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.

SCP.cn (SCPZF) Update on Sprott Resources “Fair” Value Estimates

In my opinion, the market continues to discount Sprott Resources. While I can see some speculation/pressure being put on the shares because of its size and exposure to volatile commodities, at its current price the market is undervaluing its “fair value” in business interests and liquid assets, not even taking into account the future potential (which I feel is high) for earnings/investments and more shareholder value. This is my latest estimation of what SCP.cn should be trading at given its current investment portfolio, not taking into account any future earnings, investments, or sales of investments.

For the purpose of this valuation, I decided to focus on each seperate investment that Sprott has and try to assign an appropriate value for these investments. I will honestly admit that I believe these estimates to be very conservative as I will explain below. The investments consist of following: Waseca Energy; ownership is 100%, Orion Energy; Owns 229.33 million shares, Stonegate Agricom; owns 63.66 million shares, One Earth Farms; owns 80%, cash, gold and silver bullion, and portfolio investments. The company also owns One Earth Oil and Gas of which I could not find very much information on. The venture seems to be new and sort of a spin off from One Earth Farms. For the purpose of this update, I did not assign a value to this.

1. WASECA ENERGY (100% Ownership). Waseca is expected to have production by 2010 year end of 1,500 bbpd. To a value for this, I estimated $50,000 per flowing barrel, which is very conservative in my opinion. According to Keith Schaefer the average amongst junior Canadian producers is around $71,000 per flowing barrel. This gives the production a value of $75 million. I did not assign any value to reserves, expansion plans, facilities, etc, in an effort to preserve my cautious estimates and to reduce speculation involved in this simple analysis.
2. ORION ENERGY (80% Ownership). Sprott owns 229,334,351 shares of Orion. It is currently trading at $1.22 as of 4/28/10. This values Sprott’s investment at CAD284.37 million. Using an exchange rate of CAD1.0126 values the investment at $280.84 million in terms of US dollars.
3. STONEGATE AGRICOM (80% Ownership). Sprott owns 63,662,000 shares of Stonegate, which is currently trading at $.98 (this is its first day being public so not a whole lot of faith can be put into this number) as of 4/28/10. This puts the market value of this investment at CAD61.12 million, using the same exchange rate gives us a US dollar value of $60.34 million.
4. One Earth Farms (80% Ownership). One Earth was by far the toughest one to value because it is a newer venture , thus I decided to make my estimates as conservative as I could. In my view I would much rather error on the side of caution. It seemed rather impossible to try an estimate a value for this one because of so many uncertainties revolving around the business (ie crop pricing, weather, expansion plans), and due to the fact that it is currently working on rapidly expanding this business. Thus, I decided to use the CAD27.5 million that Sprott just pumped into the venture (or $27.16 million), plus $453K of inventory. At 2009 year end, the company sold 800 tons of its 2.9 thousand tons in inventory for $173K. Using this same information, I estimated that the rest of the inventory could be valued at $453K. This puts the value of One Earth at $28 million, a very conservative figure given the future potential of this investment.
5. CASH: According to their latest financial statements, Sprott has roughly $107,085,000 in cash.
6. Gold and Silver Bullion: At 2009 year end the company held 73,971 ounces of gold bullion and sold its silver bullion. The gold bullion using a current gold spot price of $1171/oz values this position at $86,685,135.48
7. Investment Portfolio: Valued at $33.8 million at 2009 year end. For the purpose of this analysis, I included my per share estimates both with and without this.

PER SHARE ESTIMATION:

Adding up the values gives you $637.97 million and $671.77 million including the portfolio investment. Dividing by the shares outstanding gives us a per share price of $6.63 and $6.98 with portfolio added in. This is a 60% undervaluation given its current price. Keep in mind this is a 60% undervaluation of its fair value, using very conservative estimations while excluding One Earth Oil and Gas, and not its potential future value which could be far greater than this. Bottom line, I still think the market is mis-pricing Sprott and that the shares are still a buy here.

Source: Company financial statements and most recent presentation.

I look to double this position at $4 dollars if it can get there. It is currently trading at $4.30….which is right were I bought it….I would love to average that cost down a bit if given the chance.

CEN.cn Is this one worth considering? Possible play on emerging oil demand

Coastal Energy is another interesting oil play. The company mainly operates in Thailand, where they have several wells off the NW coast of the Gulf of Thailand. The company is currently producing roughly 11,500 boepd, however that is not what draws me to this company. The reason I like this company is because they are a pure production growth play, and while they do have some gas assets, they are primarily oil. This company could actually be a 50,000 boepd company in three years assuming their prospective wells are as successful as their first. Another reason I am drawn to this company is because it is operating in Thailand, a country that could have a significant amount of exploration and production in the future, despite its current state of political turmoil. Most large globals are already exploring there, including: Exxon, Shell, and Chevron. Because of Thailand’s location and their growing economy, I think oil will become a bigger part of their success story. The problem however, lies with their falling production rates. In fact, some have estimated that Thailand’s oil production will be close to zero within a few years, according the EIA. Coastal has experienced some loss in production however, this has come from water inflows into one of its wells, not from drier drilling results. This has led state owned PTT to invest heavily into natural gas production. This is a concern for me, as the success for this company relies solely on their ability to grow production rapidly. If these wells are not going to produce as expected (and lets me remind you, expectations are pretty high), this could dramatically affect the share price. Due to the speculation surrounding the future production of this company, it is currently receiving some pretty low valuations from the market place. Here is a summary of a few of those:

Low Valuations:

• Forward P/E 4 X –Since this is a forward multiple, it is obviously heavily dependent on whether or not their wells are as successful as they hope they will be, since these forward earnings are expecting huge growth in their production, so perhaps this metric has little meaning as the market is waiting to see if the company can actually execute.
• For what its worth, it Trades at a significant discount to the NAV of their 2P reserves: According to several analyst and the company, the NAV of their 2P reserves is somewhere in the neighborhood of C$5.60.
• From a EV/flowing barrel metric, the company is extremely cheap relative to its competitors. Currently the company is being valued at roughly $41,285 per flowing barrel, while Schaefer estimates the peer average to be $71,000.

In my opinion, there is only one thing that matters when considering a position in this stock, and it has to do with the company’s ability to expand production and meet production expectations, which is obviously leading to these lower relative valuations. Judging from the action lately, it seems as though the market is losing its confidence in the company’s ability to do this, following the closing of one of their wells and missing expectations in their Songkhla field. This dynamic makes the stock increasingly risky, as the expectations are pretty high. However, I do think that if they are able to execute on their next drilling project which seems to be their Ban Ban field, this stock could be a double from here easily. The Ban Ban project has 5 prospective wells, with the potential to add several thousand boepd, which would be a huge boost to production. The wells are expected to come on stream in June 2010. This will perhaps be the next big catalyst for the stock. In my opinion, despite what happens, the results of their Ban Ban drilling, could potentially be a catalyst regardless the results. If they are good the stock will pop, however if they are bad it might provide us with a great entry point for stock (the market is currently partly pricing this thing for disaster). In addition to the recent difficulties that the company has had in its drilling business, I am also concerned with the management of this company. While historically they have been able to grow production successfully, they have had some technical difficulties with water inflows and have been forced to shut down some of their wells. Also, while it is debatable, I still don’t like to see a company that seems to pay out its management at the expense of the shareholders. What I am referring to is their $19.5 million general and administrative expense, which was roughly 25% of revenues. $5.83 million was in warrants granted to the executives.This just seems a little excessive to me, especially considering the recent problems the company has had.

While this company definitely has an inherent amount risk involved with it, the stock has been beaten down over the year, down over 25%. In fact, in my opinion the market is already pricing in a significant amount of future production problems. This is obvious given the 4X earnings multiple (keep in mind this is a forward multiple), for a junior mining company that has shown they are able to grow both their production and reserves at very high rates. This makes me more inclined to consider a position here, as I think the stock is currently priced (at least partly) for much lower production growth from its key assets. While this could be a good entry point, I think the play here is to remain on the sidelines and wait for this one to play out more, especially given the current economic environment and their most recent drilling problems. Perhaps after their next press release we can re-evaluate the future of this company based on how they are able to execute the Ban Ban drilling projects and better evaluate the managements technical ability. I will remain on the sideline with this one for now, given just too much uncertainty regarding this company.

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.

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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

CLR LEG.cn Two Attractive Bakken Plays…In Progress

This is a post that I was working on last week. It is not finished yet but I wanted to post it anyways so that I have it for a reference to re-visit. Here are two plays that I really like on the Bakken oil regions. My favorite has to be LEG.cn since following it, it has been up every day, even while oil and oil related stocks have fallen a bit. This is something I definitely would like to consider a position in. Here is the post that has some information on it.

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Recently, I have spent some time trying to find some attractive oil plays that have exposure to the fast growing Bakken oil regions. While I must confess that though I feel a bit like I am late to the party on this, I still feel there are some tremendous opportunities here for several reasons. Firstly, while the growth has been high for the Bakken region, it is still only a few years old (one analyst claims about 3 years though I have yet to verify that). Secondly, (and more importantly) new technologies are emerging that are allowing companies to extract previously unattainable reserves within these regions. As a bonus, these new technologies are actually in some cases decreasing production costs at the same time (one horizontal drill can now be used to replace 4 vertical wells). Here are a few more attractive aspects from Keith Schaefer, who has a great deal of knowledge with regards to the Bakken regions. He has a monthly newsletter (which I am actually thinking about getting for myself) which you can subscribe to HERE

* The Bakken oil play, located in the Dakotas and Saskatchewan, is a great example of how technology is constantly improving economics. Three years ago, expected recoveries were 10%. But as companies are learning how to better frac these wells (sending fluids down at very high pressure to break up the rock that holds the oil), recovery factors (RF) have gone up (so far) to 22.5%.

* Independent consultants gave each Bakken well a proven reserve of 50,000 barrels in 2007. Now that’s up to 100,000 barrels, and likely to go higher. The play is only three years old.

* Initial Production (IP) rates have increased, as fracing techniques have evolved. The number of fracs a company does in a formation from one drill pad has increased, in several stages, from five to 40.

* These are several reasons why, according to both Haywood Securities in Canada and UBS Securities in the US, these Bakken wells have 300% IRR with all costs factored in.

After learning more about the opportunities here, I feel that there will continue to be some profitable investing opportunities here. The key question for me is what is the best way to gain from this growth. Is it by investing in the bigger more established companies that have some high quality assets and are growing production growth rapidly? Or should we be looking at some potential takeover targets to gain from the extremely high level of acquisitions going on within these regions? When looking at these larger players, nobody is more solely focused in these regions than PBN.cn and CLR. I have previously looked at PBN.cn (see POST HERE), and feel there is definitely some potential there, however I still think their are some issues to sort out concerning their most recent acquisitions. I would much rather wait a bit for the smoke to clear on that one rather than jump into a position blindly.  Other potential companies that look interesting to me are: CLR, AEZ*, BEXP*, EOG, HES, and WLL.  Looking at junior plays within the regions here are a few names that I found that could be some potential take over targets: RYD.cn, ATK.cn, REL.cn, LEG.cn* , SEO.cn. In attempt to (somewhat ambigiously) answer my above questions, I decided to look at each question specifically and provide what I thought were the best picks for each. After spending some time I favor CLR has huge quality assets in the Bakken regions (and other places as well), and lots of production and reserves growth in the past few years. After looking at some of the junior plays within the region, I feel that LEG.cn would most likely be an attractive takeover target. I will outline my reasons for these picks below.

* Indicates that I would not mind doing further research on those companies.

LEG.cn : Legacy Oil + Gas

After doing some research, LEG.cn seems like the best acquisition prospect. Even if they were to not get a bid from somebody, I still think that LEG.cn trades upwards from here. The reasons I like LEG.cn so much as a potential buyout target is because of their focus in light oil reserves. The company had an average of 5,750 boepd in 2009, with reserves of over 17mmboe. Of that 5,750, 93% was light oil. PBN.cn as well as some of the other larger companies have been focusing on acquiring junior producers that have a focus on light oil. With a market cap of just under $1 billion at $950 million, the company is not too big. They are currently trading at a P/B of only 1.96, which is extremely cheap for a junior exploration company (I calculated an industry average of well over 2.5). The company is also growing. They forecast for 2010 to have production totaling 6,525 boepd (97% oil), over 10% growth in one year. They are able to do all of this while operating with a $50 per boe operating netback, which is very attractive. LEG.cn also have 283,135 acres of undeveloped land in the Bakken regions. This is perhaps one of the most appealing factors for buyers, as represents a great opportunity to gain exposure to these regions. Given the current deals that have happened within the industry, premiums for juniors that have assets in the Cardium and Bakken regions are rising. Just recently, PBN.cn’s purchase of Barens valued its production at $90,000 per flowing barrel, which represents some significant upside potential for these junior companies. In summary, I think that LEG.cn has some high quality assets is some very attractive territories. Their focus on light oil makes them a premium target, not to mention their 283K of undeveloped land in the Bakken regions. This is a company that already has some profitable wells, and is growing significantly. I can’t imagine this company continuing to fly under the radar for much longer. If not through a buyout, the shares should rise on increase production growth and solid operating profits as more wells come online. For what its worth, all 9 of the analyst that cover the stock recommend a buy according to Bloomberg.

CLR: Continental Resources

Continental Resources represents one of the best ways to play the Bakken regions. The company is growing significantly. Over the past year, they grew proven reserves by over 62% to 257 million boe, with 2/3 of their proved reserves being crude oil. Of their 488,500 net acres, 81% is still undeveloped in the Bakken regions. Most of their production and reserve growth has come through internal discoveries and expansions, which tells me that the company is sitting on some quality land reserves, and this number could grow drastically as the company continues to explore on those properties. In addition to growing their reserves, CLR has dramatically grown in production, especially within the Bakken regions. The company grew absolute production by 13% from 2008 to 113.6 million boe in 2009. The company also raised their guidance from 10% production growth to 13% production growth for 2010. Most of this was done within their Bakken oilfields where the company doubled its production. According to their CFO, the company’s long term plan is to double their production reserves every five years.  In 2009 the company replaced 8.1 times their production.

THESE GUYS ARE SMART!

They now have 15 (11 in bakken regions) rigs company-wide plan on making it 24 by mid year.

EXPANSION:

Anadarko Woodford Shale – Currently own 200,000 acres in Anadarko woodford properties

Increased Capex…31% increase in their 2010 capex budget to 850 million to expand drilling, $479 of that to be used in North Dakota Bakken regions, $34 in Montana Bakken drilling, $39 million in Anadarko woodford shale,

ECO-PAD

————THIS POST IS NOT FINALIZED OR EDITED. WILL COME BACK TO IT SOON—————

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.)