TRP-TSX).

Bentek estimates Canadian gas exports into the US will drop 2 bcf/d over the next five years, out of 6.9 bcf/d exports now.  Less volume means higher tolls for natural gas producers and other shippers on TransCanada’s Mainline, as TRP has a guaranteed rate of return with its current toll, or fee, structure.

But producers cannot afford to pay higher tolls and stay competitive in the new low gas price market – so they are negotiating now with TRP to lower their tolls.  But obviously, Transcanada does not want the value of its Mainline to be reduced.

Weixel says gas transported by TransCanada from Alberta is subject to being “squeezed out” of the western U.S. market by the new Ruby and Bison pipelines that will transport cheap Rockies gas to markets in in Northern California and the Midwest.

In eastern North America,  Weixel says there is 1.7 bcf/d of new pipeline capacity from Marcellus over six or seven different projects, so US gas from the Marcellus could end up REVERSING its flow, moving Marcellus gas west in southern Ontario, displacing more western Canadian gas and further reducing the utility of TRP’s main line.

I have only seen one analyst mention that attributes TRP’s recent decline in stock price to the market’s realization that toll rates on its main gas lines must get reduced to keep WCSB gas competitive.   As a result, TRP is focusing efforts to secure shorthaul gas transportation contracts in Ontario to make up for a shortfall in longhaul gas transportation from Western Canada.

At a recent investor day presentation, TRP did say it is negotiating with the producers on its toll charges.  TRP and the producers have had a strong relationship over the years, and the producers I spoke with (nobody wanted to be quoted) were confident a good deal would be reached.  Others commented the discussions were frank and lively though.

TransCanada did not grant an interview for this story.

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In its presentation (http://www.transcanada.com/docs/Investor_Centre/MASTER_INVESTOR_DAY_2010_PDF_for_Website_Final.pdf) the company used all the right buzzwords –

• Industry negotiated solution

• Lower and stabilized toll

• Various Concepts for Toll Reduction

• Lower depreciation

• Deferral of revenue shortfall

• Rate design changes

And said it would be filing its application for toll charges with Canada’s National Energy Board (NEB) by year end.

There needs to be some very creative thinking between the Canadian producers, the pipeline companies and the government (royalties) – everybody in the food chain – to keep western Canadian gas competitive.

That is happening – TransCanada is weighing the idea of providing producers more value for the liquids portion of their gas stream (the NGLs, or natural gas liquids like propane, butane, and condensate etc.) instead of leaving that value with shippers who actually move the gas out of Alberta for export.

Bentek’s report says that by next summer, the situation will worsen for TransCanada and Canadian producers.

Rockies producers will then have an incremental 1.2 Bcf/d of westbound capacity on El Paso’s new Ruby Pipeline, bound for Oregon, which is in direct competition with Canadian supply for PG&E’s (Pacific Gas and Electric) Citygate, the premium market in the West.

Bentek’s Big Squeeze report states “The competition between Alberta and Rockies prices has already ratcheted up this year with the increased Canadian imports to the West. Ruby will intensify the battle and, given its low variable cost, ultimately displace significant volumes of Canadian gas.”

Follow this link to read Part 1 of my 2011 Canadian Natural Gas Outlook

The Montney Gas Play

By
Keith Schaefer
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0

Here’s where the attention is shifting now

The Montney gas formation – already the lowest cost gas producing region (that I can see) in Canada just got bigger and better, thanks to a boomer well by Celtic Explorations (CLT-TSX) last week.

Celtic said its well tested 10.2 mmcf/d, (million cubic feet of gas per day) which included a very good 50 barrels of wet gas, or Natural Gas Liquids (NGLs) per million cubic feet (expressed in industry short form as bbl/mmcf).

Most of the NGL basket here is condensate, or C5, which is by far the most valuable NGL and is usually worth more than oil.  GMP Securities said in a research report that it equates to a 2,235 boe/d test rate – over 10% of CLT’s total current production.

Celtic’s stock was up 25% in two days to $16.20 on 5-6x average daily volume both days.

Celtic is calling this new area Resthaven, and it’s located at the very south-eastern tip of the Montney gas play, which straddles the BC-Alberta border.  This map came from a report on the play on Thursday Nov 18 by Macquarie Capital.

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What perhaps is even more remarkable is that Celtic was able to secure 280,820 net acres (438 sections) in Resthaven over the last year at low prices.  It is really difficult to get that size of land block anywhere in western Canada now; the competition is so intense among the many Calgary based oil and gas companies.

The juniors with the biggest land position in this play are Donnybrook Energy* (DEI-TSXv) and Cequence Energy (CQE-TSX).

Donnybrook has assembled 20 net sections in Resthaven, mostly just east of Celtic, which could support 80 net wells, says Donnybrook director Murray Scalf.

Cequence says they have 50 sections of land in what they call the Simonette area just east of Resthaven.

GMP Securities suggested this play could be worth $38 billion, or $39 a share to Celtic.  There were several brokerage firm reports out on this play, and their economics were similar – costs of a well would be $6-$7 million. Estimated Ultimate Recovery (EUR) would be roughly 4-6 bcf, or billion cubic feet.  Canaccord Capital said in their research on this play that this is TWICE what the current best area of the Montney, Kaybob, gets.

GMP says the NPV (Net Present Value) of each well would be roughly $11 million. The NPV, in very rough terms (and my accounting knowledge is just that—very rough) is the amount of money the company expects to get back from all the production over the life of the well – after costs.  So it could be called the profit.

Multiply that by just $10 million  by 350 potential horizontal well locations, and you get $35 billion.  GMP Securities says that’s assuming only 20% of the land is prospective; the potential gross # of wells could be much higher.

The NPV of a good Bakken well in Canada is about $5 million – maybe it’s up to $6 million now with lower costs and better recoveries over the last 12 months – on a (roughly) $5 million well.  But investors get the picture that this is a great well – twice the NPV as a Bakken light oil well – at $5.50 gas.

For Donnybrook, 80 net wells at $10 million per well creates an unrisked NPV potential of $800 million.

Until now, the Kaybob area of the Montney has been considered to have the best economics of the entire play.  Now these brokerage firms are calling Resthaven another Kaybob.

*Note: Donnybrook Energy is in the Oil and Gas Investments Portfolio ie Keith Schaefer owns Donnybrook.

2011 Outlook for Canadian Natural Gas

By
Keith Schaefer
-
0

Western Canadian gas exports to the United States could be completely displaced into Northern California by

1.      Abundant, low cost US natural gas production, and

2.      By several new gas pipelines in the US…

Says a new market study by Bentek, a US energy analysis company.

Overall, Canadian gas exports to the US will drop 2 bcf/d over the next few years – almost 30% – and this impending loss of the northern California market builds upon the loss that western Canadian gas has in lower exports to the US northeast.

Increased Canadian demand and declining Canadian supply will pick up some of the slack, but it won’t be enough to offset a significant loss of exports to the US market in the near term, they add.

Bentek’s report, titled “The Big Squeeze,” is a report that also outlines how fast growing production from the Marcellus shale in Pennsylvania is displacing Canadian gas to the lucrative Northeast US market, and how new pipeline capacity carrying low cost gas out of the Rocky Mountains is now set to displace much of Canadian gas to the US Midwest and lucrative California markets.

“What we outlined in our study was complete displacement of Canadian gas into Northern California by the summer of 2014,” says Jack Weixel, Director of Energy Analysis for Bentek.

Last summer I wrote about how the new $6 billion Rockies Express pipeline, or REX, going from Colorado to Ohio, was displacing western Canadian gas production by almost 10%.  Lately, US natural gas production from the Marcellus shale has also been displacing Canadian gas to the US Northeast.  Canadian suppliers have been able to send more natural gas into the Midwest and Western US to help make up for that drop.

“—-ing Will Change Everything”

Technology, by its very nature, creates change.

But there’s one technology in particular that is causing massive changes in the oil and gas exploration industries.

Now…I can’t give it all away right here.  But rest assured – “—–ing” is a technology understood by very few.

But at the same time, “—–ing” is about to create explosive short-term profit opportunities for those investors who know where to look.

That’s where I come in.

I’ll tell you all about “—–ing” – yes, including the actual name – and how you can claim your share of the fortune that’s about to be made.

I’m talking about more than a dozen triple-digit profit opportunities over the next 12 months.

Click here to learn more right now.

But Bentek says even that market is at risk – and Canadians could see this market get curtailed within the next two weeks, in early December 2010.

That’s when low cost Rockies gas supply will start flowing east on the newly installed Bison Pipeline.  This will give Rockies producers an additional 0.5 Bcf/d (billion cubic feet per day) of capacity out of the Powder River basin in Wyoming.  The Bison connects into the Northern Border Pipeline, which moves mostly western Canadian supply.

Image provided by BENTEK (bentekenergy.com)

Image provided by BENTEK (bentekenergy.com)

Weixel expects the Bison Pipeline to create stiff competition for Canadian gas.  He says Canadian gas has to get cheaper to stay competitive.

“They (Canadian gas producers) need to drop 14 cents (an mcf).  Let’s say Rockies gas is $3.50/mcf – that means that AECO (the Canadian natural gas benchmark price out of Edmonton) needs to be priced $3.36 to be competitive in northern California,” says Weixel, adding that the breakeven price for certain Rockies gas producers in the Pinedale and Jonah tight sands plays is “well below $3 per mcf.”

Weixel expects net Canadian exports to drop 2 bcf/d through 2015 – out of a total of 6.9 bcf/d now.  But it’s not all gloomy for producers – and their shareholde“At the same time exports are declining, you’ve got Canadian demand growing, primarily from oilsands in the west and coal retirements in the east,” he says. “You’ve also got production slipping  from conventional gas plays in Alberta.  So there is a tightening supply-demand balance.

“Traditionally that would lend itself to gas prices getting stronger.  But we believe that due to the drop in exports, that there will be just as much gas on hand in Canada as there is now.  So if production drops 1.5 bcf/d but exports drop 2 bcf/d, they’re up half a “b” a day.

Canadian gas production is actually going up because of the unconventional plays in BC (read: MONTNEY), but Weixel says the gas rig count in Alberta dropped off a cliff this September, and is about half the number it was last year and about one quarter what it was in 2008.

What’s surprising to me is how little both the industry and investors appear to be concerned about this issue.  The Calgary Herald ran a small story on this, and The Daily Oil Bulletin, which is ready by the industry only, ran a story (masthead, or lead story).  There are thousands of high paying jobs at stake – mostly in Alberta but also in northern B.C.

NEXT STORY – HOW DOES THIS AFFECT THE PIPELINE COMPANIES?

– Keith

Publisher’s Note:  Many of my readers have emailed me to ask what my # 1 energy trade is.  That’s an easy one to answer at the moment.  It’s a little-known Canadian company with an extraordinary new technology… one that will shape the oil & gas hydraulic fracturing (fracking) market for decades to come. This company’s proprietary process is proven to increase production in wells by 40% or more — while it literally “pays for itself.”  I’ve put together a video that details this trade in full. Watch it by following this link.

The Best Junior Oil Stocks in the Alberta Bakken Formation

By
Keith Schaefer
-
0

The Alberta Bakken has gained a lot of visibility in the last month, but how quickly will events on the ground develop?  And where can retail investors profit the most from this new play?

This hot new play is being touted as a probable look-alike for the Saskatchewan-North Dakota Bakken.  But there is very little public information to back up these claims, as no well rates have been announced on the Montana side of the play, and only one well on the Canadian side.

That could soon change, however.   GMP Securities reported that Crescent Point (CPG-TSX) was issued licenses to drill two wells – one license on October 29, the other on November 5 –  into the Alberta Bakken.  One will be at the north end of the play on the Alberta side, and the other in the south very near the Montana border.

Crescent Point is arguably the most respected and most successful Bakken producer in Saskatchewan, and trades at one of the highest valuations of any producer on the Toronto Stock Exchange.  Their presence in the Alberta Bakken in such a big way is a good omen for the play.   They were able to acquire over 1 million acres in the play; almost all of it via purchasing a distressed private company out of receivership – for only $96 million, which included 900 bopd production.

You could say the land was basically free or if you don’t back out the production the cost was around $10/acre.  Recent land sales have attracted bids as high as $1500 an acre.  So the Alberta Bakken has the potential to be extremely accretive to CPG – if it works. Crescent Point plans 19 wells into the Alberta Bakken in 2011.

GMP says one of the best positioned juniors to benefit from this new play – and Crescent Point’s activity – is Bowood Energy (BWD-TSXv).

“We view any incremental drilling activity that helps prove up the play as a positive for Bowood Energy” GMP states, “who’s lands are clearly on trend with the two latest wells licensed by Crescent Point.  We continue to view BWD as one of the best levered ways to play this new light oil development.”

“—-ing Will Change Everything”

 

Technology, by its very nature, creates change.

But there’s one technology in particular that is causing massive changes in the oil and gas exploration industries.

Now…I can’t give it all away right here.  But rest assured – “—–ing” is a technology understood by very few.

But at the same time, “—–ing” is about to create explosive short-term profit opportunities for those investors who know where to look.

That’s where I come in.

I’ll tell you all about “—–ing” – yes, including the actual name – and how you can claim your share of the fortune that’s about to be made.

I’m talking about more than a dozen triple-digit profit opportunities over the next 12 months.

Click here to learn more right now.

Bowood has partnered with the Blood Tribe First Nation in southern Alberta for much of their land – they have 94.75 contiguous sections (60,640 acres) there, and total Alberta Bakken acreage of 162 sections (104,000 net acres). Bowood intends to drill its first horizontal oil well into the play by late 4Q10 or early 1Q11.   Macquarie Capital says Bowood “has no sizeable expiry issues to deal with across their land base in the near term” so they can take their time drilling.

 

DeeThree Explorations (DTX-TSX) says they have 300 sections (in this area of Canada that’s one square mile) of prospective Alberta Bakken lands.  Haywood Securities says they have half of it in the main fairway of the play, and that the company will drill 3 vertical wells by the end of 2010 to test some of their ground.

Neil Roszell’s Wild Stream Exploration (WSX-TSXv) has just over 30,000 undeveloped acres in southern Alberta right along the Montana border – very close to where Rosetta is drilling on the US side – and has identified 15 net conventional drilling locations.

BLACKSTEEL ENERGY (BEY-TSXv) has 2,530 net acres that is prospective for the Alberta Bakken.

On the US side, Primary Petroleum (PIE-TSXv) was one of the early movers in the play and has now assembled more than 230 net sections, President Mike Marrandino says.

(I alerted OGIB subscribers to Primary Petroleum at 16 cents a share in May 2010 because of their large land position in this play, and I am now taking partial profits – over 500% in six months!)

Primary intends to find a partner for their large land position.  This is not unusual for juniors in emerging shale plays – I have written about the Paris Basin shale play in France, where junior producer Toreador Resources (TRGL-NASD, $14.48 and another OGIB portfolio pick at $8.81 only two months ago) brought in Hess Corp (HES-NYSE) to joint venture 50% of their play – for a whopping $265 million.

Murphy Oil (MUR-NYSE), Rosetta Resources (ROSE-NASD), Quicksilver (KWK-NYSE) and Newfield Exploration (NFX-NYSE) are the larger producers on the Montana side of the play.  Rosetta has publicly stated they expect 12-13 million barrels of oil per section.  Newfield has said they now have one horizontal well producing from the play – they just didn’t give an IP rate.

Rosetta and Newfield have  been the most active in the US side, with each drilling about eight wells this year – most of them vertical test wells, or “strat” wells as the industry calls them, to test for rock stratigraphy – a geological term that means studying how rocks are laid down; studying the layers of rock.

Covenant Resources (CVA-TSXv) and Mountainview Energy (MVW-TSXv) are also active in the US side – Covenant will be spending $3 million in 2010-2011 to drill at least eight vertical test wells on their 41,500 acres (64 sections; 640 acres in one square mile).  In their corporate presentation, Mountainview says they own 74,000 net acres in the Alberta Bakken and will be spending $5.8 million there in 2011.

ARKANOVA ENERGY (AKVA-OTCBB) has 6400 acres, and Abraxas Petroleum (AXAS-NASD) has 3000 acres.

Macquarie Capital says in a report dated October 18 2010 that shareholders in these juniors could be happy as they get bought out by more senior companies looking to get involved in the play:

“What’s next?

“…Consolidation. Junior companies with meaningful, strategically situated lands will be purchased outright by mid/large cap producers who seek to bolt on additional acreage to already established positions. The potential exists that players who were late to the game may try to establish a position in the play via a small corporate acquisition, once some of the associated risks have been mitigated by the early-comers.

“Farm-ins. We believe some select junior/midcap companies will execute strategic farm-ins on super-major companies or freehold owners as they look to either expand their land position as an early-comer or establish a position as a player late to the game.”

Of course, this is music to the ears of junior oil and gas investors.  This is what we do – find early entrants with big positions in good emerging plays, and (pray they work) wait patiently as the play develops and we get bought out for a premium by a larger company.

bakkenjuniors

Keith Schaefer
www.oilandgas-investments.com

Part I of the Alberta Bakken series, please click here.

Part II, please click here.

Publisher’s Note:  Many of my readers have emailed me to ask what my # 1 energy trade is.  That’s an easy one to answer at the moment.  It’s a little-known Canadian company with an extraordinary new technology… one that will shape the oil & gas hydraulic fracturing (fracking) market for decades to come. This company’s proprietary process is proven to increase production in wells by 40% or more — while it literally “pays for itself.”  I’ve put together a video that details this trade in full. Watch it by following this link.
by +Keith Schaefer
 

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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The Alberta Bakken: Stealth Oil Play of the Year?

By
Keith Schaefer
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0

One of the Largest North American Oil Discoveries in Decades

What has the oil and gas industry so excited about the Alberta Bakken – the stealth play of the year?

Some big companies on both sides of the 49th parallel have spent millions buying thousands of acres of land – with almost no well data.  This flurry of activity says the industry is convinced the Alberta Bakken could be North America’s next big play.

“I think what has the industry excited is the potential and similarities between the Alberta Bakken and the Williston Basin (in North Dakota),” says Mike Marrandino, President of Primary Petroleum, which has 235 net sections in the Alberta Bakken in Montana.

“The (Alberta Bakken) reservoir size is over such a large land area, the potential is huge – if it does prove up.”

The original Bakken covers parts of North Dakota, eastern Montana and southern Saskatchewan, and estimates of how much oil it could hold (OOIP-Original Oil in Place) range from 5 billion to 167 billion barrels of oil, making it one of the largest discoveries in North America in decades.   And the industry is always figuring out ways to increase recoveries; i.e get a greater percentage of that oil out of the ground.

It is the largest onshore discovery in North America in decades, and is really the only shale oil play on earth with a production history.  In many of the new shale plays emerging around the globe, the management teams are saying – “This is a Bakken look alike!”

But are they?  How does the Alberta Bakken stand up?

Analysts agree the source rocks from the two plays were built up at the same geological time, but that eastern Bakken, in North Dakota/Saskatchewan, was the inside of a giant crater.  The western one was a big west facing beach.

Canadian brokerage firm BMO Nesbitt Burns wrote a report on the two Bakkens in October, and it said the Alberta Bakken meets the criteria for a big Bakken like discovery (my translation in brackets after each point):

i) pervasive petroleum saturation;  (lots of oil all over the place)

ii) abnormal pressure (high);  (high pressure=big wells)

iii) a lack of downdip water;  (no water below the oil)

iv) updip water saturation;  (lots of water above the oil)

v) low-permeability and low-matrix porosity reservoirs ;  (it’s typical tight rock)

vi) deliverability is enhanced by fracturing; and  (natural cracks in the rock make it easier for oil to get to the well)

vii) plays that are self-sourcing within a mature source rock fairway.  (there is lots of oil in an area surrounded by a bigger area where we have already found a lot of oil)

BMO concluded that the Alberta Bakken met its criteria on all counts.

Macquarie Capital, a large, world-wide resource investment bank and brokerage firm, compared them this way:

“Geological properties….To the west in southern Alberta and BC, the lower Bakken members actually correlate with the Exshaw formation, while the upper Bakken member is similar to the basal black shale unit of the Banff formation….”

TRANSLATION – the lower Bakken formation in North Dakota and Saskatchewan is called the Exshaw in western Montana and southern Alberta, but it’s basically the same thing.  And the upper Bakken is called the Banff formation in Montana/Alberta.

“….The Exshaw/Bakken is an organic-rich, marine, source rock that occurs in the lower part of the Mississippian-Devonian system.”

TRANSLATION – there is oil in the rock at the bottom

“….The formation as a whole represents a petroleum system that can be tracked from source to trap.”

TRANSLATION – you can see where the oil was formed, and you can also see how the oil has moved up until it hits the top of a cone in an impermeable rock and stops—trapped there.

“….The Exshaw, Bakken (lower and upper members), and Lodgepole formations consist of organic-rich, black, basinal  laminites with average TOC’s up to 12% in the lower Bakken, 40% in the upper Bakken, 5% in the Lodgepole, and over 20% in the Exshaw. Each formation consists of Type II organic matter (characteristic of most marine oil source rocks)…

TRANSLATION – the Total Organic Content (TOC) of the rock (this means enough little bugs died in one place millions of years ago) is big enough that it’s likely a lot of oil is present.

“…Unfortunately, the Lodgepole formation is typically less mature than the Exshaw/Bakken shales and as such over time has demonstrated the most oil expulsion of the three layers; in fact, it serves as the source rock for most Mississippian oil pools.”

TRANSLATION – most of the oil is gone and moved up into oil pools closer to surface

“…Conversely, the Exshaw/Bakken is considered the most conducive (and prospective) for horizontal multi-stage fracturing given that it has experienced limited migration, and most of the oil remains contained within the member.”

TRANSLATION – most of the oil is still there, and it looks like the best one.

“We have identified over 18 wells that have drilled through the Bakken near or on our property,” says Primary’s Marrandino.  His team has been evaluating old data  to better understand the similarities between their  Bakken package to that of the Bakken Williston Basin.  They have had to travel to Denver Colorado and Billings Montana to locate the physical data – old core, or “thin sections” and analyze them under a microscope to better understand the characteristics of the Alberta Bakken formation and potential oil in place

“It further de-risks the play,” he says.

So it looks like the two plays have very similar geological characteristics.  What about economics.?

BMO, Macquarie and Haywood Securities have all acknowledged that the Alberta Bakken is a deep, overpressured formation.  This leads them to believe that the deliverability (economics) may be superior to the main Canadian Bakken play in Viewfield, south-central Saskatchewan, but lower than the North Dakota Bakken in the US.

Like most horizontal, multi fracked wells in the Bakken it is assumed that the initial flow rates of the Alberta Bakken will be high, with high decline rates, and a relatively large total amount of oil recovered.

For the Alberta Bakken play BMO Capital Markets estimates that oil companies will recover a total of roughly 250,000 barrels of oil per well (this is called the “Estimated Ultimate Recovery” or EUR) and a three-month average IP of 348 bopd. They say this yields a Before Tax Net Present Value @ 10% of ~$4.5 million for a Horizontal Oil Case, an Internal Rate of Return (IRR) of 75.9–108.8% and a Breakeven Supply Cost (BESC) of $41.25–42.20/ bbl.

These economics are just below that of the Saskatchewan Bakken, BMO adds.  It’s as big an “NPV 10” (the present value of how much money the producer might get after the well pays back its cost) as the Saskatchewan Bakken – which has the highest valuation per barrel of any basin/play in the country.

Keep in mind that there is only one well on which to base these figures, and that was a vertical well which hit a natural fracture—not exactly a typical well that investors expect to see over the life of the play.

Concludes BMO Nesbitt Burns: “Ultimately, when comparing the Alberta Bakken type well to the Saskatchewan Bakken type wells, the Alberta Bakken—due to the overall thickness of the reservoir, and the overpressured, Deep Basin setting—has the potential for a highly economic well.”

There are a basket of juniors in Canada that now have some very intriguing capital gains potential, if they get lucky with their geology.

I’ll tell you who they are and a rough outline of their plans in my third and final story on the biggest oil play most investors have never heard of, the Alberta Bakken.

Keith Schaefer
www.oilandgas-investments.com

Publisher’s Note:  Many of my readers have emailed me to ask what my # 1 energy trade is.  That’s an easy one to answer at the moment.  It’s a little-known Canadian company with an extraordinary new technology… one that will shape the oil & gas hydraulic fracturing (fracking) market for decades to come. This company’s proprietary process is proven to increase production in wells by 40% or more — while it literally “pays for itself.”  I’ve put together a video that details this trade in full. Watch it by following this link.

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:

[facebook-like id=”1″ ]

The Bakken Play the Oil Majors Are Watching Closely

By
Keith Schaefer
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0

The best new shale oil play you’ve never heard of is getting ready to explode onto investors’ radar early in 2011 – the Alberta Bakken.

Located on either side of the Alberta/Montana border, the key land packages in this play have been assembled with very little news or fanfare – but by some very smart and successful companies, like Crescent Point (CPG-TSX) in Canada, and Rosetta Resources (ROSE-NASD) , Newfield Exploration (NFX-NYSE) and Murphy Oil (MUR-NYSE).

But these larger companies have been very tightlipped about their plans, and aside from Crescent Point’s one press release this fall, it’s not easy to get information – because everybody is still trying to buy more land. To date, there are only a handful of juniors involved in the Alberta Bakken, but juniors and the bigger intermediate producers are all putting a lot of money into this play hoping it will be just like the Saskatchewan and North Dakota Bakken play to the east – which created tens of billions of dollars in shareholder wealth and many buyouts – corporate takeovers – over the last 5 years. Recent reports by Canadian brokerage firms agree.

So the play is gaining momentum but hasn’t become mainstream yet. That will change in the coming months. The historical geological evidence is intriguing, even compelling.  But there is still only one well that has been publicly reported in the whole play – though several have been drilled.  And despite the fact that the Alberta and North Dakota/Saskatchewan Bakken plays have completely different geological settings, huge land prices have been paid for big parcels of Alberta Bakken land in areas where truly, very little is known about the oil formations (yes this will likely be a multi-zone play if it works).

This play was discovered on the US side of the border, in Montana.   And while there has actually been a lot more activity on the US side, but you have to look hard to find mention of it. Rosetta, Newfield and Quicksilver (KWK-NYSE) have each acquired roughly 300,000 acres in northern Montana in this play – a material land position even for companies this size – but you won’t find that information anywhere except in a couple lines buried deep in their quarterly statements.  Rosetta said in its quarterly released just last week they had acquired more ground.  Rarely do any of them include even one slide on this play on their corporate powerpoint. Rosetta and Newfield have each publicly said they are drilling 8 wells, though most of them now are vertical test wells, which the industry calls “strat” wells, which is short for stratigraphy.

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Basically they’re trying to gather geological information and determine the best place to drill a more expensive horizontal well.  No results have been released to date. But I can tell by reading the research reports on these companies that the analysts down in the US are watching this play. So are the majors, which did not participate much in the shale gas or shale oil boom in North America.

On the Canadian side, land prices around the Montana border edged up consistently this year – going from a low of $83 per hectare ($33.20/acre; 2.5 acres in a hectare) to $1535/ha, or $614 per acre – taking a lot of industry people by surprise at the time.  The highest price paid for one small block was over $4500/ha, or $1800/acre. Crescent Point came clean in September when they announced they had acquired over 1,000,000 acres in the play, mostly via an acquisition of a private company, Darian, which had a substantial land position, but also through some freehold staking on their own. Most of the land in the area was bought up by land brokers, a whole sub-industry in the oilpatch that acts as front-men for the oil producers. That is not unusual.

It is unusual to see a well licensed in the name of a land broker, which is what has happened with the one well in the Alberta Bakken that everyone is watching – here is a quick quote from BMO Nesbitt on this well: “In Alberta, one horizontal well has been drilled and completed targeting the Alberta Bakken (drilled under broker: Antelope Land Services 14-7-1-21W4: TD – Wabamum; results confidential). A second horizontal well is presently drilling (Antelope Land Services 16-24-2-25W4, licensed to the Exshaw, spudded August 17, 2010), and a third horizontal well licensed by Antelope Land Services located at 3-8-1-18W4 has also been drilled and rig released on October 3, 2010, to the Exshaw. It is believed that Crescent Point Energy is the operator of these three wells.”

Murphy Oil (MUR-NYSE) has also got involved, acquiring about 150,000 acres via a deal with the Blood Tribe in Southern Alberta.

The few juniors in the Alberta Bakken play stand to be richly rewarded if it works out as well as the early movers hope. This will also be good news for their shareholders – here is how Macquarie Capital sees the Alberta Bakken playing out for them: “Junior companies with meaningful, strategically situated lands will be purchased outright by mid/large cap producers who seek to bolt on additional acreage to already established positions. The potential exists that players who were late to the game may try to establish a position in the play via a small corporate acquisition, once some of the associated risks have been mitigated by the early-comers.” In my next two stories on this fast emerging play, I will compare what is known about it to the Saskatchewan/North Dakota Bakken, and list the junior companies involved on both sides of the border.

Keith Schaefer
www.oilandgas-investments.com

Follow this link for Part 2 of the Alberta Bakken series.

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