RPG.cn Ram Power looks like a very interesting Geothermal Play

I do not know much about geothermal at all, but it is definitely something that interests me. Due to the BP spill, and now the ME rig explosion in the gulf (though it was very small), I think there is a good chance that there will be an increased amount of pressure to pursue alternative forms of energy. Accordingly, the latest IEA (International Energy Association) presentation was focused on the importance of using more efficient energy sources. I began reading several other articles which turned me onto geothermal energy technology. I have read briefly about this before, and conveniently saved a list of some potential companies to look at. I wanted to narrow down on one or two possible plays here and compare them. After spending some time, I decided to focus on Ram Power Corp (RPG.T) and  Magma Energy Corp (MXY.T). It seems, so far, that RPG has a lot more support behind it and some very interesting assets. More importantly they seem fully funded with access to more capital, a necessity for a company of this nature. I wanted to do a preliminary post to remind myself to look further into this Ram once time permits. Look for a post soon.

I need to check out (TRIT) Tri-Tech Holdings

I need to look at this one again when I have some time. I day traded this stock last year when it had its IPO back in late 2009. It turned out to be a pretty awesome trade. Since then I haven’t really gone back to it but it has pulled back quite a bit (as have GDW and RINO). While the foreign water treatment industry seems to be in the tanker after China and other nations have cut stimulus packages, I still think their is a healthy demand for those products, especially in regions where water is very unsanatary (Brazil, China, India, Indonesia). Piper Jaffray has a price target of $20 on this stock, which seems reasonable. It is currently trading at 14X earnings, which is arguably small for a company that is growing revenues rapidly. Many companies of similar nature have had 20X multiples. I think the real question to answer, it are they going to be able to continue growth at these rates. Many seem to think this will not be the case, thus it is critical to be able to answer this. None-the-less I am still interested in this name.

WEE.cn Wavefront is there potential here?

This is a very interesting little company. I read about this company from Keith Schaefer (whom I have now mentioned numerous times in my latest Bakken related posts), who recommended it back in July. It seems that he is not the only one to think it has potential, as three of the top five largest positions in this company are from large hedge funds, namely Sprott Asset Management, Wellington, and Passport Capital. WEE.cn has developed two patented products. The first, is their main seller and deals with using their patented water pulsing technologies to increase the amount of recoverable oil from wells. The product claims (and has numerous test results and client approval letters to prove this) that they can increase the amount of recoverable oil by 15-20% on average. In fact, the company actually leased an oil field in Oklahoma so that it could demonstrate its effectiveness. Their products are starting to gain the attention of the large blobal producers for obvious reasons. To a large multi-national company, 15-20% more oil translates into hundreds of millions and even billions of dollars a year.  As a rough estimation, lets use PBN.cn as an example. They  produced 45,000 boepd from roughly 157 wells (according to their latest production update) for 2009. Using wavefronts technology, and assuming a 20% increase in recovery, they would be getting an extra 9,000 boepd. At $80 per barrel, this translates to an extra $262 million a year the company would be making in sales. From a cost standpoint (and this is also a rough estimate), Wavefront charges $3000 per month per well (They usually charge $6,000 per month per well but are currently charging half that much if the companies sign up for a whole year. For the purpose of this little example lets assume that they do just that), that comes out to $5.6 million in costs (3000*157*12). The benefits in this example represent over 50X the costs! So it is obvious that the incentives are there assuming the 20% increase production is correct. As a side note, I have read that the break even point is 120 powerwave systems at $3,000 per month. Currently, the company serves over 40 different clients, including PEMEX, who I think could be a huge client for them considering the drop off in production there. There is actually a pretty good video demonstration of how the product works on the website HERE.  My major concern with this company is with the sales growth. From what I can tell, it seems that the demand is there, however the company is having a hard time executing on the growth. In its latest release, the company stated that they have secured 166 licenses, with 56 of those already installed. This means that they have a current backlog of over 110, which makes me wonder whether or not they are having issues with getting this technology out there and making it profitable. In essence, I am not too impressed with their ability to take order and turn them into sales. The more I look at this, the more I see a problem here. How is the company going to have the engineering capacity to complete an order for 100+ systems if it were to come in? Perhaps this might be what is holding companies back from adopting their systems on a much larger scale. Also, sales growth year over year has been rather lackluster in the past few years. Having said that, I do think that there is a possible explanation here. Wavefront’s technology really began to gain exposure right before the recession hit. Once the financial markets crashed and oil dipped below $50 a barrel, I can imagine it must have been difficult to get oil companies to spend money on anything regardless of its potential during that time. I was actually impressed with the way sales were able to hold up during the recession considering the environment. I think the company is actually picking up some momentum now, with new orders coming in from new clients. Here are some of the most recent headlines that I think show this momentum:

• April 5, 2010: Wavefront Technology Solutions Inc.: Texas Independent Turns to Powerwave to Boost Production and Reserves Installing 16 Powerwave Systems in Utah Operation.
• March 3, 2010: Wavefront Technology Solutions Inc.: Integrated Oil Producer Implementing Powerwave in Western Texas
• January 28, 2010: Wavefront Technology Solutions Inc.: Primawave Flourishes in First Danish Project
• January 13, 2010: Wavefront Technology Solutions Inc.: Pemex Poza Rica-Altamira Asset Approves Powerwave Stimulations
• October 5, 2009: A leading Canadian integrated oil & gas company demonstrated a 16.7% improvement in oil production over historical levels from using powerwave systems. Engineers have sought to increase the number of tools installed.
• September 15, 2009: Top 5 global producer has deployed the first of four powerwave systems in its Alaskan operations. Many analyst believe the client is BP, ConocoPhillips, or ExxonMobil.

So, as you can see, WEE.cn is starting to gain some sales momentum, highlighted by this latest deal for 16 powerwave systems, which I think is pretty significant given the size of some of the other orders mentioned. Most of their other sales have been for 2-5 systems (Ex-the PEMEX contract), as companies cautiously test this new product on their wells. This agreement for 16 systems is actually quite large and shows that this company really does believe in this product. This actually represents their second largest order yet, behind their 36 powerwave order coming from PEMEX. I remain optimistic on this trend and feel that the company is going to continue to grow sales.

Despite the attention being paid to their powerwave product, I also think there is a lot of potential for the primawave product to really catch on as well. The primawave focuses on the treatment of contaminated groundwater at certain sites. This could be huge, especially as more environmental agencies investigate the negative effects that drilling has on groundwater. The following is from their website:

To serve this market, Wavefront licenses service providers to use the process in conjunction with established methods to treat and eliminate hazardous chemicals from contaminated groundwater. Verified as an effective environmental remedial strategy by Environment and Industry Canada, the Primawave process can help in the cleanup of a vast percentage of all contaminated sites at little additional cost. Primawave technology is not only a smart way to restore a site to its natural state – it’s smart business, as well.

Primawave, which utilizes the innovative Hornet Environmental Tool, is designed as a surface-mounted system for wells and direct push-type injection systems. The technology has a simple, low-maintenance design that allows for on-the-fly adjustability and low operating costs.

This is what a independent environmental firm had to say about the primawave:

Primawave and the associated Hornet tool represent the first truly new innovative technology for the delivery of treatment fluids in the environmental sector in the past ten years”, commented Mr. Pat Hicks, Ph.D., Technical Director of Zebra Environmental, a specialized environmental contacting company based in Lynbrook, NY. “Zebra and its clients have successfully used Primawave in challenging subsurface environments where conventional methods have proven ill-effective. There is no question Primawave will be in great demand in the environmental marketplace.

With both of these products gaining momentum in the market place, and an extremely solid balance sheet ($15 million in cash with no debt), I think this company will either grow through expanding its client base in more markets, or eventually get bought out by a bigger player. In fact, I think that being bought out might be worse of a scenario considering the upside potential from where they currently are. I did notice however that they had a poison pill as of 1/14/10. Because of these reasons, I think that WEE.cn could be a great speculative play, especially as the oil markets heat up and oil companies continue to expand their E&P operations. The risks are obviously there for this one, with the stock falling to as low as $.20 and rising to as high as $5.40. Admittedly, I am not 100% confident on the true benefit of their products. Some very big questions come into mind. Can their technologies be easily imitated? Are newer technologies already being developed that could make this one seem useless? Why haven’t the large globals spent time/money developing these technologies years ago? What does this technology have to do with fracing? With horizontal drilling? All of these questions unfortunately are difficult for me to answer as I am not a water geologist or technical engineer, so I do have some concerns regarding the true benefits of using a product like this. However, from what I have read, this seems like a serious product that can definitely be of benefit to any oil producing company. Another concern I have, is that a number of their contracts are made as non-binding letters of intent between the client and WEE.cn. Here is what Jim Letourneau has said about the product, who is a hydrogeologist and has some solid experience within the industry:

In my capacity as a newsletter writer, I’m exposed to hundreds of companies a year. It is extremely rare to find one with as much groundbreaking potential as Wavefront. My experience and expertise as a petroleum hydrogeologist over the last 20 years gives me a great deal of comfort with the reliability of Wavefront’s technology and the science behind it.

Read more: http://www.jimletourneau.com/2008/09/wavefront-update/#ixzz0kMDXEmg9

Do to the size and age of this company, it is nearly impossible to put a valuation on this one. However, looking at the fundamental picture here tells us that this is definitely a company that could take off. The key benefit with this one is, it could literally happen overnight. One big order of 100 could send this thing skyward. This is not out the question with WEE.cn’s CEO estimating that there are currently 4,500 wells in the fields in which they are now operating. Although the sales growth over the past few years has been a little weak for such a small company, and the company is still loosing money (obviously these go hand in hand), I still see a bright future for this company. With a solid patented product and a gigantic potential market for it, I have to like this one as a speculative play. Based on my outlook for the energy markets (which is favorable), the potential market for WEE’s products, and the sales momentum they are picking up, I could see an easy double from here.

Two good articles on WEE.cn

http://seekingalpha.com/article/43671-wavefront-energy-improving-oil-recovery

http://seekingalpha.com/instablog/365869-keith-schaefer/6529-how-to-recover-10-20-more-oil-from-the-earth-very-cheaply

OAS Bakken IPO coming soon….this is something we should watch for

I am not sure when this company is suppose to go public but it seems like they could have some potential. They have nearly 300,000 net acres under lease in the Bakken regions. They are currently producing around 3,000 boepd. The management team seems solid, coming from a team of guys at Burlington Resources.Given the current run up in oil prices and the attention that the Bakken is getting, this seems like perfect timing for the IPO.

————————-

Bakken Shale Benefits From Natural Gas Fears

Posted: Apr 06, 2010 09:00 AM by Eric Fox

The Bakken Shale has started to get even more attention from investors as the market displays a pronounced tilt toward companies that are exposed to oil-oriented basins due to the weakness in natural gas prices.

Going Public
Oasis Petroleum is an exploration and production company with nearly 300,000 net acres under lease in the Williston Basin, and with some prospective for the Three Forks and Bakken formations.

The company is planning an initial public offering (IPO), hoping perhaps to take advantage of investor enthusiasm towards exploration and production companies that have production and reserves weighted more toward oil. Oasis Petroleum hopes to raise as much as $350 million in the offering.

Oasis Petroleum is currently backed by EnCap Investments L.P., a private equity firm with dozens of investments in private oil and gas companies.

Production and Reserves
Oasis Petroleum has proved reserves of 13.3 million barrels of oil equivalent (BOE) as of 12/31/2009. This reserve base is 93% oil, split about evenly among three areas: the Western part of the Williston Basin, the East Neeson Anticline and the Sanish Formation.

Oasis Petroleum currently produces just over 3,000 BOE per day, almost all of it from its Williston Basin properties. Oasis Petroleum has allocated $220 million in capital to develop its acreage in 2010, targeting mostly the Bakken Shale. The company will use $179 million of this to drill 91 gross and 31 net wells during the year.

Although Oasis Petroleum is new to the public markets, the company was founded several years back by an experienced management team at Burlington Resources, a large independent exploration and production company that was purchased by Conoco Phillips (NYSE:COP) in 2006.

Competition
Investors that might want a more established company in the Bakken might take a look at Whiting Petroleum (NYSE:WLL), which has more than 88,000 net acres in the Williston Basin.

Continental Resources, Inc. (NYSE: CLR) is a major operator in the Williston Basin and was one of the first exploration and production companies to take the position that the Three Forks and Middle Bakken zones were separate formations.

The company provided additional evidence of this when it released the results of the Bice 2-29H well. This well was drilled and completed to the Middle Bakken formation, about 600 feet above the Bice 1-29H, a Three Forks well drilled in 2008.

Continental Resources, Inc. said that the Middle Bakken well produced at a higher rate than the earlier and lower Bice 1-29H, and had no pressure depletion.

Bottom Line
The Bakken Shale and other “oily” basins are getting more play as investors worry about the falling price of natural gas, and back away from companies that are oriented toward this formerly favored commodity.  Investors seeking to take a broad bull position in oil should consider such exchange-traded funds as the United States Oil Fund (NYSE: USO). (For further reading, check out What Determines Oil Prices?)

WEE.cn Wavefront Technology

This is a very interesting little play that I am definitely going to look into further. I could really see myself taking a position in this company once I learn more about it. Seems like they have some interesting technology and are also involved in the cleaning up of contaminated water. As the gas shale companies continue to expand their drilling, I could see this company being an easy double from here….Stay tuned for a post

SPY 04/17/10 115 Puts Sell to Close @ $1.01

Man…This really turned out to be a bad trade for me. The reasoning was there, the profits were there, the trade was there….but the timing was not. This just turned out terrible for me and it really shows the leverage that you get using options. I bought these options for $1.29, at the end of the day they were worth $1.77 for a 37% gain in less than 5 hours. Sounds good huh? I decided to leave them on considering the run that the market has had of late….what was I thinking…of course this market doesn’t go down!?

So long story short, this thing just tanked…I am lucky I sold when I did because they finished today worth $.84. I might look to put this trade back on if the market continues up tomorrow. I will possibly use the 116 puts this time. They are currently sitting with a bid of $1.13. I remain cautious of this market yet despite all that is going on in the world it seems to continue to drift higher on low volume.

FSYS Is this Sell-off Overdone?

Following a nearly 50% drop in the share price of FSYS in less than three months, one must beg the question: Is this sell off over done? This question becomes increasingly important as the spread between crude oil and natural gas continue to widen. With several potential positive catalyst in the near future for the alternative fuel markets, it seems as though FSYS could be an bargain at these levels. It is no mystery that natural gas is gaining some serious exposure as a possible alternative energy source and has continue to gain political momentum. The real question becomes then: If natural gas becomes more widely used, who are the companies that are going to gain from this shift in the energy markets? This will be examined in another more detailed post soon. However, I will say that I do feel that nobody stands to gain more than the companies involved in natural gas engine transformations. My basic reasoning for this being, that as natural gas prices continue to remain low while crude prices rise this only produces more desire to use natural gas for our vehicles. Unlike fertilizer or chemical companies (to name a few who benefit of lower natural gas prices), vehicles are owned by a large percentage of the population. A large percentage that would like to pay less for their fuel, which means that these issues will be felt by a larger percentage of the population rather than just a business or and industry. Thus, natural gas as a fuel I feel will benefit most from these trends because it will get more awareness from more people. In summary, we are not talking about a percentage drop in costs to produce, but an entire market being created.

The real sell off began after Italy, FSYS’s main market, decided not to extend incentives for natural gas vehicles in 2010. This in turn caused management to guide down for 2010 based on lower sales forecast for Italy. In 2009, Italy accounted for almost half of their revenues. The company did note that they began to see a steady trend of increasing volumes during the later half of 2009 (after the expiration of the Italian subsidies), and that they expect to continue this momentum into the first half of 2010. While Italy remains a very big concern, FSYS sees their company continuing to grow significantly due to a broader range of product offerings, a growing awareness for alternative energy conversions, and a growing interest from governments around the world. While Italy is a huge part of FSYS’s business, I feel that this will continue to decline as a percentage of total revenues due to increased demand from other nations. Currently, FSYS have a 50% short interest on their float. The bulk of that short interest I think lies on each person’s speculation over this next years sales. The company maintains that they believe growth in the back half of 2010 will continue to be as strong as the growth seen in the later half of 2009. Many analyst do not believe that 2009 levels will be attainable due to the loss of their Italian subsidy. When reading over the most recent conference call transcript, I was actually surprised at the extent to which management addressed the Italian issues. While obviously they are not going to scream bloody murder, they were extremely confident in their growth strategies and believe that more and more, their businesses as well as the industry should experience more growth without such a focus placed on subsidies. There several ways that this can happen. First, is through a higher consumer and business demand for these cleaner and more efficient vehicles.  Secondly, OEM’s are beginning to gear towards more natural gas vehicles to replace diesel as well as crude. The reason that OEM’s are now focusing away from diesel is because the engines (and therefore the cars/trucks) are extremely expensive to produce. From a business standpoint, this is a no brainer. Not only is natural gas engines cheaper to produce, the are much cleaner and fuel costs are much cheaper for the drivers. So I think it is very possible to see an increase demand from these OEM’s which could really help gains some momentum for natural gas vehicles on a much larger scale. Another major concern was that management guided margins down pretty significantly, from 32% in 2009 to 28-30% in 2010. When asked about these changes, management stated that these changes came from a more favorable product mix in 2009.

TOO MUCH TOO SOON

This is a growth stock in a growing sector. Never has the future look so bright for these companies as it does now. With natural gas supply continuing to seem never ending, prices should be kept down for sometime. Even if natural gas prices rise, it would still take a gigantic move in natural gas prices to really discourage natural gas as an alternative fuel. More and more subsidies around the world (with the exception of Italy of course) are coming into play. Not only here is the US with the natural gas Act, but in other emerging economies as well, which could be a huge growth factor for these companies. As an example of this, in Venezuela, where FSYS is currently increasing its exposure, the government just mandated that 40% of all vehicles convert to natural gas. FSYS is also operating in other key markets such as Brazil, China, and India. The company has several partnerships with OEMs around the world including Tata, GMC, Ford, Chevy, GM, Suzuki, and Mitsubishi. Bottom line, this is a growing company who is a leader in their industry (they are perhaps one of the only ones that operate in that industry that are currently profitable.)

The question now becomes, as asked above, is this 40+% sell off too little or too much? Personally, I believe that this stock has been oversold. The stock sold off roughly 50% from its highs. While growth will be stalled in 2010 due to the high figures put up in 2009, the company still guides revenue growth of over 10+% from 2011 out. Just for the record, 2010 sales guidance put the company at $400 t0 $450 million which is only a 10% drop from 2009’s record numbers. I will also note that the upper end of the guidance has no stimulus driven factors that move the dial. The company is pretty cheap from a multiple standpoint. As of today’s prices, the FSYS trades at just 17 times the lowest estimates for 2010 earnings and 14.8 times average estimates. This is pretty cheap for company that though they may struggle in 2010 to mimic sales in 2009 due to the lost subsidies, they are still estimated to grow revenues by 10%+ for many years out into the future from their 2010 estimates. I believe that FSYS might again test the $30 level. This would, in my opinion provide a great entry point for a longer term position in the stock. To test this, I looked at a simple earnings sensitivity analysis. Using actual EPS for 2011 of $1.82, which is 20% below expectations, and a multiple of 17 (an arguably low multiple for this company) would produce a share price of $30.95. I think this could be a good estimate for the for a solid entry point. The stock also comes with a decent 1.25 price to sales ratio and very little debt on its balance sheet, which is a significant plus for a high growth small cap company like FSYS. FSYS will experience some severe headwinds due to its massive short interest, however I feel that more subsidies will be introduced globally as FSYS expands its businesses into new markets, and that the industry could experience some significant growth through more organic (non subsidized) demand for these products.

NATURAL GAS ACT:

I must honestly admit, that I do not think that FSYS is the best way to play a potential passing of the natural gas act. This is solely because their primary markets are overseas and their business focuses much more on standard personal vehicles instead of larger fleet vehicles. Lets remember that FSYS’s key technology is in duel-fuel system, which allows cars the ability to switch between regualr oil and natural gas with a flip of a switch. I do not believe this technology has been adapted to larger fleet vehicles, or at least focused on these larger vehicles (I am waiting for confirmation from the company on this issue). There are a few reasons why I think the larger fleet vehicles will be more important in this bill. Firstly, it is because electric and hydrogen energy solutions can not be used to power these larger fleet vehicles that travel much longer distances while they are gaining more acceptance with regards to personal vehicles. Secondly, it is my current view (which I am in the process of confirming), that the bill will target subsidies for these larger fleet vehicles. Lastly, it is my opinion that there is much more incentive for companies, cities, governments to use natural gas because transportation makes up such a big part of their costs. Therefore I think natural gas as an alternative could begin to gain momentum in those markets before being adopted by individuals. I would like to address at this point, this does not mean that I don’t think FSYS would gain from the passing of the act. Just recently, I think the company realized the potential here in the US, and launched a US automotive alternative fuel division in February of this year. This program will focus on serving the US automotive fleets, an area where management feels they could be the market leaders. I think this is possible largely because there is no real strangle hold over the industry yet in the US (WPRT probably the leaders now), and FSYS has several relationships with OEMs within the states. They noted that they already have natural gas systems available for multiple Chevy, GMC, and Ford vehicle platforms. Surprisingly, when asked about the natural gas act in latest conference call this is what their CEO had to say:

“stimulus in the U.S., we know what’s in the pipeline. I don’t think that’s going to move the dial in 2010 for the business.”

This again confirms managements belief that growth for this industry in the future will be driven by a more organic demand coming from a need to use alternative energy beyond just receiving incentives for its technology. I personally like how the company is focusing on growing its business without the assumptions of continued subsidies, despite this being a big factor of its business in the early days of this technology.

While there are definitely some legitimate risks involved here, I am sticking my head out there with recommending a position here as a long term play on a growing industry. As always, picking the entry point is tricky here. Especially when we have a market that has been up for two weeks constantly and several potential negative catalyst out there. I will look for FSYS to get below that $30 level (another 4%-7% drop from here) and gradually pick up some shares. I would also note that I do believe that WPRT is a better way to play the natural gas act passing, however their stock is up huge vs. FSYS’s 50% drop. I am still trying to assess the upside potential for a company like WPRT. If the natural gas act were to pass, I could easily see WPRT as a $2+ billion dollar market cap which would put the stock price at above $62 assuming no more shares were issued. While this is seems a little far fetched, a $30 price target is definitely not out of the question for WPRT. This will be an interesting industry to follow as it gains more momentum.

PBN.cn This company has great potential. Is it worth considering a position?

Recently we got turned onto Petrobakken Energy, as a potential play on the highly sought after Bakken oil fields. The main risk here is whether or not this company acquired too many companies too quickly. They have made several acquisitions in the past year (making  three already in 2010). Not only does this make the company extremely complicated to value because of all these transactions, but has also substantially raised the debt level. To combat this rising debt level, the company is planing on selling some of its assets including some of its natural gas properties and other under performing assets. This coupled with its strong operating cash flows should provide enough support to alleviate some of the debt concerns. For the purpose of this company, I decided it would be best to look at the positives and negatives for this company so we could better gauge the risk and reward trade off from investing in it.

NOTE: I tried to make these comparisons company specific, instead of focusing on the major macro trends that could affect each side. Mainly, ignoring commodity pricing and other overall market risks that would affect this company’s operations.

POSITIVES:

• Have exposure to both the Bakken oil fields and the Cardium oil fields: These are probably two of the hottest oil regions in North America. One analyst writes that:

Bakken Shale oil production alone may reach 500,000 barrels per day in 2011, up 50% from two years ago.   And now, beneath the Bakken a new, apparently just as prolific, oil formation, called the Three Forks, is being explored.  The Three Forks is rumored to contain just as much oil as the Bakken.

Also, newly exploited to the northwest, in Canada, the Cardium formation is showing an abundance of oil.  SA author Keith Schaefer has written extensively on the Cardium.

THIS ARTICLE provides some additional information for the potential of these regions.

• Large Land base: PBN has been able to grow its land base to over 1 million acres with over 1,300 wells. While most of these acres are in the Bakken and Cardium regions, they also own acreage in northeastern BC which focus on natural gas production. These regions have not been fully invested in yet because of the current price of natural gas. Why spend money drilling here where you get $5 when you can expand your light crude drilling programs that yield over $75 a barrel?
• Unique technologies: The company has gained its advantage over its competitors by focusing on horizontal drilling that it perfected in the Bakken regions. They are experts is using fracing techniques that help increase the amount of oil derived from their wells and help them to extract hard to reach light oil that is protected by two layers of shale.
• Solid growth in boe production: Over the past year due to both strategic acquisitions and internal expansions, PBN.cn has grown their production from 34,000 boe/d to over 47,000 boe/d (27,000 of which are from the Bakken regions).
• Reserves: Through several acquisitions and internal expansions, the company has been able to substantially increase their reserves. Over the past year they have grown proven and probable reserves by over 141% to 143.6 million boe.
• Pretty decent dividend yield of 3.3%, especially for a growth company like PBN.
• High Netback vs. its Canadian Peers: In PBN’s latest quarter, they reported a netback of $46.68 boepd up from $40.25 in the previous quarter. The average of its peers was around $25 in Q3 according to a company presentation. This growth was mostly a result of higher commodity prices which I think have the strong potential to be even higher moving out into the future, and thus these margins could continue to expand. Their advantage over their competitors comes from not only the quality of their oil but also the technological approaches in extracting their oil (as described above).
• Strong Asset Growth: Since its formation, PBN has aggressively (to say the least) grown its asset base. From 2008 to 2009, the company grew its assets by over 239%.
• Core asset is the highly profitable light/sweet crude oil: Petrobakken is 95% light oil weighted with a majority of that production coming from their Bakken regions. According to a presentation provided by the company, PBN’s peer group average is around 40% light crude oil. This gives them a significant advantage over their competitors and helps them generate much better cash flows for the company.

NEGATIVES:

• Not Transparent: At this moment, it is very hard to try and gain a clear understanding of how to value PBN. Not only are they a newly formed company themselves, but they have also made so many acquisitions that is hard to get a solid idea of this company until these begin to subdue.
• Highly leveraged: With almost $1 billion in net debt, it is clear to see that there could be some concerns here. While the sale of some of their under performing assets and strong cash flow help mitigate some of this, it is still a very large number at almost 25% of its market cap. This becomes increasingly worrisome if the assets that PBN paid for in their most recent acquisitions fail to prove as valuable as the company anticipated; This is undoubtedly a huge risk when buying oil reserves that are not completely known or accurate.
• Greatest Assets could be their biggest burden: Although there has been tremendous growth in the Bakken and Cardium regions, I still think their lies and underlying risk for these regions based on the hype surrounding them. The premiums paid for wells in these regions have been growing substantially as more and more companies become aware of its potential. In my opinion, I think their is a large risk here for these assets to continue to produce top quality oil and lots of it. If one of these wells or companies fails to meet expectations in one of these regions (especially the Cardium region which has been extremely bid up as of late), there could be some serious backlashes against the junior miners in these regions and more importantly against PBN because it has paid top dollar for several of these companies. This is what one analyst has to say about this:

“And even I have to admit the today’s valuations are assuming that all Cardium acreage is 100% prospective and every single well will be a gusher…there will be some pain at some point…heaven help the first junior that has to report it misses a Cardium oil well.” -Kieth Schaefer

• Overpaid for some of its assets? The company has been dishing out some serious cash for these new Cardium plays at record high premiums. Many investors believe that the company has overpaid for these assets, however I feel it is  too soon to tell in my opinion.  THIS ARTICLE does a very good job of breaking down their Result Energy purchase, arguing that PBN may not have paid as much as everybody thinks after breaking down the land, production, and cash that PBN acquired in the deal (I would definitely give this article a read). In my opinion it does seem a little expensive when compared to historical deals, however it all depends on the future prices for oil and gas and whether or not these wells will produce what the company thinks (hopes) they will.

Overall, I think that PBN would be a great place to invest considering their high quality assets and growth potential. In my opinion the future for oil and gas is bright based on a what I feel will be a growing demand for energy. The company is currently trading at roughly 19 times forward earnings which  is not terribly high considering the growth potential for the company (I would also note that it is hard to tell how accurate these forward earnings estimates are considering they keep making more and more acquisitions). My biggest concern is the recent run up in oil and gas producing stocks, which might provide a better entry point if they were to pullback a bit here. While PBN has not participated in this as much because of concerns surrounding their most recent acquisitions (whether or not they paid too much), one can’t help but to speculate that oil prices could pullback for a bit. Also, the company just completed another acquisition today of Rondo Petroleum, indicating that they are showing no signs of let down in growth strategies. Should people continue to think the company is paying too much for these and future acquisitions PBN could experience some significant downside pressure. Having said that, I believe the long term prospects for this company are good and in the end, through share price appreciation and dividend payments it will be a profitable investment.

Maybe the way to play this is through a smaller company that we think will be acquired by Petrobakken. PBN has shown no signs of slowing their acquisition spree and many feel they will continue to be aggressive in acquiring companies that have solid assets in the Bakken and Cardium regions. A possible play could be something like Crescent Point energy or some other smaller player within the region. One analyst covers these prospects in his monthly oil & gas investing newsletter (which he actually does seem like he knows what he is doing if you ever wanted to consider it HERE is the website.)

QUIK – This company has a lot of potential but hard to value due to its size

QUIK is company that looks very interesting. They primerely develop CSSP chips that are used in mobile devices such as netbooks, cellphones, GPS systems, PCD/MID, and data cards. As you probably are aware, QUIK focuses on three main things: costs, power, and vision. They aim to be the lowest cost producers of CSSP chips that allow for greater connectivity and visual effects while lowering the amount of power used for mobile devices. From their 10-K:

“CSSPs, which we pioneered and introduced in the first quarter of 2007, are developed for specific power sensitive applications that have differentiated features in terms of IP, intelligent data processing or connectivity requirements. Target customers value CSSPs for the ability to provide a range of products from a single platform and the flexibility to address specific product requirements or changes. Market leading original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs, seek to develop product platforms from which several products, or SKUs, can be introduced.”

One of the main reasons I like this company is that the future potential for them is almost limitless in a sense. For example, suppose that data cards become the new standard of electronic data storage for individual records in the US as is the norm in Europe. In Europe, individuals use these data cards for Bus cards, medical information, credit cards, security codes, and more. In my opinion, CSSP or programmable chips will be need for this especially as this information needs to be constantly updated to ever changing environments. This is just one example of many possible needs in the future for this sort of technology, and that is what is so attractive about this company. Another reason I like QUIK is because I feel like they are focusing their product on the the “right” aspects of the future growth in the mobile device markets. More specifically, QUIK’s chips are focused on streamlining media applications such as visual lighting, quality while improving things such as connectivity, downloading speeds, battery life, and more. These are all very important things that are valued by mobile device users. In fact, I think these sorts of things are only going to be in higher demand as consumers are going to continue to want to be able to do more and more media and social activities on these mobile devices.

Due to its extremely small size, unfortunately it is hard to try to model or value this company into the future. Another reason this company is so hard to value is that they do not provide pricing figures and or any sort of customer information to protect their customers. As such, any attempt at such would be entirely speculation. Thus, it is hard for to apply any concrete numerical analysis and or price target. However, I think the fundamental picture for QUIK is there. Their new products seem to be gaining some good traction in the market place, be incorporated in several new products such as AT&T’s new phone. People familiar with the stock seem to place a greater focus on the break even point for these new products vs. actual modeling profitability. Some seem to think this could be done as early as Q4 2010.  For the past several quarters, management has been issuing shares to try and boost its financial stability. I feel this is to intice more investors into the company who would previously not consider the company based on its size and financial structure. In my opinion this is a step in the right direction. QUIK has also seemed to established some very solid partnerships with some industry leading companies such as: AT&T, Qualcomm, and Intel. Even more attractive, is the earnings potential for this company. The more chips this company makes the lower these chips begin to cost (obviously), but starting at such low levels allows for some significant potential growth in their earnings power.

After looking through their most recent presentation, I was a little concerned about the new product growth. While it is definitely experiencing some solid growth, it still represents less than half of the company’s revenues, while their legacy products (which are dramatically decreasing as expected) make up the rest. While I admit I am not an expert in the industry, it seems to me that the growth there could be better considering these new products have been in the marketplace for several years now.  This also places a greater risk to the company as those old legacy revenues continue to decline. Also, obviously due to its size ($4 million in revenues last quarter), it is hard to get behind this company fully.

Though I am very interested in this company and feel that it would be an appropriate investment considering the potential upside vs. the downside risk, I can’t help but think that at this point we would be chasing it a bit. However, this is purely due to my view of the overall markets and is as much speculation as anything. Having said that, this could be one that we treat as an option-like investment and even leave room for a possible double down if necessary. That way, we can gain from any large short term moves while still allowing us the opportunity to average down.

VA TECH WABAG (WABAG)- Try to Remember This one

I was reading a little bit about this company. It is a water treatment company (a sector I have liked for some time now) that is focused primarily in India. It is one of the largest water treatment companies in the world and it is really hard for US investors to gain exposure to this in India. I read in article that was written in September 2009, that this company was thinking about going public with an IPO in early 2010.  I want to try and keep an eye for this as I would definitely be interested in picking up some shares.