Introducing the CVI - Punch Card Portfolio Newsletter

I write a weekly investment newsletter. This newsletter involves the development of a focused portfolio of undervalued securities. The subscription price is $10 per month (cancel any time). Every investment idea I recommend will be one I purchase for my own portfolio. If you have questions prior to subscribing shoot me an e-mail (

Please note I'm running a low-tech operation and that the newsletter is sent by me via e-mail. There will be a delay between when you pay and when you receive your first e-mail (usually a couple of hours).

Subscribe to CVI - Punch Card Portfolio Newsletter

Tuesday, November 30, 2010

Attractiveness of some oil sands players

The oil sands transaction between STO and PTT highlights increasing foreign

interest in Canadian oil sands assets -- a trend we expect to continue. STOPTT
was one of the larger deals seen in recent history and, at $1.23/Bbl-
$1.73/Bbl, seems to be done at record-high transaction parameters.

As oil sands transaction activity continues, we expect the equity-asset

discount to narrow. Given the improving backdrop, we believe investors
should continue to gain exposure to the oil sands. We highlight SU, MEG
and OPC (in order of risk) as attractive ways to gain exposure.

Key Takeaways

• We believe foreign oil companies are once again stepping up the hunt for

Canadian oil sands assets. Last week’s oil sands transaction between Statoil

(STO–NYSE) and PTT highlights this trend. At $2.3 billion, the STO-PTT deal

was one of the larger oil sands transactions in recent history.

• We value the STO-PTT transaction at $1.23/Bbl–$1.74/Bbl, with the large

variance reflecting the differences in resource estimates (STO estimates

2.5 billion Bbls–3.7 billion Bbls and PTT estimates 4.3 billion Bbls). Either

way, we believe this is one of the richest transactions in recent history and

continues the general trend of improving transaction parameters.

• The majority of large oil sands transactions have involved foreign oil

companies that, no doubt, have low cost of capital. We believe there are

still many more of these entities looking to enter or expand positions in the

oil sands.

• We continue to believe there is a significant disconnect between equity

valuations for oil sands and what assets can fetch in the transaction

market. We believe this large disconnect will gradually close as we see

further M&A activity in the oil sands space.

• In the big-cap space, the largest disconnect between equity valuations and

implied asset valuations are Nexen (NXY–SO) and Suncor Energy (SU–SO),

where recent metrics would imply their “transaction worth” would be more

than 80% above current share prices. While Suncor is clearly not a takeout

target, we do believe that if it took action such as monetizing Syncrude (a

reasonably likely scenario), it would help close the gap. We do believe

Nexen is an attractive takeover target provided it can reasonably de-risk

Long Lake 1.

• Virtually all the small-/mid-cap oil sands players are radically undervalued

by recent transaction parameters. OPTI Canada (OPC–SO-Spec.) clearly

offers the highest leverage (but highest risk) to increasing parameters as

the share price reflects deep market concerns on execution/liquidity. While

these concerns are very real, we believe the risk/reward is attractive. Even

if a buyer were willing to pay one-third of recent transaction parameters for

OPTI’s undeveloped resources, the stock could be worth 3x its current level.

• We highlight MEG Energy (MEG–SP) as a very high-quality way to gain oil

sands exposure. Unlike many of the small-/mid-cap oil sands players, MEG

has substantial current production (~25,000 Bbls/d) and has proven that it

has exceptionally high-quality assets – and lots of them. MEG is well

financed and positioned to deliver a 20+% production CAGR through 2015.

Oil Sands Re-emerging As

Sought-after Asset

Statoil-PTT Deal Once Again Highlights Diverse Interest In

The Oil Sands

On the surface, it is surprising to see Norwegians (Statoil) selling oil sands

assets in Alberta to a Thai oil company (PTT). However, looking deeper, it

becomes apparent that this is just another example of the continued high levels

of global interest in the Canadian oil sands. Although the market largely

shrugged off the news, we consider it to be another bullish data point supporting

the value of the oil sands and the attraction of those with large oil sands

resources. We believe there are still many interested parties – many with very

low cost of capital – still considering entering or expanding positions in the oil


PTT Acquisition Values Oil Sands At $1.23/Bbl–$1.37/Bbl

The most recent transaction in the oil sands was the US$2.28 billion sale of a

40% interest in Statoil’s oil sands assets. Valuing the transaction is somewhat

complex given that there appears to be conflicting resource estimates (Statoil

quotes 2.5 billion Bbls–3.7 billion Bbls vs. PTT which discloses 4.3 billion Bbls).

Simply taking the deal value divided by the resources implies a value between

$1.35/Bbl and $1.88/Bbl. However, as the company is very near production on

the first 10,000 Bbls/d phase, it makes some sense to deduct the value of that

first phase in determining the valuation of the undeveloped resources (i.e., the

valuation that we would apply to other undeveloped oil sands leases). If we

assume a value for Phase 1 of approximately $650 million ($260 million for

PTT’s share), the adjusted transaction metrics for the remaining undeveloped

resources are approximately $1.23/Bbl–$1.73/Bbl – still amongst the highest we

have seen to date in the oil sands space.

Oil Sands Transaction Parameters Now At Record Levels

In the first half of 2009, when oil prices were low and oil sands were out of

favor, acquisition parameters hit rock-bottom levels, with values attributable to

undeveloped resources essentially reaching zero. As oil prices recovered in the

last half of the year so, too, have acquisition parameters, and we now believe

transaction parameters are into record territory – highlighting the improving

outlook for oil sands.

Exhibit 2 outlines the recent transactions in the oil sands and, as illustrated, we

are clearly seeing an increasing trend on the value being applied to undeveloped

oil sands resources, with the most recent transaction range marking the very

high end of the scale. What is interesting about many of the deals seen recently

is that they’re not only high in terms of the per-barrel valuation, they’re also

quite large in scale. For instance, to date in 2010 there have been three deals

over the $1 billion mark whereas in the previous three years combined there

were only two deals over that level.

Noteworthy is the fact that virtually all the sizeable deals (i.e., deals over

$1 billion) have involved foreign oil companies. The appeal to foreign oil

companies is no doubt the large resource base and that this is one of the few

regions around the globe where these resources are readily accessible. Low cost

of capital for many foreign entities [such as PTT, PetroChina (PTR–NYSE), etc.]

clearly has an influence on what these buyers are able to pay and still add

economic value. We believe there are still many other large foreign oil

companies, with similarly low cost of capital, looking to enter or expand

positions in the oil sands. Given this backdrop, we expect transaction

parameters to remain robust.

Another interesting observation with regard to transaction parameters is there is

no obvious value distinction between operated and non-operated assets.

Typically in oil and gas, operated positions attract a premium given that most

companies prefer control of developments. However, the oil sands is a very

different asset base and very few of the foreign players entering the oil sands

have any relevant experience operating such assets and, therefore, may actually

prefer the non-operated positions (PTT, PetroChina). We believe this bodes well

for the existing players with large resource bases that are looking to transact

[i.e., Athabasca Oil Sands (ATH–TSX) farming out additional leases or OPTI as a

takeout target].

On-stream Oil Sands Also Undervalued

By nature of the fact that there are relatively few on-stream oil sands assets,

there are far fewer transactions for these assets than undeveloped resources.

However, as we witnessed earlier in the year with Conoco’s (COP–NYSE) sale of

its 9% interest in Syncrude to Sinopec (600688–SS), the value for developed

assets is far above what equity investors are currently valuing the assets. For

instance, Conoco sold its 9% interest for $4.65 billion, or $147,000 per Bbl/d, of

current capacity. There are positive read-throughs from this sale to virtually all

producers with installed oil sands capacity. Canadian Oil Sands Trust (COS)

(COS.UN–SP) is the most obvious given its 100% focus on the Syncrude asset.

The sale implies COS is worth $36/unit versus our current price target of

$30/unit [which is based on our net asset value (NAV) estimate].

Why the disconnect between our valuation of Syncrude (and other on-stream

assets) and what buyers are willing to pay? The most likely factor is difference in

cost of capital and/or oil price assumptions. Most buyers of oil sands assets tend

to have a lower cost of capital, which has an enormous impact on what can be

paid for oil sands assets. For instance, lowering our cost of capital from our base

case of 9% to 7% gives us a valuation for Syncrude in line with what Sinopec


While the valuation read-through from the Conoco–Sinopec transaction is most

obviously applied to Canadian Oil Sands Trust (a Syncrude pure play), we

believe there is also a very dramatic read-through to Suncor – particularly when

one incorporates recent transaction parameters for undeveloped resources.

Suncor owns 12% of Syncrude and has 350,000 Bbls/d of its own oil sands

capacity with a cost structure no different than Syncrude. It should be argued

that Suncor’s oil sands, given its 100% ownership, would attract a premium

versus a non-operated interest in Syncrude.

Valuing Suncor’s oil sands at the Sinopec/Syncrude parameter implies a market

value of approximately $58 billion. Suncor has another 20 billion barrels of

contingent bitumen resources (17 billion barrels in SCO terms), which at

$1.23/Bbl (the lower end of our interpreted value of the Statoil–PTT deal)

implies a valuation for those resources in the range of $25 billion (up to

$35 billion at the higher-end parameter). Combined, these valuations put the

market value of Suncor’s oil sands in the $83 billion–$93 billion range. In

addition to the oil sands, Suncor has another 230,000 Boe/d of production and

443,000 Bbls/d of refining capacity, which we value on a discounted cash flow

(DCF) basis at approximately $25 billion. In relation to Suncor’s current EV of

$65 billion, this implies a significant disconnect between Suncor’s current market

valuation and what it would theoretically be worth on the market. While we

believe there is no chance of Suncor being acquired, we use this as an example

to highlight just how inexpensive the company is and how large the disconnect is

between asset and corporate valuations.

More Syncrude On The Block?

So given the significant disconnect between asset and corporate valuations, the

question is “will companies take advantage of this opportunity to close the

valuation gap?” We believe the easiest opportunity for the large-cap producers is

monetizing further Syncrude interest. Within our coverage universe, Imperial Oil

(IMO–SU), Nexen and Suncor are all holders of Syncrude. There is virtually no

chance that Imperial Oil would reduce its Syncrude exposure, which leaves

Nexen and Suncor as the two most likely. Nexen has clearly indicated that it

does not see this as a viable option at the present time. Suncor, on the other

hand, seems open to such a transaction (but has by no means committed to

doing so). Such a transaction would be very well received by investors and could

go a long way to closing part of the value gap, particularly if the estimated

$6.2 billion of proceeds were passed on to shareholders by way of a special

dividend or buyback. Given that Suncor has a very comfortable balance sheet,

we believe that would be the most likely scenario.

Why Are Transaction Parameters Improving?

1) Base Economics Have Improved

The oil sands have received a bad rap on a number of fronts over the past two

years. Environmentalists have mounted an all-out offensive against the oil

sands, resulting in deteriorating public opinion and concerns for some investors.

From an economics standpoint, perception hasn’t been much better. Still very

fresh in investors’ minds is the almost unfathomable $174,000 per Bbl/d cost

estimate in late 2008 that Petro-Canada put forward for the Fort Hills oil sands

project – a level that would have required $100+ oil to get a 10% IRR.

Since the Fort Hills cost estimate and the ensuing global financial downturn, the

pace of development in the oil sands has slowed, construction costs have fallen,

natural gas costs have dropped and, perhaps most importantly, bitumen

differentials have tightened to a level that would make it highly economic to

build bitumen-only projects. Overall, the economic outlook for most oil sands

projects have vastly improved and development plans for the sector appear

much more sustainable than at anytime in the past five years.

Exhibit 3 depicts our IRR assumptions and NPV/Bbl assumption for some of the

planned oil sands projects in our coverage universe. As shown, we view

non-upgraded SAGD projects as having the most robust returns with an average

23% IRR for planned developments using our US$85/Bbl long-term oil price and

a 20% light heavy differential (translating to approximately a 60% realized price

versus light oil benchmarks).

The outlook for non-upgraded mining projects appears quite reasonable but not

quite as good as SAGD returns. We note, however, that there is greater

“resource” risk in SAGD projects, as reservoir complexity is far more problematic

for investors to assess in SAGD than it is in mining.

Based on the current outlook, we regard non-upgraded SAGD and non-upgraded

mining projects as being very, very competitive on a global scale in terms of


2) Oil Sands Have Embedded Optionality

Technology has had a profound impact on transitioning shale gas from a

marginal resource to one of the most sought-after resources on the planet. We

believe the same will happen in the oil sands – it is only a question of when. As

discussed previously, the oil sands today are a massive and globally competitive

resource using current technologies (SAGD and surface mining). However, there

is no doubt that today’s technologies have a lot of residual potential that could

lower capital and operating costs, create more efficient upgrading strategies,

reduce fuel consumption, increase recovery factors, reduce surface footprints

and CO2 emissions, etc. Over the past few years, producers of all sizes have

begun to place a greater emphasis on R&D, aimed at improving one or all of

these different areas. Investing in companies with big, established resources

provides a long-dated option on improving technology – an attractive notion for

long-term investors.

3) A Good Combination Of Size, Return & Lower Political


Exhibit 4 looks at a number of the major global oil and gas developments over

the next 10 years and plots the expected after-tax IRR (y axis) versus political

risk (x axis) versus relative size (size of the bubble). The most sought-after

resource opportunity would involve low political risk, massive resource and a

high rate of return. Not surprisingly, there are few of these opportunities around

the globe.

A key takeaway from this analysis is that, in general, oil sands look very

compelling when combining rate of return, political risk and resource size. The

positioning of oil sands has changed significantly over the past 24 months due to

a combination of: 1) the outlook for natural gas is for lower natural gas prices

(oil sands, particularly SAGD, is very natural gas intensive); 2) tightening

differentials (which makes it viable to build oil sands without costly upgraders);

and, 3) slight declines in construction costs, particularly when risk is taken into

account. Whereas 12–24 months ago oil sands would have been showing rates

of return in the 10%–15% range with an US$85/Bbl oil price, we now see rates

of return in the 15%–25% range at the same price deck.

Highlighting The Oil Sands

Asset-equity Valuation Gap

We continue to believe there is a large disconnect between equity valuations for

oil sands producers and what the assets are worth in the transaction market.

Exhibit 5 highlights the large disconnect between equity valuations and current

transaction parameters. In this analysis, we look at what the implied share price

is for various oil sands players at varying EV/Bbl assumptions for undeveloped

resources. For those companies with producing assets (oil sands and other) our

starting point is the company’s 2P NAV discounted at 9% plus the value for the

oil sands contingent resources. We believe this methodology is likely

conservative, as transaction parameters for producing assets are tending to be

well above our NAVs, likely reflecting lower cost-of-capital assumptions and/or

higher oil price assumptions. As depicted, virtually all oil sands players are

trading well below valuations implied by recent transaction parameters.

The base NAV of each company is quite sensitive to the cost-of-capital rate at

which it is discounted. When we drop the discount rate from 9% (used in

Exhibit 5) to 7% (used in Exhibit 6), which is more in line with what we believe

many foreign buyers are transacting on, we can see that the base NAV of most

companies increases by an average of 25%. The only exception to this trend is

OPTI, where the company’s NAV jumps by 5x due to its highly leveraged nature.

The following table represents the same valuation upside sensitivities shown in

Exhibit 5, with a cost-of-capital assumption of 7% rather than 9%.

In the big-cap space, Nexen and Suncor stand out as having the most leverage

to changing valuation parameters, although we note that between the two

companies Suncor carries far less execution risk than Nexen.

In the small-/mid-cap oil sands space, there is no shortage of ways to gain oil

sands leverage. Athabasca Oil Sands, with its massive resource base (with or

without carbonates included), offers significant leverage with no short-term

financial risk. MEG also offers quite substantial resource leverage with the added

benefit that it has a substantial amount (25,000 Bbls/d) of production on-stream

and, arguably, has some of the highest-quality resources of the group. OPTI

clearly offers investors the highest torque to changing valuation parameters but

with an obviously higher risk level reflected in its limited liquidity and

uncertainty surrounding Long Lake 1. Although OPTI is a high-risk investment,

we believe it still offers high risk/reward and is a good speculative investment.

Three Ways To Play The Sands

The following provides a synopsis of what we view as three great investment

ideas in the oil sands, ranging from low risk to high risk.

Suncor Energy (SO, $43 Price Target) – Conservative Oil

Sands Exposure With Lots Of Upside

Suncor is a relatively low-risk oil sands investment given the high contribution of

on-stream assets, strong balance sheet and outlook for significant free cash

generation – all while it continues to increase oil sands output.

We believe Suncor’s valuation is poised to re-rate upwards as the company

completes its asset sales and once again starts to deliver reliable oil sands

operations. The valuation re-rating combined with above-average growth should

lead to outperformance vs. its domestic and global peers.

We believe Suncor is capable of delivering at least 8% oil-weighted production

growth through 2015 by spending only 75%–80% of cash flow – a rare

combination of growth and free cash flow. We expect Suncor’s weighting

towards oil sands to increase to the 80% range by 2015 (versus approximately

50% now), which should lead to valuation expansion on top of the attractive

base-line production growth.

Following the $3 billion–$4 billion of asset sales, we expect Suncor to reduce

debt to the $10.5 billion range by the end of 2010, at which point the company

will be well situated to decrease debt further or buy back shares by utilizing the

substantial free cash generated over 2011/2012.

Our $43 price target for Suncor is in line with our risked NAV estimate and

translates to 8.4x 2011E/2012E EV/DACF and 15.8x 2011E/2012E P/E. Our

risked NAV includes minor value for Suncor’s vast undeveloped oil sands

resource base. If we value Suncor’s oil assets at recent transaction parameters

(on-stream assets valued at Sinopec–Syncrude parameters and the undeveloped

resources at recent transaction parameters), we would see a target valuation in

the $60 per share range.

MEG Energy (SP, $44 Price Target) – Good Exposure To

High-growth Oil Sands With Proven Resource Quality

MEG is well positioned in the oil sands as a mid-size player, with plenty of cash

and proven high-quality resources. We believe MEG is capable of a 24%

production CAGR through 2015 – a very high growth rate. Factors that clearly

differentiate MEG from many other emerging oil sands players are that it has

plainly demonstrated its ability to execute and has high-quality resources. MEG

recently broke records for how quickly it recently ramped up its 23,000 Bbls/d

Phase 2A expansion. The fact that the SOR has already been demonstrated at

2.4 (very good), and continues to trend lower, provides solid evidence with the

quality of its resource.

While history has not been kind to previous oil sands pure plays (OPTI, UTS,

Synenco), MEG is positioned to avoid those pitfalls by: 1) having a meaningful

amount of current production and cash flow (none of the aforementioned

companies had production); 2) having significant upfront financing rather than

adopting the “just-in-time” approach that has hurt OPTI; and, 3) operating its

assets 100%, which avoids the ownership/lack of control that destroyed UTS.

Our only critiques of MEG in the short term is that there is little in the way of

major catalysts and we see the expiry of share lock-ups in February as an

overhang on the stock in the short term.

OPTI Canada (Speculative SO; $1.70 Price Target) – High

Risk But Very High Potential Reward

OPTI is a speculative investment based on our views of an improving outlook for

oil sands and the likely continuation of the oil sands consolidation trend. OPTI

began a public “strategic alternatives” process in November 2009, a process still

ongoing. The length of the process has clearly spooked investors and has driven

the stock down to record-low levels.

While the length of the sale process is somewhat concerning, we note that the

improving backdrop for oil sands and continuing declines in cost of capital

(important for the acquirer) support an ultimately positive outcome. We believe

there is interest in acquiring OPTI but the challenge for most buyers is the same

as that for equity investors – needing reasonable proof that Long Lake 1 (LL1)

can deliver before pulling the trigger. We do not necessarily believe that LL1

needs to be at full capacity for a transaction to occur, but it does need to be on

a consistent trend of production growth (which it has generally been for the past

12 months) and through the 50% utilization range (currently at ~44% of

capacity) for a buyer to have adequate comfort on realizing value for LL1. We

believe it is reasonable to see LL1 cross this threshold in the next three months.

We think of OPTI’s valuation in two components: 1) the value of Long Lake 1 on

a DCF basis; and, 2) the value of its undeveloped resources.

In valuing LL1, one of the most important factors is the cost of capital. Our base

NAV for OPTI (i.e., Long Lake 1 only) of $0.40 per share is premised on a 9%

discount rate. Many buyers that would be interested in OPTI, particularly state

oil companies, have a cost of capital well below this level. Moving the discount

rate to 7% from 9% increases the NAV to $2.34 from $0.40! Another way of

interpreting this is that a foreign buyer with a low cost of capital can absorb a lot

more operational risk (i.e., higher SOR, more capex) than other buyers and still

end up with a positive valuation. For instance, running LL1 at a 5x SOR, average

well productivity of 450 Bbls/d (10% above current levels) and incorporating an

additional $900 million of capital (to pay for new steam and well pairs) would

still end up with an NAV for LL1 in line with the current share price.

Another wildcard in OPTI’s valuation is how investors treat its 1.5 billion barrels

of other undeveloped resources. OPTI’s undeveloped resources are split between

additional leases at Long Lake/Kinosis and other completely different leases at

Cottonwood and Leismer. While the Long Lake/Kinosis leases will no doubt carry

some stigma from the weak performance to date of LL1, we would still expect

these to attract some value. The leases at Cottonwood and Leismer are in the

same region and thought to have similar characteristics to a lot of the leases

that Statoil just sold to PTT at $1.23/Bbl–$1.73/Bbl (depending on which

resource number you believe). Our $1.70 price target incorporates $0.40/share

for LL1 (net of debt) plus $1.30/share for OPTI’s undeveloped resources –

equating to approximately $0.20/Bbl. As depicted in Exhibits 5 and 6, OPTI

offers enormous leverage to improving takeout parameters and cost-of-capital


While we believe OPTI is a good speculative investment on oil sands trends, we

do caution investors that the company does carry a much higher level of risk

than most other oil sands stocks due to the higher levels of execution and

liquidity risk.

Price Target Calculation – Suncor Energy

Our $43 price target for Suncor is in line with our risked NAV and translates to

8.4x 2011E/2012E EV/DACF and 15.8x 2011E/2012E P/E.

Key Risks To Price Target – Suncor Energy

The primary risks to Suncor achieving our price target include commodity price

volatility, rising operating costs, and poor execution of major growth projects. In

addition to the aforementioned company-specific and commodity macro risks,

there is risk around greenhouse gas (GHG) legislation, in particular for the oil

sands due to their relatively high GHG emission intensity.

Price Target Calculation – OPTI Canada

Our $1.70 price target is in line with our risked NAV estimate and approximately

a 60% discount to our unrisked NAV estimate. Overall, we continue to see a

positive risk/reward profile in OPTI, but note that it is clearly a high-risk

investment given its continued operational challenges and high leverage.

Key Risks To Price Target – OPTI Canada

The primary risks to OPTI achieving our price target include the ultimate

ramp-up success of its Long Lake 1 project, commodity price volatility, rising

operating costs and go-forward balance sheet liquidity. In addition to the

aforementioned company-specific and commodity macros risks, there is risk

around GHG legislation, in particular for the oil sands due to the relatively high

GHG emission intensity.

Price Target Calculation – MEG Energy

Our $44 price target for MEG is in line with our “risked” NAV estimate. Our price

target translates to a 2011E/2012E EV/DACF multiple of 25.7x – a slight

premium to its peers.

Key Risks To Price Target – MEG Energy

The primary risks to MEG achieving our price target include commodity price

volatility, rising operating costs, execution on Phase 2B, and securing regulatory

approval for all incremental projects associated with Phase 3. In addition to the

aforementioned company-specific and commodity macros risks, there is risk

around greenhouse gas legislation, in particular for the oil sands due to the

relatively high GHG emission intensity.

Ecopetrol (Colombian National Oil Company) and THAI License

So I just listened to the John Wright presentation from this month at a Merril Lynch conference.  It is linked below.  If you go to about the 35 minute mark and start listening he explains the various NOCs (PetroChina, Venezuala, Petrbras) who have been kicking the tires on THAI.

Then he gets a little more specific on how good of a fit Ecopetrol specifically is and how they have been up to Alberta a few times.  Given how close the date of this presentation was to the Q3 earnings where they basically said that 2 licenses will likely be signed by year end (you don't put that in writing unless you know they are) I'm inclined to think Ecopetrol is one of the two.

Moratorium on Gas Drilling Passes NY Legislature

Some of that Marcellus isn't going to be worth much if the boys can't drill it.

The moratorium -- which calls for no drilling permits to be issued until at least May 15, 2011 -- was approved by the state Senate in August.

The legislation now heads to Governor David Paterson, who leaves office in January and has until the end of this year to sign the measure into law.

In an interview last week on a local radio program, Paterson indicated support for the bill, saying the state would not "risk public safety or water quality."

High-volume hydraulic fracturing, also known as fracking, involves blasting millions of gallons of water, sand and chemicals into deep shale rock to free the gas trapped inside.

Part of New York state sits atop the Marcellus Shale, a massive rock formation that also extends across parts of Pennsylvania, Ohio and West Virginia. It has been among the most active U.S. drilling sites and by some estimates could hold enough gas to meet U.S. needs for a decade or more.

The natural gas industry has vigorously opposed the moratorium, saying it would halt most oil and gas drilling currently allowed, in addition to high-volume fracking.

The Independent Oil and Gas Association of New York, an industry group, called the moratorium a "job killer" in a statement issued ahead of the Assembly's vote.

Craig Michaels, the Watershed Program Director at environmental group Riverkeeper, said the legislature's action created momentum for those pushing for tough regulations of the industry, including declaring large chunks of the state that are close to drinking-water supplies off-limits to drilling.

"Right now, we think any time-out is a good one," said Michaels. "The gas isn't going anywhere."

The U.S. Environmental Protection Agency is currently studying the impact of fracking and is due to report in 2012. The New York state Department of Environmental Conservation is also reviewing how to regulate the practice in the state.

The vote in New York came late on Monday following a special session of the state legislature.

Link to New ATP Presentation

They key at this point is obviously permitting, but for anyone who has followed the company you have to be struck by page 8 and the $500mil to $800mil of liquidity that the company now has.

A year ago they had basically zilch and still didn't have the Titan installed. 

It is going to take a permit to get people feeling better, but this company is in much better shape than a year ago (both the liquidity and the fact production has doubled).

Monday, November 29, 2010

No slowing down for the CHK Land Machine

You don't really see them take big pieces like this very often any more.  Yet another example of big dollars paid for property with no booked reserves.

Antares Energy Limited announced that it has negotiated the sale of its Yellow Rose and Bluebonnet assets. Chesapeake Energy Corporation has agreed to purchase 100% of 23,180 net oil and natural gas leasehold acres in McMullen County, Texas from Antares and its partner San Isidro Development Company (SIDC). The consideration for the sale will be $200,000,000 cash. Closing of the transaction is anticipated to occur on or before December 15, 2010. The USD200,000,000 represents a transaction value per net acre of $8,628/acre. The average value of all the transactions is $7,098/acre while the average value of transactions between 10,000 and 40,000 acres is $6,356/acre. The price achieved of $8,628/acre represents a premium of 21.5% over all transactions and a premium of 35.7% over transactions between 10,000 and 40,000 acres. The value of transactions greater than 40,000 acres was $9,391/acre. Considering the relative size of the combined Yellow Rose and Bluebonnet assets being 23,180 acres, the realisation of a price of $8,628/acre is a testament to the investments made in the acquisition of 3D seismic data, the degree and quality of infrastructure in place.

Here is your Wall of Worry

Author gives you so many things to worry about you might not want to bother getting out of bed.

I guess when you stop seeing articles like this you know it is time to get out of the market completely.

Einhorn Interview with Wealth Track - Transcript

For those of you who prefer to read rather than watch:

CONSUELO MACK: This week on WealthTrack, the financial sleuth-hedge fund manager who identified the gaping financial holes in Lehman Brothers, Allied Capital and the financial system at large. Where is he seeing strengths and weaknesses now? A rare interview with Greenlight Capital’s David Einhorn is next on Consuelo Mack WealthTrack.

Hello and welcome to this Great Investor edition of WealthTrack. I’m Consuelo Mack. If you are looking for a morality tale about the financial crisis and the long trail of its aftermath, which we are still navigating, I think we have found just the ticket. It is the updated version of hedge fund manager David Einhorn’s 2008 book, Fooling Some of the People All of the Time: A Long Short (and now Complete) Story. Only this time, its new title reads Fooling Some of the People All of the Time: A Long Short (and now Complete) Story. And complete it is because the financing company Einhorn shorted, ultimately successfully after 7 long years, is no more. Suffice it to say, as you can see from this stock chart of Allied Capital, it was a harrowing ride. A roller coaster from 2002 when Einhorn’s firm Greenlight Capital started shorting its shares, to 2007 when the stock went into a free fall But that’s not the half of it. In the process, Einhorn was, as he describes it, “attacked by the company, vilified by the press, and investigated by the Securities and Exchange Commission.” And that’s the mild stuff.

As you will see in just a moment, it takes an unusual individual to be a successful long investor, let alone a successful short. David Einhorn is both: summa cum laude graduate of Cornell, world class poker player, co-founder of value-oriented hedge fund, Greenlight Capital in 1996, when he was still in his twenties. And Greenlight has delivered greater than a 21% annualized net return for its partners since its inception by mostly buying companies long, but making its reputation shorting stocks in a very public way. One of its most heralded shorts was Lehman Brothers, another bruising, albeit much shorter battle. As for the morality tale, Einhorn believes the Allied Capital saga has a meaning far beyond the company. He says it represents what’s still wrong with the entire financial system. I asked him for some specifics.

DAVID EINHORN: The basic problems were that you had accountants that weren’t doing proper oversight. You had the SEC, which was not doing proper oversight. So you have rules on the books that are not actually being enforced. You have a management team that is being dishonest. And you have all of the support network, which is supposed to actually be sort of a watch dog, actually enabling it. So you have Wall Street analysts touting management’s side of the story. You have the financial media taking on their sound bites and adopting them as just the way that things ought to be. And so you have this entire sort of breakdown in terms of watch dogs, and then cheerleading section that is actually enabling the bad behavior to persist, ultimately to the detriment of the people who are supposed to be protected, which were the investors.

CONSUELO MACK: Has anything changed? Are any of the watch dogs doing their job better?

DAVID EINHORN: Well, the truth actually is, what we’ve seen is, even in the bigger financial crisis, the same watch dogs have just repeated the same behavior, just in a much bigger way. So what we’ve seen, the same kind of sort of forbearance towards Allied Capital has been granted to the big banks, the big investment banks, and so forth. The credit rating agencies, which did such a bad job with a subsidiary of Allied Capital, we now know that they did such a horrible job, perpetuating the whole crisis, and quite honestly, even though we passed a financial reform bill which is longer than a telephone book …

CONSUELO MACK: Right, 2,000-some odd pages, right?

DAVID EINHORN: Yes. It doesn’t actually address the obvious things that came out of the crisis that a common sense person would say, we need to simply fix them.

CONSUELO MACK: So what do we need to fix?

DAVID EINHORN: Number one is, we shouldn’t have credit rating agencies in any form. Even in their best, they add to cyclical pressures. They say positive things when things are good, that restores confidence; and then when things start getting into a crisis, they actually exacerbate the crisis by now saying that things are bad. Another thing that needs to be changed is, we learned that the money markets are unregulated banking institutions without reserves and without regulation, such that they can’t suffer even the smallest amount of loss. That was the big fallout from the Lehman crisis, was when the money market started appearing to have runs on them. And …

CONSUELO MACK: And a couple broke the buck.

DAVID EINHORN: That’s right. And soon the investors there, they basically believed that the buck could not be broken, and so the whole system was going to collapse around that. And that remains very much in place today, with all of that same risk. Number three, we learned that big financial institutions, if they’re so big, and you allow them to fail, they’re going to have domino effects.

CONSUELO MACK: So even with what we’ve seen, with the banks being more prescribed in what they are able to do, I mean, using much less leverage, being more scrutinized, you don’t think that that’s enough?

DAVID EINHORN: It’s just not enough. If you look at the big banks, they’ve gone from maybe 25 or 30 times leverage to 15 or 16 times leverage, or something like that. That’s still a lot of leverage. And it doesn’t count the derivatives books. And you have these huge notional derivatives books that, they’re just sort of tail risks that are sort of out there, and nobody really knows what’s in them, and nobody knows what risk they pose, and you certainly know that if any of the big four or five books that have the massive derivatives books was going to be on the cusp of failing; you would need to bail them out, the same way, in the future, that you would in the past. Notwithstanding whatever the new rules supposedly say.

CONSUELO MACK: So as an investor listening to you, would you touch a bank with a ten foot pole? At this point, would you invest in one of the major money center banks?

DAVID EINHORN: No. We wouldn’t invest in the major money center banks.

CONSUELO MACK: In a recent letter to Greenlight Partners, which, for those of us who don’t own hedge funds, means investors, you wrote-- you were very critical of the Federal Reserve, and the most recent round of quantitative easing. And not only do you doubt it is going to be successful, but you also think that it could actually be harmful. Why?

DAVID EINHORN: Well, I think it’ll be harmful for growth, right away, if the purpose of the quantitative easing is to ease financial conditions, thereby, according to the Fed Chairman’s op-ed, make the stock market go up, make some people feel wealthy, and then go out into the stores and buy things. That’s offset by the fact that they’re trying to create inflation. And they may not get the inflation where they want. They’d love the inflation to be in house prices. But they might get it instead in oil prices. Or cotton prices. Or food prices. And there’s already a lot of evidence of this. The problem is that those prices affect a large number of people who have to buy these sort of necessities of life.

CONSUELO MACK: Food and shelter.

DAVID EINHORN: Food and shelter, and …

CONSUELO MACK: Right. Energy.

DAVID EINHORN: … clothing, and energy. And if the prices of those things go up, they’re not going to have as much money to buy other things. And so you may actually not get any increase in demand. You may actually slow down economic growth. And that is separate and apart from the longer-term ramifications of going through a process of effectively money printing, buying, creating electronic money to buy Treasury securities, which is what the so-called quantitative easing ultimately amounts to.

For the rest of the article:

Petrominerales may be The Jewel of Petrobank

More big exploration success and if you listen to the company they believe they are just scratching the surface.  Still trades at a very reasonable 5.5x cash flow.

40 plus exploration wells in 2011 and an excellent balance sheet.

Sunday, November 28, 2010

BP Sells $7bil in Argentina Assets

And in related news I sold a used lawnmower for $40 !

BP has agreed to sell its share of an Argentina-based oil and gas company for $7.06 billion in cash, bringing to about $21 billion its total sales of assets to help cover costs stemming from the Gulf of Mexico oil spill.

After the sale, BP will be most of the way toward its goal of selling as much as $30 billion in assets by the end of 2011 to help cover spill costs and bolster cash holdings to assure investors and lenders of the oil giant's financial stability. The sales are expected to reduce BP's assets by 10 to 15 percent.

Entire article

Saudi King Urged US to Attack Iran

I have a friend convinced an attack on Iran will happen within 12 months

WASHINGTON (Reuters) - Saudi King Abdullah has repeatedly urged the United States to attack Iran's nuclear program and China directed cyberattacks on the United States, according to a vast cache of U.S. diplomatic cables released on Sunday in an embarrassing leak that undermines U.S. diplomacy.

The more than 250,000 documents, given to five media groups by the whistle-blowing website WikiLeaks, provide candid, tart views of foreign leaders and sensitive information on terrorism and nuclear proliferation filed by U.S. diplomats, according to The New York Times.

Among the revelations in Britain's Guardian newspaper, which also received an advance look at the documents, King Abdullah is reported to have "frequently exhorted the U.S. to attack Iran to put an end to its nuclear weapons program."

"Cut off the head of the snake," the Saudi ambassador to Washington, Adel al-Jubeir, quotes the king as saying, according to a report on Abdullah's meeting with General David Petraeus in April 2008.

Among the disclosures reported by The New York Times were:

-- suspicions Iran has obtained sophisticated missiles from North Korea capable of hitting western Europe, and the United States is concerned Iran is using those rockets as "building blocks" to build longer-range missiles;

-- allegations that Chinese operatives have broken into American government computers and those of Western allies, the Dalai Lama and American businesses since 2002;

-- talks between U.S. and South Korean officials about the prospects for a unified Korea should the North's economic troubles and a political transition lead the state to implode;

-- the South Koreans considered commercial inducements to China to "help salve" Chinese concerns about living with a reunified Korea that is in a "benign alliance" with Washington, according to the American ambassador to Seoul;

-- reporting that Saudi donors remain chief financiers of Sunni militant groups like al Qaeda, and the tiny Persian Gulf state of Qatar, a generous host to the American military for years, was the "worst in the region" in counterterrorism efforts, according to a State Department cable last December;

-- Since 2007, the United States has mounted a secret and so far unsuccessful effort to remove highly enriched uranium from a Pakistani research reactor out of fear it could be diverted for use in an illicit nuclear device.

Petrobakken and Petrobank discussed on BNN Friday

Not sure why I'm posting this.  This guy likes both, no real details provided.

Saturday, November 27, 2010

PayPal Cofounder's Hedge Fund Struggling

Article in the NY Post on Peter Thiel and his hedge fund.

Consider the following numbers:

AUM 2008 - $7bil
AUM 2010 - $800mil

2009 down 25%
2010 down 17%

Ask anyone who knows Silicon Valley venture capitalist and PayPal co-founder Peter Thiel and the first thing they will tell you is that he's really, really smart.

Ask the same people why it is, then, that Thiel's hedge fund, Clarium Capital Management, is on track to suffer its third year of negative returns, and they will squirm and tell you not to worry, he's super smart and his tactics will pan out -- eventually.

There's no doubt that Thiel, who sold PayPal to eBay for $1.5 billion when he was barely 35 years old, is an impressive guy. He's also far more interesting than most of the traditional money men plying their trade on Wall Street.

Friday, November 26, 2010

Ah, remembering Aubrey and his maps

A very bad taste in the mouth....

Chesapeake Energy has come under fire lately for its hefty compensation to its chairman and chief executive, Aubrey K. McClendon. On Friday, Mr. McClendon was at the top of the list of the highest-paid chief executives in 2008 for companies that are in the Standard & Poor’s 500-stock index.

But it turns out that Mr. McClendon is more than just a well-paid chief executive. According to the proxy that the company filed on Thursday, he’s also an avid collector of historical maps.

According to the filing, in December 2008, Mr. McClendon sold a collection of historical maps of the American Southwest that had been on display at the company’s headquarters in Oklahoma City. The buyer was none other than Chesapeake Energy, which paid $12.1 million for the collection at the end of last year.

While the filing notes that the $12.1 million was Mr. McClendon’s cost of acquiring the collection over the last six years and that the collection was worth at least $8 million more, it also notes that the appraisal came from “the dealer who had assisted Mr. McClendon in acquiring this collection.”

In exchange for displaying the collection, the company was required to insure the maps and notes that its main reason for buying the collection was because “the Company was interested in continuing to have use of the map collection and believed it was not appropriate to continue to rely on cost-free loans of artwork from Mr. McClendon.”

The filing provides further justification for the purchase by noting that the map collection ties in very closely to the company’s interior design and contributes to its “workplace culture.”

Musings from the Oil Patch - Shale Gas Declines

More on the shale gas debate and for consideration on a CHK investment:

He postulates that there is a serious disagreement among industry

participants over the shape of the decline curve for these gas shale

resources. The differing views lead to sharply divergent conclusions

about the volume of gas that can come from these shale basins,

which not only determines their economic attractiveness but also

how long our economy can count on the supplies being available.
The technical argument revolves around the shape of the production

decline curve that projects how long, and at what level, we can

expect gas shale wells, and by implication the entire gas shale play,

to produce. When you do the math – volume multiplied by time –

you arrive at an estimate of the economic ultimate recovery (EUR) of

the well. There are two schools of thought about the shape of the

decline curve and they are defined by the value of the exponent “b”

in the equations defining the curve‟s shape. The equation includes

the initial production rate, the initial rate of production decline and

the degree that the initial decline rate flattens out over time.
The people who believe in a hyperbolic decline rate (b equal to or

greater than 1.0) expect gas shale wells to produce at a reasonably

high rate, and therefore a low cost, over a long period of time. The

less optimistic people believe an exponential decline curve does a

better job of plotting future production. Therefore, they believe the b

exponent will have a value below 1.0 and closer to 0.5. Putting this

debate into context, those who believe in the hyperbolic decline rate

project EURs for gas shale wells in fields such as the Haynesville

and Marcellus will be between 5.25 billion cubic feet (Bcf) and 6.5

Bcf, as postulated by Chesapeake Energy (CHK-NYSE) in its recent

presentation to analysts. Those who believe in the exponential

decline would put production for these same wells closer to 2.0 Bcf.

NY Times Article Suggests Troubled Loans Have Peaked

When shall we plan for the next banking crisis ?  Say 2025 ?

What an awesome business a bank is.  Enormous leverage.  Only real way to defeat competition is buy either paying more for deposits or less for loans.

AFTER several years of decline, this is shaping up to be the year in which the problems of America’s banks began to recede.

The Federal Deposit Insurance Corporation reported this week that the proportion of troubled loans on bank books fell to 9.1 percent at the end of September, down by more than a percentage point from the record 10.3 percent figure posted at the end of 2009.

“The industry continues making progress in recovering from the financial crisis,” said Sheila C. Bair, the F.D.I.C. chairwoman. “Credit performance has been improving, and we remain cautiously optimistic about the outlook.”

The improvement was not across the board. Loans secured by commercial real estate became a little worse, and some smaller banks that specialize in such loans have reason to be worried. The number of banks labeled as troubled by the F.D.I.C. continued to rise.

The figures for problem loans combine the proportion of loans that are at least 30 days behind in payment, those that are no longer expected to pay and are therefore in nonaccrual status and those that are being written off. All three categories are falling, and the total amount of loan write-offs, at $47 billion in the third quarter, was the lowest in six quarters.

Bank fortunes have also improved because the extremely low interest rates engineered by the Federal Reserve mean that banks can borrow money almost for nothing, and then they can lend it out for something. During the quarter, the average cost of funds for the nation’s banks fell to 0.91 percent.

It is the largest banks, with assets of more than $10 billion, that pay the least. Their cost of funds was just 0.8 percent, while those banks with less than $10 billion are still paying over 1 percent.

For most of the decade before the financial crisis, banks as a group reported returns on equity of more than 12 percent, a performance that should have set off alarms in a period of declining interest rates. To get such returns on a consistent basis should have provided a hint that banks were taking on serious risks, either in the category of assets they owned or in the leverage they took on to produce the earnings.

For the third quarter, banks as a group posted a 3.9 percent return on equity, a rate that has been falling this year in part because banks are being forced to hold more equity. Under the tougher capital rules that are expected to be phased in, it is unlikely that the banking industry will soon be able to post the kind of returns that seemed normal only a few years ago.

One caution about the results was sounded by Ms. Bair, who noted that a significant part of the banks’ profit improvement has come from reducing the amounts set aside as provisions for future loan losses. “At this point in the credit cycle, it is too early for institutions to be reducing reserves without strong evidence of sustainable, improving loan performance and reduced loss rates,” she said.

Just how much better things really are may become clearer when banks report their full-year results. Historically, the industry reports more red ink, and writes off more bad loans, in the fourth quarter than it does in other periods. That may be because auditors and regulators look more closely at full-year numbers than they do at interim reports, and that sometimes require banks to be a little less optimistic in the estimates that go into calculating profits and losses.

Thursday, November 25, 2010

More Insider buying at Petrobakken

Apparently I'm not the only one who likes a 5% yield plus production growth.

Nov 24/10 Nov 23/10 Brown, Ian Stephen Direct Ownership Common Shares 10 - Acquisition in the public market 2,500 $18.750

Nov 24/10 Nov 23/10 Brown, Ian Stephen Direct Ownership Common Shares 10 - Acquisition in the public market 2,500 $18.690

Nov 24/10 Nov 23/10 Brown, Ian Stephen Direct Ownership Common Shares 10 - Acquisition in the public market 1,500 $18.730

Nov 24/10 Nov 24/10 Wright, John David Direct Ownership Common Shares 10 - Acquisition in the public market 1,800 $18.830

Nov 24/10 Nov 24/10 Wright, John David Direct Ownership Common Shares 10 - Acquisition in the public market 1,100 $18.870

Nov 24/10 Nov 24/10 Wright, John David Direct Ownership Common Shares 10 - Acquisition in the public market 900 $18.860

Nov 24/10 Nov 23/10 Wright, John David Direct Ownership Common Shares 10 - Acquisition in the public market 800 $18.840

Nov 24/10 Nov 23/10 Wright, John David Direct Ownership Common Shares 10 - Acquisition in the public market 5,200 $18.850

Nov 24/10 Nov 23/10 Wright, John David Direct Ownership Common Shares 10 - Acquisition in the public market 3,000 $18.810

Bernanke Blooper List

Sandridge CEO still sees little hope for a Nat Gas turn

Petrominerales - Next Information Update

From an investorvillage board where there actually is useful information at times.

What we may learn next week, between Mon. 11-29, and Fri. 12-3 :

[1] Caruto-1 log results (Corcel exploration well)

[2] Boa-2 flow test results (Corcel development well)

[3] Yenac-2 flow test results

[4] Asarina-1 heavy oil flow test results (Rio Ariari)

[5] Mochelo-1 log results (Rio Ariari)

[6] Yatay-1 spud date (between 11-10 & 20 ?), and depth reached (Candelilla)

[7] Mantis-1 spud date (between 11-10 & 20 ?), and depth reached (Yenac trend)

[8] Hobo-1 spud date from Arion-1 pad, assuming Arion-1 sidetrack is delayed

[9] Dates for final award from ANH on new blocks

Wednesday, November 24, 2010

Haynesville Rig Count Drop


Haynesville Rig Count Falling Fast

Haynesville Rig Count Continues to Slide. The Haynesville rig count

continues to decline and is now down 38 rigs or 18% from the end of April to

a current 173 rigs. Importantly, drilling in the Haynesville ‘core’ (Bossier, De

Soto, Red River, Bienville and Caddo counties in Louisiana) is declining

rapidly as well, down 27 rigs or 22% from the end of April to 98 rigs.

Regionally, we find the Louisiana Haynesville rig count down 19 rigs or 14%

to 118 rigs while the East Texas Haynesville rig count is now at 55, down 19

rigs or 26% over the same time period. Rigs are declining due to low gas

prices and continued ‘lease capture’. The fall in the Haynesville rig count and

other ‘dry gas’ areas are major reasons for our more bullish $5.25 per

MMBtu 2011 price outlook (see our recently published notes “Natural Gas:

11 Logically Bullish Gas Market Factors” from 10/27/2010 and “Natural Gas:

Another Look at 11 Logically Bullish Gas Market Factors” from 11/10/2010).

The Haynesville May Be the Biggest U.S. Gas Field. The growth in the

Haynesville over the past two and a half years has been truly remarkable

and it is reported that production has risen from nil in early 2008 to ~4.5

Bcf/d (it took the Barnett nearly 10 years to grow to ~5.0 Bcf/d). Haynesville

growth has been the primary reason for the depressed state of gas market

over the past 12-18 months in our view as it has represented all of the

growth in the lower 48 market (up 4.4 Bcf/d from end of 1Q08) and has

offset some conventional declines. The declines thus far in Haynesville

drilling (and we expect more are on the way) should help to slow growth and

begin to reset the gas market.

Haynesville Production Declines Will Take Time. To be sure, we do not

expect Haynesville production to decline very much right away due to the fall

in drilling activity as a result of large well completion backlogs and the

implementation of restricted rate programs (for recovery rate optimization).

Restricted rate should partially offset some of the rig count declines by

smoothing the play's base decline rate. Some operators have noted flat

production for 6 months or more when running wells at ~8 MMcf/d vs. the 15

to 20 MMcf/d initial capability. However, we believe we will begin to see

some production declines in the second half of 2011.

Fayetteville, Woodford Drilling on the Decline as Well. Other dry gas

basins such as the Fayetteville and the Woodford are seeing drilling declines

as well. We estimate that the Fayetteville rig count is down 6 rigs or 17% to

30 rigs from the end of April while the Arkoma-Woodford rig count has fallen

6 rigs or 21% to 23 rigs over the same time period.

Tuesday, November 23, 2010

8K Filed on RINO


On November 17, 2010 Frazer Frost, LLP, the independent auditors of RINO International Corporation (the “Registrant”), delivered a letter (the “Auditor’s Letter”) to the Registrant and each of its directors. The Auditor’s Letter states in part:

“In a telephone conversation on November 16, 2010, Mr. Zou Dejun, the Chief Executive Officer of the Company, informed Ms. Susan Woo of our firm, in substance, that as to the six RINO customer contracts discussed in the recent report of Muddy Waters LLC, the Company did not in fact enter into two of the six purported contracts, and a third contract among the six was explainable. When Ms. Woo inquired about the Company’s other contracts, Mr. Zou said he was not sure, but there might be problems with 20 - 40% of them. Assuming that these statements were reasonably accurate, it appears that our reports would have been affected if this information had been known to us at the date of our reports, although the effect on the financial statements is currently unknown and cannot be quantified without a thorough investigation. We further note that in a conversation the following day, November 17, 2010, involving Ms. Woo, several directors of the Company, Company counsel, and Mr. Zou, Mr. Zou stated that he was not sure the day before and went back to look into some things, and found that apart from the two problematic contracts, all other contracts are legitimate and can be verified.

The auditing standards of the Public Company Accounting Oversight Board provide procedures to be followed by an auditor to prevent continued reliance on audit reports in such circumstances. In view of the information provided by Mr. Zou Dejun, we hereby advise the Company to promptly notify any person or entity that is known to be relying upon or is likely to rely upon our audit report(s) for the periods ended December 31, 2008 and December 31, 2009 and reviewed quarterly financial statements for periods between March 31, 2008 to September 30, 2010 that they should no longer be relied upon, and that revised financial statements and revised auditor's report(s) will be issued upon completion of an investigation.”

On November 17, 2010 certain members of the Board of Directors, including Kennith Johnson, the Chairman of the Audit Committee, Jianping Qiu, the Chairman of the Board of Directors, and Mr. Zou Dejun participated in a conference call with Ms. Susan Woo, a partner of Frazer Frost, LLP in which the foregoing statements were discussed. The two other members of the Board were not available because they were traveling and therefore the Board of Directors could not take any formal action regarding the matters discussed in the Auditor’s Letter. The Registrant intends to have a telephonic meeting of the Board of Directors to further discuss such matters and related matters as soon as all of the members of the Board of Directors are available.

Why I don't invest in Chinese listed US companies - RINO International

Whenever I see something like this I feel bad for any small investors who got burned.  I always feel like the US stock exchanges should be better able to weed out companies like this.

Couple of Big Oil Deals Today

First in the Bakken.  Hess invests another $1 billion for 167,000 acres.  One week after another $1bil Bakken land grab by Williams.  Here is Reuters on the deal:

And our Canadian Oil Sands continue to turn into a United Nations meeting as Thailand (yes Thailand) now has a big stake by acquiring 40% of Statoil's interest.  Here is the Winnipeg Free Press (check out that minus 19 degrees on the front page) reporting:

Another nice little selloff today.  I'll be adding to my Petrobank holdings in one account and will likely pick up some of Petrobakken's 5% plus yield for a family member in another

Monday, November 22, 2010

ZMAN Seeking Alpha Post on EXXI Acquisition from XOM

EXXI Nearly Doubles Up; Moves To 3rd Largest Oil Producer On The Shelf

First Things First Watch:

The Price:

$1.01 B - They're using cash from the balance sheet and getting their revolver bumped in size in accordance with the new reserves to pay for the deal. Look for another secondary down the road, but probably at a higher price than here ... $30 maybe.

The Purchase:

1P Reserves of 49.5 MMBOE

(61% oil),

$20.40 / BOE = pretty good price

Reserves are engineered by Netherland Sewell so should be a fairly conservative take

2P Reserves of 66 MMBOE

(61% oil),

$15.30 BOE

Current Production of 20,000 BOEpd

(53% oil)

$50,500 per flowing barrel per day ... a good price.

Leases total 131K net acres

The Impact:

Makes EXXI the third largest oil producer (out of all E&Ps and Majors) on the Shelf

They'll be operator of 94% of all acquired

They get slightly less oily, but that's not a big deal and that's day one, before they start working the assets in the direction of their aggregate oiliness.

Nutshell: A nice price to pay to nearly double up the size of the firm. Buying from a Major ensures they will be getting overbuilt infrastructure and bypassed exploitation and exploration opportunities. Not accidentally, the properties overlap with EXXI's current operations nicely. At first blush, when compared to the Apache for Mariner acquisition earlier this year, this deal appears slightly more pricey. However, the Mariner was 53% natural gas, much less liquid rich than this transaction. Oil prices were also lower then and APA was moving into a whole new theater in the deepwater, whereas EXXI knows these properties well already.

Lastly, the deal is accretive to the way the market has been valuing EXXI on both reserves and production. If you flip your thinking around and say, "what would EXXI trade at based on its original multiples of reserves and production" you get a post deal share price of $29, and $31, respectively. It won't happen overnight to be sure, but I expect that and more as time progresses.

And that excludes any thoughts on their ultra-deep program. This is an oversimplification and gives you no benefit of higher production levels' spread of cash costs, which will undoubtedly be the subject of many questions on today's conference call, along with near term exploitation and long term exploration opportunities on the new properties. I continue to own the shares in the ZLT.

Here is a link to the ZMAN website:

Forbes Article on Energy XXI Drilling Ultra-Deep Shelf Wells

On a warm evening in early November executives of Energy XXI are unwinding with scotch and cigars in an ultramodern granite-and-leather lounge at their Houston headquarters. Lagavulin and Davidoff in hand, Chief Executive John Schiller slides open a glass wall, transforming the room into an open-air patio 29 stories above downtown.

Schiller is feeling flush these days, fresh from raising $550 million in an equity offering the week before. Above the bar filled with rare single malts, a flat-screen TV charts the reason for his confidence. It's a live feed of data from a well being drilled off Louisiana in the Gulf of Mexico. Lines and squiggles mark the depth of the drill bit (now at around 22,000 feet), as well as the resistivity and porosity of the rock that it's cutting through.

This is the second well to be drilled into the Davy Jones field by five-year-old XXI and its bigger partner, McMoRan Exploration ( MMR - news - people ). In a few weeks, when the bit hits 30,000 feet, Schiller will be watching for a repeat of the results from the Davy Jones discovery well last January--which struck a 200-foot-thick reservoir of highly porous sand brimming with natural gas. Success, says Schiller, "will allow us to connect the reservoir to the first discovery," a couple miles away. "If you can connect those sands up, you're talking big numbers."

How big? Add the potential of Davy Jones to that of their similarly ultradeep Blackbeard discovery (where results from a second well are expected "any day now") and Schiller thinks he's looking at 10 trillion cubic feet. Pile on the 12 other ultradeep prospects they plan to drill, and the prize climbs to 100 trillion--enough to supply the whole of U.S. demand for four years, the energy equivalent of roughly 15 billion barrels of oil. If it pans out, these would be some of the biggest finds in the Gulf ever. "What we're seeing so far is not making anything look smaller," says Schiller, 51.

Despite the impact XXI's 20% stake in these wells could have on his small-fry $550 million (revenues) company, Schiller knows better than to get too giddy. "I thought we were going to relax this summer and take some time off," says Schiller. Then came BP ( BP - news - people )'s Macondo blowout. As investors fled anything with exposure to the Gulf, shares of XXI plunged from $22 to $13.

Which raises the question: How is it that these guys get off drilling ultradeep wells in the Gulf when every other operator has been stymied by Washington's drilling moratorium or scared out of the water altogether, unwilling or unable to stomach tightening regulation and soaring insurance rates?

Although these wells are some of the deepest ever drilled anywhere in the world (and much deeper than BP's 19,000-foot Macondo), they are not deepwater wells at all. XXI's rigs sit right on the coastal Louisiana seabed in less than 100 feet of water. Their blowout preventers are above the waterline, and the wells, says Schiller, are engineered more conservatively than BP's--built to deal with downhole pressures as high as 25,000 psi and temperatures of 400 degrees. The federal government's new Bureau of Ocean Energy Management feels confident enough that it granted XXI and McMoRan the only new ultradeep permit since BP's disaster--to start drilling another prospect called Lafitte in October.

With these potentially mammoth ultradeep, shallow-water discoveries, McMoRan and XXI could soon lure in the supermajors seeking a replacement for the deepwater game that BP complicated. This would mean an about-face away from shale gas plays like the Marcellus Shale that have spurred multibillion-dollar acquisitions by Exxon, Shell and most recently Chevron ( CVX - news - people ). Why? At a current natural gas price of $3.50 per million cubic feet drillers can barely make money on many shale wells, which require costly and water-hogging hydraulic "fracking," suffer precipitous volume-decline rates of 80% a year and lack easy access to pipelines.

Davy Jones and Blackbeard, in contrast, are conventional reservoirs, from which gas will flow unaided for far longer. And they are situated amid a warren of existing subsea pipeline infrastructure. McMoRan figures the break-even point on Davy Jones will be less than $1.50 per thousand cubic feet. And though the vast majority of the riches recovered from these wells will be natural gas, Schiller says its entirely possible that they'll get some oil as well--a nice kicker, considering that oil sells for $87 a barrel while the same amount of energy from natural gas fetches only $25.

Rest of article here:

Saturday, November 20, 2010

Petrobank - 2007 VIC Write-up

Company has come a long way since this was written.  PMG and PBN at the time had little production.  Note that the author values Whitesands at $30 per share.  Of course today you get Whitesands for free as the Petrobank share price only reflects the market value of PMG and PBN.

It is rare to find a company that can liquate for way more than it is currently trading and has the near term potential for explosive growth. Petrobank is an undervalued oil and gas company that the pieces are currently worth over $45 in a liquidation with recent transactions in the industry and has the potential for explosive upside. Petrobank has two operations in Canada and one in Latin America.

Latin America (worth $11.65 at current market)

Petrobank owns 80% of publicly traded Petrominerales (PMG on Toronto) that is headquartered in Bogotá, Columbia. The company started producing from two development fields in 2003 and came public in June 2006. Petrominerales has accumulated 1.5 million acres of exploration land in two attractive basins.

The exploration activities are located in the Llanos Basin which has a geology and topography similar to Western Canada’s Sedimentary Basin. Petrobank’s goal is to apply Canadian geo-technical evaluation techniques to the under-explored Columbian basin. It is one of the first companies in Columbia to explore using 3-D seismic exploration tools. Large blocks of land can be obtained with no initial land payments.

In the last two months, Petrominerales has announced several positive results of drilling activity in the Corcel Block. The ultimate sizes of the prospects are still unknown and will be defined over time. They are starting a six-month test at 4,000 BPD in September. Petrominerales plans to drill eight exploration wells over the next year. It is likely, the company will do some form of financing in the next six months to fund the exploration. Tristone Capital's Chris Theal's research report indicates that it is not unreasonable assuming 3 wells in the region at 14mmb would equal 42mmb with 15 year reserve life. Corporate slides indicate the wellhead differential is 11% WTI, royalties are $5.09, and production cost are $6.74 (CDN$/BOE). So at C$71.32 equals $51.46 netback. The current proved and probable reserves are 9,148 MBOE.

Petrominerales also has three heavy oil blocks in Columbia on .8 million acres. Royal Dutch Shell just signed a contract with Ecopetrol on 1.6 million acres located in the middle of its heavy oil blocks. Petrominerales has license rights for the THAI process in Columbia.

With the successful exploration results, Petrominerales stock has tripled to $11.64 in last 60 days. Petrobank owns 76.694 million shares (80.725%) which is worth $892 million or $11.65 to Petrobank (roughly same share count at 76.591 shares outstanding).

Canada Light Oil (worth well over $4 per share)

Corporate slides indicate the light oil has a wellhead differential of 5% of WTI, royalties $5.43, and production cost of $51.30. Operating netback is $51.30 on C$71.32. Petrobank has 348,000 net acres of undeveloped land. Petrobank is drilling 60 horizontal wells in Bakken region (117,000acres) in 2007. They have four active rigs and are currently targeting six horizontal wells. Petrobank owns 183 sections in the Bakken fairway with an estimate of 4.5mmbbl oil per section. The current proved and probable reserves are 24,531 MBOE.

Canada Heavy Oil – Whitesands (worth over $30 per share)

The size of the oil sands near Ft McMurray in Canada is approximately the size of the state of FL and contains about a vast amount of heavy oil. With the recent rise in oil over last few years, there is a modern day gold rush in the area. The town of Fort McMurray has about 60,000 full time residents and over 60,000 transients. There is a huge labor shortage in the region, I heard stories of local Burger King employees earning $18 hour. All of the land in the region is leased. There currently two ways two extract oil from the heavy oil sands in Canada. The first is the means is leaching the sands near the surface (Suncore SU) and the other for oil sands 100 feet below surface (about 75-80% of the heavy oil in the region) uses process called SAGD. SAGD is a process where companies inject steam into their reservoirs to move the thick deposits, Steam Assisted Gravity Drainage (SAGD). The downfall of SAGD: process uses a tremendous amount of water, natural gas, expensive capital expenditures, low recovery, and is not friendly to environment.

Petrobank has 72 sections in this region on 46,240 acres with 2.5 billion barrels in place. Under SAGD, it is estimated that 799 mmbbls are recoverable. Marathon Oil just announced the purchase of Western Oils Sands on August 13th for $6.6 billion or $2.50 per recoverable barrel of oil. Under SAGD, Petrobank's shares are worth over $30 for the White Sands interest under price assumptions that Marathon paid. The lowest valuations in the region are $1 per bbl where timing of projects is unclear. This gives no credence to the THAI technology which Heywood Securities Alan Knowles (Aug. 13, 2007) writes that the technology eventually could make the valuations as high as $4 per bbl over time for Petrobank (process works better, lower capital cost, more refined oil, etc.) which is over four times the current stock price with no value for the other two business units.

Petrobank bought the THAI Technology from the University of Alberta. Petrobank and the Richardson family invested $40,000,000 into a THAI test site in Whitesands to see if it would work to remove heavy oil from the area (note: Petrobank recently bought out Richardson’s interest). Basically, the THAI technology injects low pressure hot air into the zone and the bitumen is lit and sustains high temperature combustion to separate the oil. A year ago the company started out with one well pair and the project in now through the final test as all three of the well pairs are up and working. The results have come in better than expected, 70% -80% more oil is recovered with 50% lower initial cost than SAGD! I have been following progress as a stockholder for two years, visited the test site last spring, etc. THAI is working! The recent addition of the third well pair is starting to upgrade the quality of the oil.

There been several naysayers to the technology: olefins, this existing fire flood technology, etc. To date, I have not found justification in these arguments in countless hours of research. For example, fire flood has been around since 1920’s where hot air is injected down a vertical well and oil is extracted. This is different because the THAI process that uses a horizontal extraction well with a patented steam pipe to extract the oil.

The real risk in THAI process was oxygen breakthrough (if air got to the backside the site it would cause a massive explosion). To date, this is not a problem as Petrobank has notched up the air pressure to stress test the production process. The process does have a couple of obstacles to manage through. For example, the THAI process produced lot sand. Yet, Petrobank has devised and tested a device to remove the sand. Another problem is storage. Since this was a test site, Petrobank did not build enough storage. The THAI process is working better than projected so management had to restrict the well flows. Eventually, Whitesands will connect to a pipeline. The only other risk I envision to the THAI process is some obstruction underground (an act of “mother Nature” so to speak) that disrupts the burn. To date, I found the management team to experienced, on point, realistic on their projections, and not full of hype. I refer to recent article in September 2007 issue of Oilsands Review ( ).

In short, THAI is a lower capital outlay; lower operating cost (minimal natural gas and water handling), will have a higher netback for the partially upgraded product, and has faster project execution time. The process is much better for the environment than SAGD.

In the forth quarter, Petrobank will submit plans for a 10,000 BBL/day project. The cost will be about $150 million dollars and take a year to construct at cost of about $15,000 per flowing barrel. With the test results coming out more favorable than expected, the company announced that the horizontal leg on the THAI process will be able to be lengthened to 700 meters from 500 meters and the spacing between well pairs will be expanded to 125 meters from 100 meters which should lower capital cost. During this phase the company will test CAPRI which is a nickel based catalyst is added at the well bore to as an in-situ cracker to further refine the oil. Management will also set out a strategic plan for 100,000 bbl/day facility at Whitesands. For more information, I would refer you to corporate website (

Corporate slides indicate that the White Sands project on heavy oil has a wellhead differential of 23% of WTI, royalties $4.35, and production cost of $8.86. Operating netback is $41.70 on C$71.32. The current proved and probable reserves are 25,290 MBOE.

Athabasca Oil Sands Think They Have a Big New Play

Need to check this further out.  If it is a decent investment with no value embedded in the share price for this it might be interesting.

Sveinung Svarte holds up a piece of rock, dull grey and pocked with small holes.

The rock is a sample of limestone carbonate that looks nothing like Alberta’s oil sands. But for the chief executive officer of Athabasca Oil Sands (ATH-T11.530.080.70%) it represents the promise of a major new oil find that could add billions of barrels to the already-huge pool of oil in the Fort McMurray area.

Canada’s traditional oil sands are made up of vast layers of crumbly, bitumen-rich sand that lie within a few hundred metres of the surface. Athabasca’s carbonate rock lies beneath the sand, in a hard layer that’s both thicker and trickier to produce.

But if Athabasca can master a new extraction technique, it could yield between 2.7 billion and 11 billion barrels of bitumen, a big boost for a company that has struggled to impress investors start since going public earlier this year.

“There’s a lot of barrels here,” Mr. Svarte said. “For us, this is a massive upside that we would look to unlock over the next couple of years.”

Athabasca made its discovery in the Leduc formation in 2007, when an experienced geologist, acting on a hunch, suggested drilling into it to see if it contained bitumen. Brought to surface, the rock emerged stained and smeared with black goo, unmistakable proof that it contained a new trove of bitumen.

If Athabasca can figure out how to tap the carbonate, its discovery will rank amongst the top new global oil finds of the past decade. It’s a tantalizing taste of the enormous volumes of Canadian crude that have yet to be tapped in northeastern Alberta, on top of the currently estimated 173 billion barrels of recoverable oil across the oil sands.

A breakthrough would come as a boon to Athabasca, which has yet to produce commercial volumes of bitumen and is trying to beat back a share price decline that has seen its stock remain 35 per cent off its initial public offering price.

After discovering bitumen in the Leduc formation, Athabasca quickly bought up surrounding land that contained the rock. The company figures it now owns 95 per cent of the play, and has drilled 25 wells – at a cost of $1.5-million each – into the Leduc, and has recently begun talking up its discovery to investors.

An independent estimate suggests the play contains 15 billion to 18 billion barrels, and that Athabasca can recover 2.7 billion barrels. Athabasca’s own geologists believe they can achieve a recovery rate of 45 to 60 per cent, which would results in a substantially higher take.

The company will soon find out if it’s right. It is waiting for provincial approval to run two tests in the Leduc this winter, one using the standard steam-assisted gravity drainage technology that is broadly used in industry today; another using a new technique that would install long, horizontal stove-style elements through the rock to heat it. The company is confident it will work.

Outside observers warn the idea may be flawed, adding that technology development is often a long, difficult process.

Investors, however, believe the Leduc has potential, even if their main hope is that Athabasca speeds its way to producing bitumen – no matter where it comes from.

The new oil find “is good value” for investors, since markets have yet to ascribe much worth to it, said Greg Bay, president of Vancouver-based Cypress Capital Management, a long-time Athabasca investor. But he says the company should nonetheless develop its less risky properties before aiming for its “blue-sky” carbonate plays.

“When you look at the story, what it really needs is just a little more definition around when they’re going to come into production,” he said.

The Leduc formation has a storied history in Alberta, as the source of Western Canada’s first major oil discovery. It was a part of this rock, located far to the southwest of Fort McMurray, that gushed oil in the well remembered as Leduc Number 1. Subsequent wells produced billions of barrels of light crude from a source that was extraordinarily productive.

One of the Leduc fields, called Wizard Lake, had what “is probably the highest recovery of any field in the world, a 97-per-cent recovery,” said Dan Claypool, a long-time driller and oil patch manager who spent decades working in the area. “The average is 30 to 40 per cent.”

In part, that’s because a Swiss cheese effect in the limestone creates a network of cracks and holes that the oil can drain through. It’s easy with light oil because it is thin enough to flow – think of pouring maple syrup. It’s much harder with bitumen, which is thicker than peanut butter and flows with much greater difficulty.

The challenge of extracting the bitumen from carbonate is not unique to Athabasca. Other carbonate formations in Alberta contain an estimated 400 billion barrels of crude, and several companies have developed techniques they are now beginning to apply in the field in hopes of tapping that great bitumen wealth.

Laricina Energy Ltd., for example, plans to begin producing oil from its Saleski pilot project in the Grosmont carbonate by year’s end.

“Based on that work, we’ll do a commercial expansion. The application for that will be filed before the end of this year,” Laricina CEO Glenn Schmidt said.

But, he added, the Leduc has several potential disadvantages over other carbonate formations, including lower porosity. In other words, there are fewer Swiss-cheese-style holes in the Leduc compared to other formations.

For Athabasca, however, the advantage of the Leduc is that it’s proven. Not only does it have a solid history in Alberta, but similar reservoirs have achieved remarkable success elsewhere. One of the biggest finds in the past decade, Kazakhstan’s Kashagan field, contains oil in comparable rock.

“These are probably some of the best reservoirs in the world. And that’s what kind of got us interested,” Mr. Svarte said.