There are two developments in the oil and gas world that have initiated a seismic shift in that business that most investors have yet to fully comprehend:
1) The advent of horizontal multi-stage fracking technology has completely rejuvenated a large number of North American conventional energy plays that were considered finished;
2) Tight formation and oil-bearing shales have tripled, if not increased by a factor of 10, the domestic reserves of oil, condensates, and especially, natural gas, of North America.
The main takeaway investors need to understand is that high capex/opex plays – like the oil sands – are going to come under increasing pressure as the cheaper and easier to produce horizontally accessed and deeper vertical shale plays are brought on-stream. It also points to the ability for energy investors to capitalize on the absence of political risk that comes with exploration and production in Canada and the United States. Who wants to explore in Mongolia or Nigeria when there are literally billions upon billions of barrels easily accessibly in North America?
Its going to take a while, but the trend is definitely going to be away from the sands and into the shales. Private, pre-producing companies with substantial land positions in key areas are going to see their valuations escalate based on land positions alone – especially as these re-drills and re-completions prove out the formerly “trapped” hydrocarbons, and fracking starts producing from the shales.
Case Study: Stormhold Energy Ltd.With potentially over 700 million barrels of oil from conventional and relatively shallow reservoirs in east central Alberta, and somewhere north of 2 billion barrels potentially in Cambrian shales, Stormhold Energy is one of the most valuable private companies in the oil patch outside of the tar sands. At a dollar per barrel in the ground, I’ll let you do the math. These are potential resource numbers, and not reserves by any stretch.
According to independent consultant Brian Mahood of Calgary-based Kerrisdale Consulting,“Our independent (51-101 compliant) resource reports prepared for the Viking, Mannville and Cambrian zones have identified, under a most likely case, approximately 25 million barrels of oil equivalent (BOE) of prospective resources in the Viking, 124 million barrels of oil equivalent (BOE) of prospective resources in the Mannville and over 280 million barrels of oil equivalent (BOE) of prospective resources in the Cambrian across the 295 sections of Crown Lease Minerals Rights held by Stormhold.”
I discovered this company in August this year, and after 4 weeks of due diligence, I am convinced that Stormhold will either become a major oil producer within several years, or will be purchased outright by one of Crescent Point Energy (TSX:CPG) (OTCBB: CSCTF), Apache (NYSE:APA) or some other U.S or Canadian major company.
According to an internal company report to the president;“Stormhold has a total of 266 sections with Upper Cambrian Deadwood Formation rights, giving a calculation of total potential ‘Most Likely’ conventional oil resource of 266 X 5.547 = 1,475.5 million barrels of oil.” Risked at 50%, that equates to a potential resource of 700 million barrels.
The big story, however, is the deeper oil-bearing shales in the Cambrian play. My bet is the company will be taken out in the next 6 months. Barring a takeout, the company is negotiating with various groups to IPO within 12 months.
Too Good to be True?Analysts at investment banks were initially incredulous about Stormhold’s representations. How could a tiny private company, who raised $8.5 million from 85 shareholders who were all friends and family, possibly hold such a large and valuable position? How could oil exist right under the noses of the established major producers in an area that has had over 4,500 wells drilled and produced 900 million barrels of oil since the sixties? All without debt, without banking relationships, without any external help? How could the price of the land position increase from $1.9 million in 2009 to today’s going rate of $54 million?
How is it that a tiny company with no banking relationships to speak of could be in a position to become one of Canada’s major oil producers?
The story, which will certainly become part of Canadian business lore, is emblematic of the innovative thinking and swift ability to seize opportunity that are pre-requisites for success in competitive oil patch.Ed Stelmach, Premier of Alberta from 2006 to 2011, raised the royalties that oil and gas producers would owe the government from producing wells in an effort to capture more of the revenue that was being lost through the tax optimized energy trusts.
The energy producing establishment banded together to boycott the province’s land sales in 2009, to attempt to force a revision in the policy by depriving the government of any revenue from land sales. Fortunately for Chadd Radke and Ted K. Cantlon, the founders of Stormhold Energy, they were not part of the establishment, and so seized the opportunity to acquire a substantial land position in east central Alberta for just under $2 million.
“We pissed off a lot of people,” acknowledges Radke. “But that’s why we’ve got such an attractive and valuable land package.”
As soon as the land position was secured, Radke and Cantlon set about sifting through their many contacts from within the oil and gas business. Radke had spent 16 years in the service side of the business, and Cantlon was a thirty year veteran of both energy finance and management. They bought seismic data and engaged two independent and widely respected engineers to help them complete reservoir studies and analyze well logs from the many thousands of wells that had been drilled on their now 295 sections of land.
It wasn’t long before they convinced several senior petroleum scientists to join the company, both as shareholders, and as consultants. And at the end of the day, it was the combined expertise of their own technical team, verified by two independent reports, that determined a few interesting facts about the land that had produced so much oil, and that is still producing to this day.
The first revelation was that, despite thousands of wells having produced hundreds of millions of barrels of oil from the Viking and Mannville plays and Provost pool, the Stormhold team knew that those formations were not the real source of the oil, which, it turns out, are present in those formations as a result of seepage through cracks and faulting from lower formations. The oil actually originates from the Cambrian shales underlying the Viking, Mannville, and many other shallower formations that comprise Stormhold’s vast holdings.
The Cambrian shales are precisely the formation that the Houston-based oil company, Apache Corporation (NYSE:APA) recently announced that there may be an estimated 3 billion barrels of crude oil under land they purchased in America’s Heartland. Its resources such as these that have already caused oil imports in the U.S. to drop by 550,000 barrels per day in 2012.
The estimated 3 billion barrels of crude oil sits under 880,000 net acres spread across Kansas, Nebraska, and Montana. The two areas of land are known as the Williston Basin around Nebraska and Montana, and the Mississippi Lime area around Kansas and Oklahoma, which is already known for its rich oil formations.”
Apache’s land holdings in this area are responsible for a significant portion of that company’s 784,000 barrel per day production. Some of the wells came on stream at 16,000 barrels of oil per day.
Momentum is BuildingWhen Crescent Point Energy bought Cutpick Energy for $420 million earlier this year, what appeared to be a win for shareholders was in fact a rescue of management’s debt-swollen balance sheet that was starting to limit the company’s ability to finance itself. Fortunately for Cutpick shareholders, their President and the President of Crescent Point were friends. So Cutpick’s shareholders did alright.
The bankers who back Crescent Point are now very interested in Stormhold’s land. In fact, a source who declined to be identified because the discussions are private, has confirmed that meetings among those companies are taking place.
Mackie Research Capital Corp, one of Canada’s most respected independent investment banks focused on energy, resources and technology, has been retained to advise on takeover offers, which, as soon as a takeover bid is announced, is expected to generate a flurry of interest that could easily turn into an auction.
A U.S. major, that is an expert in the Cambrian production, has been studying the company’s data since April, and have indicated informally that they are interested in discussing farm-in arrangements and/or a takeover.
Now obviously there are lots of things that can go sideways in that process, and so there is still risk associated with transaction completion. But Radke and Cantlon are adamant about one thing: They won’t consider less than $4 a share for a takeout offer at this point. That values the company at CA$300 million.
“When we start producing from our Cambrian well, that we are in the process of completing with our JV partners, that price will double at least,” says Radke. “That will move a lot of our resources into the reserve category. If we don’t get the price we want, we’ll just IPO in the next year. We control the company, so are comfortably in the driver’s seat in determining our future.”
The company is currently in completion on 4 wells and expects to spud four more within 6 months. “We’ve got targets picked out, and we’re looking for partners who want to participate,” said Radke. “We will finance our own wells.”
A Rare FindWhile there is risk associated with investing in an oil play that is not yet a proven producer, the third party independent valuations by Brian Mahood, a nationally respected geologist, and equally well-regarded Chapman Engineering, amount to substantial “de-risking” of the play.
The compelling argument about this opportunity from an investment perspective is that it has “compressed investment velocity”, meaning there are so many value drivers within this story – the multiple pay zones, the conventionals, the shales, the re-entry opportunities, the re-drilling opportunities, the farm-in opportunities, the complete takeover potential – that it is a very attractive vehicle for risk tolerant portfolios of accredited and institutional investors.
I think demand drivers for this company also stem from the fact that the oil sands are going to be economically non-viable, if oil drops below $70 a barrel. Not so with the Cambrian play, according to Radke. So while investors scour the planet for billion barrel plus oil reservoirs, the premium placed on such reservoirs within Alberta’s borders, from a risk perspective, will be huge.
Documentation relative to the company’s farm-in and financing opportunities can be found here:http://www.enertechadvisor.com/StormholdFor more information, contact:James WestMidas Letter Financial Group Ltd.+1 (917) 675 4777james.west at EnerTechAdvisor.com