Thursday, February 24, 2011

Gurufocus Interviews Bruce Greenwald

Here is the entire interview:

I had requested a question on the Burlington deal that Buffett made which Greenwald has questioned:

That’s opposite about what VIX is trying to telling us, but we are value investors. Regarding Berkshire’s (BRK.A)(BRK.B) acquisition on Burlington Northern, you commented that it’s not a good deal?

No, I don’t think it’s necessarily not a good deal, I just don’t think it’s a great deal. And when Buffett usually puts capitol to work, especially a lot of capitol, it’s been a great deal. And in particular, I think what he taught people was you want to be patient.

And the time that you want to take advantage of your patience when you had a lot of cash was in the winter of 2009. And other than these protected deals, with Goldman Sachs (GS) and General Electric (GE), where you got the preferred stock with all the protection of the preferred stock, he didn’t buy a lot of stock that was available very cheaply, in February, March or even April of 2009.

And given that he didn’t do that, paying as much as he did for Burlington Northern was a questionable decision. Now what you always depended on if you look historically is what happened to oil prices. And so when oil prices went up, there’s a big competitive advantage for railroads over trucking, and Burlington Northern has gone up with the oil company stocks. But it seems to me that there are probably better ways to make that bet than to pay above market value for Burlington Northern.

I say, come on Bruce.  You are calling Buffett out for not knowing exactly when the stock market was going to bottom or knowing that a collapse was coming ?  Did you know ?  Were you sitting all in cash on March 3, 2009 ?   Ridiculous.

By the way this is what you said about the Burlington deal which is working out great:

"It’s a crazy deal. It’s an insane deal.  At $100/share we think he has lost his mind. "

Chesapeake Energy - Key Details from Earnings Transcript

Most interesting conference calls to listen to.

Eric Sprott at the Casey Research Gold and Resource Summit

Should we listen to the opinion of Eric Sprott ?

He called the housing bubble.

He called the collapse of the American banking industry.

He called the rise in oil prices half a decade ago.

He called the giant bull run in gold.

He still believes in all of the above basically, but his new passion is silver.

I honestly don't know what to think, as the sky can't keep falling forever can it ? What I do know is that his opinions and resulting investing decisions have made him rich because he was right.

Thus, I listen to what he has to say so that I can at least consider it. I'm with him on oil, but don't quite understand precious metals.

Here is a video presentation that he just made walking you through his current thinking about the world and investing:

Wednesday, February 23, 2011

Uncoventional Oil Producers and Hedging $100 oil

These guys have a $100 strip through 2020.  Tell me that isn't lucrative for a Petrobakken to lock in.

Notes from Feb 2011 Fairfax Conference Call

Pretty weak year on the investment side.  But that is to be expected as they have virtually no equity exposure.

Trading at book value and positioned for any equity selloff.  FFH looks good again should markets tank.

The New Zealand quake from this week could take a bit of a bite though.

Tuesday, February 22, 2011

Some Buffett comments on Japan

Dated but maybe still applicable:

"I'm not a macro-guy. Now I say to myself, Berkshire Hathaway can borrow money for ten years at one percent in Japan now. One percent. And I say to myself, 'Gee, I took Graham's class forty five years ago, and I've been working hard at this thing all my life, maybe I can earn more than one percent.' You know, if I really work hard at it? One percent annually doesn't seem impossible does it? So, I wouldn't want to get involved in currency risk so I'd have to do it in something that is Yen denominated, so I'd have to be in Japanese real estate or Japanese business or something of the sort, and all I'd have to do would be to beat one percent, that's all the money is going to cost me, and I can get it for ten years. So far I haven't found anything. Ah, it's kind of interesting, the Japanese companies earn very low returns on equity, and they have a bunch of businesses that earn four, five, six percent on equity. And it's very hard to earn a lot as an investor when the business you're in doesn't earn very much money. Now some people do it. In fact I've got a friend Walter Schloss who worked with Graham at the same time I did, and it was the first way I went at stocks, to buy stocks selling way below working capital, very cheap quantitatively. I call it the cigar butt approach to investing. You walk down the street looking for a cigar butt someplace, and finally you see one, and it's soggy and kind of repulsive, but there's one puff left in it, so you pick it up, and the puff is free. I mean it's a cigar butt stock and you get one free puff out of it and then you throw it away and you walk down the street and try to find another one. And it's not elegant, but it works. If you're looking for a free puff it works. Those are low return businesses. But time is the friend of the wonderful business -- it's the enemy of the lousy business. If you're in a lousy business for a long time you're going to get a lousy result even if you buy it cheap. If you're in a wonderful business for a long time, even if you pay a little too much going in, you're going to get a wonderful result if you stay in a long time. I find very few wonderful businesses in Japan at present now. They may change the culture in some way so that management's get more stockholder responsible where they earn returns that are higher, but at the present time you'll find a very lot of low return businesses. And that was true even when the Japanese economy was booming. It's amazing, they had an incredible market without incredible companies. They were incredible in terms of doing a lot of business but not incredible in terms of the return on equity they achieved. And that's finally caught up with them. So we've so far done nothing there. But as long as money is at one percent I'll keep looking."

Additional Aussie Housing Bubble Articles

Shared by a reader in the comment section of an earlier post

Second Wave Petroleum Announces BHL Joint Venture

Looks like I might have been a little slow on this one.  Saw some chatter that a private company called Coral Hill Energy had drilled a very successful BHL well immediately to the north of Second Wave's property.  I was doing the due diligence this weekend but this might take the share price away.....

CALGARY, Feb. 22 /CNW/ - Second Wave Petroleum Inc. ("Second Wave" or the "Company") is pleased to announce a strategic joint venture and farm out arrangement at Judy Creek focused on its Beaverhill Lake light oil play and resumption of production at its Judy Creek Pekisko oil battery and gas plant.

Judy Creek Beaverhill Lake Light Oil Joint Venture

Second Wave is pleased to announce that it has entered into a Joint Venture and Farm Out Agreement ("the Agreement") involving its Beaverhill Lake mineral rights at Judy Creek with an intermediate exploration and production Company. The Beaverhill Lake formation in Judy Creek represents a potential large light oil resource opportunity where off-setting acreage is currently being successfully developed through the application of horizontal drilling and multi-stage acid fracturing completion techniques.

Under the terms of the Agreement Second Wave's joint venture partner will have the ability to earn a 60% interest in the Company's 50,000 net acres of Beaverhill Lake mineral rights at Judy Creek by drilling a total of 13 horizontal earning wells. The Agreement calls for the Company's joint venture partner to pay 85% of the total costs to drill and complete each of the Beaverhill Lake horizontal earning wells in exchange for a 60% working interest in each 3,840 acre earning land block. Second Wave will pay the remaining 15% of the drilling and completions costs to retain a 40% working interest. The Company's partner has committed to drill the first two earning wells prior to the end of the second quarter of 2011 and has a rolling option to drill an additional 11 earning wells thereafter to earn an interest in the remaining lands. Second Wave will be the operator of the first well drilled.

This joint venture represents a significant step forward in the development of Company's Beaverhill Lake light oil resource which the Company believes offers meaningful exposure to this potential light oil resource while allowing the Company to focus the majority of its capital on the continued development of its Judy Creek Pekisko oil resource play.

Operation Update

The Company is pleased to announce that it has resumed production at its Judy Creek Pekisko oil battery and gas plant. As noted previously on December 10th, 2010, the Company experienced a fire at its Judy Creek 08-24-063-10W5 gas plant resulting in the plant's gas refrigeration system and the associated building suffering significant damage. As a result of this damage the Company shut in approximately 1,650 boe/d of net production until repairs could be made. Upon completing required repairs and receiving all regulatory approvals the Company started up the new gas plant on February 8, 2011. Subsequently the Company has been systematically re-activating its oil wells in the area to effectively manage the flow of new volumes to the facility. A total of 18 horizontal Pekisko wells have been brought on to date with a further four (4.0 net) wells to be placed on production over the next four weeks.

During the outage the Company took the opportunity to complete a significant number of upgrades to the gas plant to improve operating efficiencies, reduce downtime and to accommodate the Company's expanding production volumes from its planned drilling program in Judy Creek. Capacity of the refrigeration unit, inlet separation and flare system were expanded to accommodate up to 12 mmcf/d of solution gas production. As part of the repair the Company also installed an electrical generator at the plant site to improve operating efficiencies and reduce future downtime.

Since re-starting the Judy Creek facility the Company has reached total corporate production of 2,650 boe/d (60% liquids). In Judy Creek the Company currently has 22 (22.0 net) Pekisko horizontal oil wells drilled, completed and tied in with eight (8.0 net) wells having less than 30 days of production history.

The Company has planned an active drilling program in the first quarter and expects to drill four (4.0 net) vertical Ellerlsie oil wells, one (0.4 net) Beaverhill Lake horizontal oil well one (1.0 net) Pekisko oil well. Two (2.0 net) Pekisko horizontal wells that were drilled in the fourth quarter of 2010 were successfully completed and tied in prior to the start up of the gas plant. To date three of the Ellerlsie oil wells have been cased and completed successfully with the fourth well currently being drilled. Drilling and completion activities on the remaining wells are scheduled to occur later in the first quarter. The Company will look to provide a further operational update on its Judy Creek Pekisko, Beaverhill Lake and Ellerslie oil plays as additional testing and production history is attained in the first quarter.

Moody's Changes Japan Outlook from Stable to Negative

Moody's Investors Service has today changed the outlook on the Government of Japan's Aa2 rating to negative from stable.

The rating action was prompted by heightened concern that economic and fiscal policies may not prove strong enough to achieve the government's deficit reduction target and contain the inexorable rise in debt, which already is well above levels in other advanced economies. Although a JGB funding crisis is unlikely in the near- to medium-term, pressures could build up over the longer term which should be taken into account in the rating, even at this high end of the scale.

More specifically, factors driving the decision are:

1. The severity and persistence of the shock that the global financial crisis imparted on Japan's government finances and on aggravating pre-existing deflationary pressures,

2. As a result, the current policy framework will not be capable of overcoming hurdles blocking a return to a path of fiscal deficit reduction,

3. Increasing uncertainty over the ability of the ruling and opposition parties to fashion an effective policy reform response to the debt and growth challenges, and

4. Vulnerability inherent in the long-time horizon of Japan's gradual fiscal consolidation strategy to worsening domestic demographic pressures, as well as to possible, renewed shocks in a fragile and uncertain, post-crisis global economic environment.

The rating action does not affect the Aaa foreign currency bond and bank deposit ceilings, the outlooks for which remain stable. Nor does the rating action affect the Aaa local currency bond and bank deposit ceilings. The ceilings act as a cap on ratings that can be assigned to the domestic or foreign currency obligations of other entities domiciled in the country.


The global financial crisis has had a deep effect on Japan's economy. It has significantly raised the hurdles which policy efforts must overcome to reach the government's 2020 balanced primary budget target (excluding interest expenditure). While Japan's real GDP growth of 3.9% in 2010 may prove to be the strongest among the major advanced economies, the apparent rebound was actually weaker in nominal terms.

Nominal GDP growth was a modest 1.8% on account of chronic deflationary pressures, which were aggravated by the global financial crisis. Over the long term through to 2020, the government does not envisage growth breaking out of the 1-2% real and nominal range in its baseline, "Prudent" scenario.

Moreover, even under the government's more optimistic "Growth Strategy" scenario, the envisaged rise in nominal GDP to 3.8% by 2020 will by itself not be strong enough to eliminate the primary budget deficit—thus the importance of policy reform. While a more buoyant global economy and a higher domestic labor force participation rate would boost growth under this scenario, new fiscal measures are unavoidably necessary to close the primary deficit.

To that end, the government intends to introduce a comprehensive tax reform program in June. However, the divided Diet -- in which the opposition Liberal Democratic Party controls the Upper House -- and the intensifying level of political challenges to Prime Minister Kan together threaten to bog down such efforts.

By contrast, we note that under that stable government of Prime Minister Koizumi from 2001-2006, confidence in the economy improved and policies gained traction. Were it not for the global financial crisis, the Koizumi target for a primary budget balance may have already been achieved.

While we do not see the government encountering a funding crisis in the near- to medium-term, we agree with Bank of Japan Governor Masaaki Shirakawa's view that "as history shows, no country can continue to run (large) fiscal deficits forever" (7 Feb 2011 speech, "Toward a Revitalization of Japan's Economy").

Large deficits and the collapse of growth since the early 1990s have led to an overhang of government debt that is by far the largest among the major advanced economies -- whether projected at 226% of GDP by the IMF, or at 174% of GDP by the Cabinet Office for 2010 (accounting practices explain the difference). Moreover, both sources project an inexorable rise in debt over the long term under current policy and growth assumptions.


Should the government of Japan put into place a comprehensive package of fiscal and supply-side economic reforms in June, we would monitor developments to assess their efficacy in stabilizing the government's credit fundamentals.

Japan's credit strengths lie mainly in its deep financial markets from which spring an exceptional home bias. The government can fund itself at a lower nominal cost than any other advanced economy. Moreover, throughout the global financial crisis, JGBs demonstrated sounder and more stable safe haven features than even US Treasuries, as the government relies on a domestic funding base buttressed by an ample stock of household savings equal to three times GDP and relatively moderate indebtedness.

Related to Japan's home bias is its strong external payments position which insulates the country from external shocks. In addition to a seemingly structural current account surplus on the balance of payments, its net international investment position, at 58% of GDP in 2009, was the largest of any industrialized advanced country — larger than Germany's 28% of GDP, while Aa-rated Spain and Italy had net liability positions. In fact, net income receipts from overseas assets provide a bigger contribution to the current account surplus than net merchandise trade.

Lastly, the strong external payments position is a reflection of the continuing competitiveness of Japan's large, export-oriented companies. Despite the recent appreciation of the yen, we see this sector continuing to support growth and the external position over the long term.


Japan's very large economy and very deep financial markets provide the wherewithal to absorb economic shocks. Nevertheless, the inexorable rise in government debt suggests that actions are urgently needed to regain a path of fiscal consolidation. Moreover, the government's large refinancing needs introduce susceptibility to financial tipping points, which could lead to abrupt, downward rating pressures. These may include:

1. An inability by the government to put into place its comprehensive tax reform program, or its adoption of weak measures that postpone action into the indefinite future.

2. A depletion of the domestic funding base to a level that is insufficient to meet government refinancing requirements. This could arise from a drop in the household savings rate into negative territory.

3. A shift in the current account on the external balance of payments into deficit. This would reflect a downshift in national savings and would raise government funding costs to a level on par with those in foreign government debt markets. It could also sharply raise the risk premium for JGBs.

On the upside, policies which help revitalize the economy and which lead to a clear and sustainable reduction in fiscal deficits would support the current Aa2 rating.

We expect the outlook horizon to extend over the next year or two, depending on developments.


The last rating action was on the Government of Japan on 18 May 2009, when Moody's unified Japan's public sector ratings at Aa2 with a stable outlook.

The principal methodology used in rating the government of Japan is "Moody's Sovereign Bond Methodology", which was published in September 2008.

Press releases of other ratings affected by this action will follow separately.

Friday, February 18, 2011

Notes from Howard Marks lecture

Good stuff.  It is never much more than common sense folks.

Like if you can buy Petrobank today, pay nothing for 700 million barrels of oilsands and nothing for a game changing technology, get a management team that took a $50mil mkt cap company to $5bil in a decade, sells a commodity the world is going to be badly in need of over the next decade........your investment will likely work out ok

Rare Interview With SAC Capital's Steven Cohen

Thursday, February 17, 2011

February Petrominerales Presentation

Didn't see much new.  I'd love to know if there are follow ups to Yatay planned.  I noticed they had expanded fluid handling capacity at Caruto to 14k so they must be planning a follow up there.  First well was put on at 5.6k per day natural flow.

More From Muddy Waters on CCME

If his one gets delisted likc their first target does one jump on board the next time they spot a fraud ?

Petrominerales - What will it look like after 45 exploration wells in 2011 ?

I struggle a bit with PMG.  Still have a large holding due to the spinoff from PBG.  Not cheap based on common metrics, but when you grow 75% per year it isn't historical metrics that you should be thinking about.  It is what the exploration program over the next 3 years is going to find.

Wrote a little article for gurufocus today:

Goldman Suggests A Way to Play Japan Debt Problem

I've been reading Kyle Bass letters on Japan and his case is very convincing.

Goldman has an idea of how to profit.

Wednesday, February 16, 2011

Energy Report Feb 15, 2011

GeoResources Inc. (NASDAQ:GEOI).

Triangle Petroleum Corporation (TSX.V:TPO; NYSE.A:TPLM).

RAM Energy Resources (NASDAQ:RAME).

Energy Partners, Ltd. (NYSE:EPL).

Rosetta Resources Inc. (NASDAQ:ROSE)


Pescod article had the following regarding BXE value of the their Cardium interests.  In the article the Canaccord analyst suggests 78 sections in the Cardium are worth $2 billion. 

Interestingly Petrobakken has 240 sections.  So is that worth $6 billion ???  I don't know, but it does seem strange that the stock price was punished for paying $1 billion for it as clearly it is likely worth $3 billion plus.

"Cardium light oil upside: Bellatrix currently holds 78 net

sections of Cardium rights in West Central Alberta, along

with some of the best producing wells that have been reported

in the play to date. We see over $2 billion of ultimate

Cardium upside, which, based on our forecast drilling

pace, we have calculated as $6.98 per share in potential


Tuesday, February 15, 2011

Presentation on the Horn River and Montney Plays

Shell Warns on Oil Supply/Demand

Petrobakken Montney and Horn River - Over 1TCF of recoverable Natural Gas

Number crunching based on the numbers in this article:


Sections 17
BCF per section 40,000,000,000
Recoverable 30%
Recoverable per section 12,000,000,000
Total recoverable gas - Montney 204,000,000,000

Horn River
Sections 97
BCF per section 40,000,000,000
Recoverable 30%
Recoverable per section 12,000,000,000
Total recoverable gas - Horn River 1,164,000,000,000

Looks like they could have over 1TCF of recoverable gas here.  So many variables at this point though.  The old rule of thumb was that 1TCF was worth $1 billion.  That would be about $5 of value on PBN's 187 million shares.

More work needed.

Petrobakken and the Montney continued

Article with details on the Montney and Horn River.  Will take a stab in a few minutes at what this might be worth

"Additional investments in natural gasAdditional long-term growth will come from PetroBakken’s large land position in the Montney and Horn River natural gas resource plays located in Northeast British Columbia.

The company has 17 sections of land in the Monias area with Montney potential of upwards of 30 to 50 billion cubic feet (bcf) of original gas in place (OGIP) per section, providing a total resource potential of 510 to 850 bcf of OGIP with recoveries expected to range between 25% and 35%.

In addition, the company will have a further 97 sections north of Fort Nelson in the Horn River Basin. Various industry sources estimate that the prospective zones within the Horn River Basin may contain between 30 and 300 bcf of OGIP per section. PetroBakken’s technical team has successfully drilled over 450 horizontal wells with multi-stage fracture stimulations, more than any other operator in the Western Canadian sedimentary basin. This experience positions PetroBakken to be a leader in the development of these massive unconventional resource plays, according to Smith."

Petrobakken and the Montney

Oil and Gas Investments Bulletin -

There is Schaeffer's website.  Here are some of his comments about the Montney play on the BC/Alberta border.  Why am I interested ?  Because of Petrobakken (thus Petrobank's) 400 drilling locations there that I have assigned zero value to.

Canada's Junior Gas Stocks: The Surprise Performers

It’s strange but true – some of the best performing energy stocks in Canada have been the junior GAS stocks.

And there is also an argument that the future may be brighter than previously thought for a select few gas stocks.

All these stocks have three things in common:

1. They have core areas in the Montney formation that straddle the BC-Alberta border.

2. Their wells are liquids-rich, i.e. high Natural Gas Liquid (NGL) count, or wet gas count – especially CONDENSATE.

3. They hit big wells, and better understand the multi-zone potential of the Montney

In January Artek (RTK-TSXv) jumped 30% from $1.30 when it announced a well that was 1895 boe/d – including an eye-popping 1000 barrels a day of condensate, which gets roughly the same price as oil. And the stock has kept rising – now at $2.10

Cequence (CQE-TSX) almost doubled from $1.60-$3.10 per share in the last three months as it announced several Montney wells, including one well that was 8 mmcf/d (million cubic feet of gas per day) and 200 bopd of NGLs.

Painted Pony has gone from $6-$11 in the last few months not because of its great Bakken oil lands, but because of its Montney reserves, production and flow rates. One of their wells flowed 13 mmcf/d, and all their wells had more than 20 bbl/mmcf – 20 barrels of NGLs for every million cubic feet of gas.

My own little favourite, Donnybrook Energy (DEI-TSXv) has gone from 23 to 70 cents on its Montney lands – a triple for OGIB subscribers (not many junior gas stocks can say that...).

These stock are popping up because the industry is still improving how well they frack this formation, and are continuing to get higher and higher flow rates. But I think more importantly, the ENTIRE market is now getting just how profitable the NGLs, especially condensate, really are for these producers.

Condensate, or C5, as the industry calls it, is a very light oil, over 50 API, and has a ready market in Alberta as it is used to dilute the goopy, syrupy heavy oil from the oil sands, so it will flow in a pipeline. As oil sands production increases, the need for condensate will keep its price strong power for many years.

And it’s not just stock prices that are rising in the Montney – land values are going up as well. The Montney generally runs 20-40 bbl/mmcf, but a new liquid-rich play at the bottom, the Duvernay shale (about 1000 m below the Montney), has been shown to have 75 bbl/mmcf and have OGIP (Original Gas In Place) of 5x what the Montney has.

The industry has since paid $800 million for land where the Duvernay is the focus.

Trilogy, Celtic Explorations (CLT-TSX) and Yoho Resources (YO-TSX) are now drilling the Duvernay shale at the bottom of the Montney, and this formation goes out across much of the play. This consortium has found the Duvernay has 100 bcf of Original Gas In Place (OGIP) per section, compared to 20 bcf for the Montney. So recoverable gas in the Duvernay could be 2-3x what it is in the Montney – across much of the play – and with twice the condensate content of the Montney. Many juniors don’t have the $10 million per well to drill the Duvernay – but if it’s there under their property, whomever buys them out almost certainly will.

The Montney Gas Play

by Keith Schaefer on November 27, 2010

Here’s where the attention is shifting now

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

An Unconventional Nat Gas Play Goes “The Full Montney”

by Keith Schaefer on November 4, 2010

The Junior Players in this “Unconventional” Natural Gas Formation

Large land prices for natural gas parcels in Alberta are continuing to drive higher – despite some of the lowest gas prices in the last seven years in western Canada.

Alberta has made over $2 billion on land sales so far in 2010, at an average price of $629.57/hectare, vs. a total of $280 million at the same time last year, at an average price of $189.91/ha. And at the most recent sale, where $151 million was raised, much of that was for natural gas.

While that may not make sense, the answer can be found in one word – Montney.

This formation is turning into exactly what producers in western Canada need to stay competitive in a time of low gas prices in North America – big, thick and rich in higher value add natural gas liquids, or NGLs.

“The Montney is becoming increasingly attractive because it is recognized as a thick, highly pressurized formation with a lot of recoverable reserves of natural gas and with a high “NGL” content,” says Malcolm Todd, President of Donnybrook Energy (DEI-TSXv), which has 34 gross sections in the Montney.

The Montney is a NW-SE trending, football shaped formation that straddles the border between British Columbia and Alberta. Much of the merger and acquisition activity in the upstream Canadian gas industry has been here – and at high valuations.

Buyouts this year included ARC Energy buying Storm Exploration for $69,000 per flowing barrel – which at the time was roughly the average valuation price for junior/intermediate oil producers. When Monterey Exploration was bought out by Pengrowth in July, they paid $200,000 per flowing barrel (but some other production behind pipe).

“Those were really strong sales, and it shows the long term money knows this is a good place to be,” says Ben Jones, CEO of Canada Energy (CE-TSXv), which has 42 sections in the Montney.

He added “our observation has been that critical mass and pipeline access drive the acquisition costs; i.e. large tracts bring higher prices than small, isolated tracts. That’s somewhat counterintuitive – whatever happened to ‘volume discounts’?”

Jones listed off a number of geological factors that are making the Montney an industry focus:

1. broad expanse-companies can assemble or buy a BIG land package

2. intermediate depth

3. sweet gas (vs Haynesville shale in Louisiana which has carbon dioxide)

4. very fracable rock (“brittleness”),

5. high amounts of natural gas liquids through much of the trend

6. flat declines relative to other shale plays (VERY important for valuations…)

7. The Barnett Shale appears to be the closest analogue in the US, although he says the Estimated Ultimate Recoveries (EUR) are higher in the Montney.

Donneybrook’s Todd adds that though the Montney is an “unconventional” play, it’s not a true shale play – it’s better. It’s more like a sandstone, which means it’s more porous than a shale, and so the fracks should move farther into the formation – making Point #7 – higher recoveries – come true.

Jones could have added “multiple zones” – there is the upper, middle and lower Montney, and two zones called the Doig Phosphate and Doig Siltstone. There is also the Duvernay zone at the very bottom of all the formations which has garnered a lot of attention recently – the Deep Basin it’s called.

Natural gas producers in the Montney have been getting 25-40 barrels of natural gas liquids per million cubic feet of dry gas produced, though sometimes higher. The basket of NGLs trade roughly at 80% of oil prices, which greatly increase the economics for these wells.

Several other factors are also in play – the Alberta government reduced royalty rates in April, and that sparked a renewed interest in gas in the province. Plus, there is a sense in the industry that gas prices will not stay low forever.

“Companies with the ability to fund land will continue to do so if they think it is quality,” says Doug Bartole, President of Vero Energy (VRO-TSX), a gas-weighted producer in Calgary. “They don’t think in short term gas prices – and new crown land has long tenure. They will run their economics accordingly. Current and near term price forecasts are not sustainable.”

There are several junior Montney gas players, including – in alphabetical order – Advantage Energy, Birchcliff Energy, Canada Energy, Celtic Exploration, Cequence Energy, Cinch Energy, Crew Energy, Crocotta Energy, Delphi Energy, Donnybrook Energy, Insignia Energy, Orleans Energy, Painted Pony Explorations, Progress Energy, Rock Energy, Seaview Energy and Terra Energy and Trilogy and Yoho Resources.

PS – A good map to the British Columbia Montney land sales in 2010 is here –

Monday, February 14, 2011

Eric Sprott - Gold Tsunami

WestFire Presentation

Nuttall Again

Bit hard to ignore him on the first two

Eric Nuttall - Sprott Asset Management

Is he 12 years old ?  I don't know.  But I do know he is the most useful analyst I've ever seen on any financial network ever.

Ladies and gentlemen.....Eric Nuttall from Sprott

Interview with Eric Sprott

Courtesy of Zero Hedge

Shell Provides Your Daily Warning On an Oil Supply Problem

THE global appetite for energy is likely to swell far more rapidly than available supply in coming decades as oil production hits a plateau and emerging markets see rampant economic growth, Royal Dutch Shell says.

In a report published today, the oil giant predicts that by 2050 world energy demand may have tripled compared with 2000 levels, based on historical patterns of development. However, energy supplies may grow by only 50 per cent in the same period.

Improvements in energy efficiency could curb demand by 20 per cent. But the world still needs to figure out how to bridge a looming gap between supply and demand that is equivalent to the global energy industry's entire output in the year 2000, Shell calculated.

By the end of this decade the world will run into a plateau in oil production, a development that will put "upward pressure" on oil prices.

Jeremy Bentham, the vice-president for business environment at Shell, said: "The coming surge in energy demand reflects the surge in developing nations. China will be continuing through its industrialisation period over the next ten years, and India is probably ten years behind that.

"This will be followed by the likes of Indonesia, Vietnam, and so on. These successive waves of development will create a surge in underlying demand for energy. This is leading us to a vast zone of uncertainty."

The projections came in a report updating energy scenarios that Shell published in 2008. Since then the recession set global energy demand back by about two to three years, meaning that 2008 demand levels will be reached again only this year.

However the broader trend in energy markets is clear, the report said: the world faces rapid demand growth as emerging markets industrialise, coupled with increasing strains on traditional sources of energy. Oil production is likely to rise 16 per cent between 2010 and 2020, Shell's projections show.

Growth over the subsequent ten years will be virtually non-existent, however, leaving oil production at roughly 96 million barrels of oil a day, Shell said.

Mr Bentham said that while oil production is set to plateau at the end of the current decade, "the stresses in the oil markets may come much earlier".

He said: "You saw the foreshocks of those developments in 2007-08, interrupted by the recession. Now you are seeing in the market a building up of tension again. In the short term you are in a manageable situation given Opec's spare capacity but you get to a more stressed situation later in the decade."

Brent crude prices currently hover above $US100 a barrel amid tensions in the Middle East and growth of around 10 per cent a year in China. The countries that control easily accessible oil are likely to develop their resources "at a pace that meets their own underlying aspirations, and not at the pace at which others would like it to be developed," Mr Bentham warned.

One positive recent improvement in the energy supply outlook stems from huge "shale" gas discoveries. Explorers have more than doubled the discovered resource base in North America in the past three years, prompting Shell to increase its estimates for gas output.

Its previous energy scenarios forecast gas production to reach 65-70 million barrels of oil equivalent by 2030. It now sees close to 83 million barrels of oil equivalent being produced by that time.

That should help to ease demand for polluting coal, but the oil giant is still expecting a doubling in the use of coal between 2000 and 2030. By contrast, oil production is expected to rise by only 27 per cent over the same period.

Renewables will help to bolster resources but they are expected to meet only 16 per cent of energy demand by 2030 compared with 11 per cent in 2000, including so-called biomass fuels such as wood burning.

Get to Know Bill Ackman a Little Better

He bet his father that he would get a perfect score on his SATs.  I'm not sure I can recite the alphabet correctly.

Deepwater Permits Within Weeks ? That is What Bromwich Said

When Giants Run Dry - Jim Puplava On Peak Oil

Saturday, February 12, 2011

Charles T. Maxwell In Barrons - Likes Suncor/Cenovus

$300 per barrel oil by 2020 says the oldtimer.

Get ready to drill: Deepwater permits likely in “next several weeks” says Bromwich

Federal regulators could issue the first new deep-water drilling permits since last April’s Gulf oil spill “in the next several weeks,” the nation’s top offshore drilling regulator told Houston Chronicle editors and reporters today.

Michael Bromwich, director of the Bureau of Ocean Energy Management, Regulation and Enforcement, previously had projected the first permits by the end of the second quarter.

The hold-up for the five deep-water permits that are pending is mainly related to industry finishing the construction of equipment for a spill containment system, Bromwich told the Chronicle editorial board.

An industry consortium formed by oil majors including Exxon Mobil, Shell and Chevron is expected to conduct testing later this month on a capping stack that could handle a Macondo-like blowout. A second well containment system being developed by Helix Corp. is expected to be ready by the end of March.

Bromwich is in town to speak at a symposium on offshore drilling at Rice University’s Baker Institute. Here’s a copy of his prepared remarks.

Thirty-one shallow water drilling permits have been approved since last June, while there are currently nine shallow- water permits pending, Bromwich said.That’s not the pace industry would like, but he said no more than 15 permits have been in line waiting for review since the Macondo blowout and oil spill. BOEMRE actually shifted staff to the permit review process last year to speed up the process, but industry hasn’t applied for shallow-water permits at a higher pace.

Bromwich denied suspicions by the oil industry and its supporters that the pace of permitting reflects a desire by the White House to stop all offshore drilling.

“I have very little contact with the White House,” Bromwich said. “They’re interested in what I do, but they can’t lean on me to do political things.”

If anything, he said, the pace of permitting may have been slowed by BOEMRE field personnel who are extra cautious about making decisions in the wake of the Deepwater Horizon accident, for fear of making a decision that could expose them to criminal liability.

Bromwich, a criminal lawyer, said he wants to reassure employees they need not fear prosecution if they perform their duties conscientiously.

“That’s something I’m going to stress to them in a meeting next week,” where he will speak to the approximately 500 BOEMRE workers along the Gulf Coast who take in the drilling applications.

The joint BOEMRE/U.S. Coast Guard investigation of the failed blowout preventer on the Deepwater Horizon is still ongoing and shoudl be done by the end of February, with a report on it to be issued toward the end of March. That will mean the next hearing of that investigatory panel will not happen until April at the earlier, Bromwich said.

Friday, February 11, 2011

Zeke Ashton - Tilson Dividend Fund Annual Commentary

Zeke's annual comments plus a couple of ideas in a Kiplingers article

World's Richest Man Bullish On Colombia

Warms the heart of the holder of a company (Petrominerales) who had their pick of the litter when land blocks were auctioned off in 2004 for peanuts.  Now big companies coming in, paying big bucks and big royalty rates.  Petrominerales simply had to commit to exploration and pays much lower royalties than the new land auctions.

Carlos Slim, named the world’s richest man by Forbes Magazine, said he’s seeking to boost his investments in Colombia because of the country’s open policy on oil exploration, its mineral assets and growing middle class.

Slim aims to expand the drilling and oil-platform services he provides Mexico’s Petroleos Mexicanos through exploration opportunities in Colombia, he said yesterday in an interview at Bloomberg News headquarters in New York. Slim, whose holdings rose to $70 billion last year, has stakes in U.S. oil services companies Bronco Drilling Co. and Allis-Chalmers Energy Inc.

“The government is actively looking at the development of the oil industry and is promoting other investments,” he said. “We’re looking at what to do beyond the telecommunications business that we’ve been doing for 10 years in Colombia.”

Colombian foreign direct investment more than quadrupled in the past decade, to $7.2 billion in 2009 from $1.5 billion in 1999, after former President Alvaro Uribe repelled guerrilla groups that attacked oil pipelines and assassinated politicians.

OGX Petroleo & Gas Participacoes SA, the oil company controlled by Brazilian billionaire Eike Batista, said last year it may begin producing crude in Colombia in 2012. Batista is also boosting his investments in the Andean country, joining Anglo American Plc, BHP Billiton Ltd. Xstrata Plc and Drummond Co. in tapping South America’s largest coal reserves.

Surging Prices

Commodity prices are surging as emerging markets such as China and India require more resources to accommodate the needs and wishes of their growing middle classes for infrastructure and consumer goods, according to Slim. The depreciating value of the dollar is also driving those countries’ governments to build up their investments in commodities, he said.

“They don’t want to have Treasuries,” Slim said. “The dollar is weak and there’s no interest, and also with commodities they have reserves for internal consumption.”

Colombian President Juan Manuel Santos, who took office in August, is counting on rising commodity investments to fuel the Andean nation’s growth. Oil blocks auctioned last year will draw more than $1 billion over three years from companies including Royal Dutch Shell Plc, SK Energy Co. and Repsol YPF SA, according to the government.

Colombia attracted about $6.5 billion in foreign direct investment through the third quarter of 2010. Foreign direct investment in mining rose to $3 billion in 2009, the last year of annual figures available, from $1.8 billion in 2008, according to central bank figures.

FPA Capital's Rodriguez Interview

Good interview.  Rodriguez was out in front of the debt bubble (although fund still got hammered) and has been talking about peak oil for quite a while.

Should investors stay away from municipal bonds?

I’ve been quite cautious about them for several years. You’ve seen their yields blow out. There are probably some good values now, but you have to really pick through them.

How about corporate bonds?

We’re staying very short in duration with [any type] of bond because we honestly don’t know how this thing is going to unfold. Some managers are adding equities into their bond portfolios. It isn’t because they think equities are attractive; I would say they’re not enthusiastic about bonds.

What do you think of the new Congress?

Better than the last Congress! There’s some positive talk, but there are so many ingrained constituencies that feed from the public trough that it makes it very difficult to restructure.

Assume you don’t think the last round of the Fed’s quantitative easing will propel the economy into a sustainable expansion?

It’s the height of lunacy! The purpose of QE2 is to lower interest rates and encourage asset price appreciation so that consumer balance sheets are improved and there’s a higher propensity to spend. You do not build long-term, productive resources by encouraging people who are overleveraged to go out and borrow more.

The consumer added more debt to his balance sheet between 2000 and 2007 than in the prior 40 years.

What are your thoughts about the historic low interest rates’ effect on retirees?

The Fed policy is an abject, unmitigated attack on savers — and a horrendous attack on people who are in or near retirement.

What will it take to get the jobs market going?

Re-training and re-directing. Various tax policies should be changed. I talked about that more than two years ago. You’re looking at higher levels of unemployment for a prolonged period.

Rest of article:,2#

Thursday, February 10, 2011

My pal Bromy still saying mid year for permits

I heard Al Reese on TV say he is still optimistic about Q1.  The man Bromwich is saying mid year timeline still appropriate.  Quite frankly, as an ATP shareholder either will work fine.

The Interior Department’s top offshore drilling regulator met with officials from major oil companies Tuesday and said he sees progress in their efforts to improve their capability to contain blown-out deepwater wells.

Interior is demanding improved capabilities before it resumes issuing permits for deepwater oil-and-gas drilling, which was halted after last year’s BP oil spill.

Michael Bromwich, director of Interior’s Bureau of Ocean Energy Management, Regulation and Enforcement, said he met Tuesday with the Marine Well Containment Co., an Exxon-led consortium of major oil companies that also includes Shell, Chevron and ConocoPhillips and is developing enhanced systems that can be quickly deployed in the event of another blowout.

“I think they are making progress and they answered some of the questions we had, and we will continue to work with them,” Bromwich told reporters Wednesday.

Last Friday Bromwich sent letters to the consortium and the Helix Energy Solutions Group — another company developing containment systems — seeking details on their efforts.

“The most critical missing piece in the process of approving applications for permits to drill in deep water is the demonstration of well control and subsea containment capability,” Bromwich wrote in the letters to the companies Friday.

On Wednesday Bromwich said the meeting provided some of the answers he’s seeking.

“I think we are getting closer. I think we needed to put the questions to the highest levels of those companies so we could get good and coherent responses. We got many of those yesterday, and we will have continuing discussions with them over the next several weeks,” he said Wednesday.

Bromwich last month said he expects permitting for deepwater projects to resume before mid-year. Asked Wednesday if that timeline remains effective, he replied, “Yes. I think it is.”

Oil Drilling Boom - per WSJ

Rig Count Doubles in U.S. as Companies, Landowners Tap New Crude Sources

Oil-drilling activity in the U.S. has accelerated to a pace not seen in a generation as energy companies, oilfield contractors and landowners rush to exploit newly profitable sources of crude.

The number of rigs aiming for oil in the U.S. is the highest since at least 1987, according to Baker Hughes Inc. The 818 rigs tallied by the oilfield-service company last week are nearly double last year's count and about 10 times the number that were drilling for oil in the late 1990s.

While the drilling surge is unlikely to yield enough crude to alter the global oil-supply picture, analysts say the new activity, centered on so-called unconventional reservoirs, could greatly boost domestic oil production and help offset declining output in Alaska and the Gulf of Mexico.

[More from Widening Probe Snares Trader]

These reservoirs, trapped in tight shale-rock formations, were deemed too hard to crack a decade ago. But in the past two years, breakthroughs in drilling technology, combined with the resilience of high oil prices, have led companies like Chesapeake Energy Corp. (NYSE: CHK - News) and Petrohawk Energy Corp. (NYSE: HK - News) to switch rigs formerly devoted to drilling for natural gas to emerging oilfields like the Eagle Ford shale formation, which stretches from the outskirts of Houston and San Antonio, Texas, south into Mexico.

In this sun-scorched cattle country, prolonged drought and financial strain gave way to prosperity when the oil-patch leasing agents began pouring into town three years ago. For struggling ranchers the proceeds from the subsequent land deals and royalties from the intense oil drilling that is now under way are "pennies from heaven," says real-estate broker and oil-and-gas producer David Phillip. "All these new trucks you see ranchers driving," he says, "it wasn't from cattle."

Land prices in the area have risen exponentially, and ranchers such as Mike Green, who owns about 70 acres along the Guadalupe River in the heart of the Eagle Ford's oily swath just outside Cuero, are holding out for higher offers. Three years ago ConocoPhillips's Burlington Resources unit offered Mr. Green $400 an acre to lease the land, Mr. Green says. He declined: "That's like beach-front property."

[More from Goodyear Posts Loss, Closes Tennessee Plant]

His belief that prices would rise appears to have been validated. Last fall, Petrohawk paid the state $12,012 an acre for mineral rights in the river's bed.

The Eagle Ford experienced a more-than-tenfold increase in the number of wells drilled last year over the 94 completed in 2009 and is slated for even more development this year. And the trend is playing out nationally, in formations such as the Bakken Shale in North Dakota and the Monterey Shale in California.

Oil production from these sources is expected to reach 1.5 million barrels a day by 2015 from fewer than 500,000 barrels a day now, according to energy consultancy Wood Mackenzie. That is similar to the amount of crude produced in the offshore Gulf of Mexico, and the equivalent of nearly 30% of current U.S. production. That extra million barrels per day could help replace some expensive oil imports as conventional oilfields in the rest of the country decline.

To extract the rock-bound crude, explorers and producers will boost spending this year by an estimated 8.1% to $93.6 billion, according to a Barclays Capital survey of 210 companies.

[More from Icahn Extends Dynegy Offer Again, With 4.41% Support]

In recent months large natural-gas producers Devon Energy Corp. (NYSE: DVN - News), Chesapeake and Petrohawk have outlined major transitions to oil exploration. Even Chinese state oil giant Cnooc Ltd. is also embracing unconventional oil: its first major investment in the U.S. consisted of an Eagle Ford joint venture with Chesapeake. Large, oil-focused companies such as Anadarko Petroleum Corp. (NYSE: APC - News), Occidental Petroleum Corp. (NYSE: OXY - News) and ConocoPhillips are also ramping up their drilling programs from California to North Dakota to Texas.

These companies are applying to oil shales the same horizontal-drilling and hydraulic-fracturing techniques that they developed to coax natural gas out of tight, deeply buried rock formations. So successful were producers in that pursuit that they created a glut of natural gas and pushed prices into a protracted slump. Despite high heating demand during this winter's unusually frigid temperatures, natural-gas futures are on track for their lowest winter peak since 2001-02.

Oil, on the other hand, is a more profitable commodity; its prices are approximately $90 a barrel, about twice the level seen in the immediate aftermath of the financial collapse of 2008.

Analysts say that the oil frenzy is unlikely to result in a similar slump. Unlike domestically traded natural gas, however, oil is priced mainly on world-wide demand. And no matter how much crude comes out of North America's unconventional reservoirs, the global appetite for oil—which the International Energy Agency predicts will rise to 89.1 million barrels a day this year—won't be sated. Nor is the production likely to significantly affect prices, says Wood Mackenzie's Matthew Jurecky.

Mr. Phillip, the real-estate broker, is also taking note. He says the South Texas countryside glows at night as small producers flare gas that they cannot sell because pipelines are bloated. As a result, Mr. Phillip, who operates seven traditional vertical gas wells, will begin drilling his first horizontal oil well into the Eagle Ford this week.

ATP CEO on Fox News

Al Reese on Fox News yesterday talking about permits.  Stil optimistic that they get a permit this quarter, but who the hell knows.

At the mercy of the government.

China buys a little more of Canada


EnCana Corp (C:ECA)

Shares Issued 735,309,907

Last Close 2/8/2011 $31.25

Wednesday February 09 2011 - News Release

Mr. Randy Eresman reports


EnCana Corp. has signed a co-operation agreement with PetroChina International Investment Company Limited, a subsidiary of PetroChina Company Limited, that would see PetroChina pay $5.4-billion to acquire a 50-per-cent interest in EnCana's Cutbank Ridge business assets in British Columbia and Alberta. Under the Co-operation Agreement, the two companies would establish a 50/50 joint venture that would ambitiously grow natural gas production from the Cutbank Ridge lands for years ahead.

"This agreement is the culmination of more than nine months of discussions between PetroChina and EnCana and represents both a significant achievement and major milestone in the developing relationship of our two companies. By combining resources with PetroChina in this joint venture, we would expect to recognize additional value through accelerating our pace of development and by leveraging increased capital and operating efficiencies through further technical advancements and through greater certainty of the long-term development plan for the business assets," said Randy Eresman, EnCana's President & Chief Executive Officer.

Accelerating value creation from EnCana's large undeveloped resource potential

"This transaction is an important step forward in the plan that we announced last spring A to accelerate recognition of the value inherent in our vast natural gas resource portfolio. Over the past number of years EnCana has assembled a very large portfolio of some of the best natural gas resource plays in North America by focusing on high-quality resources and building the expertise to capture and develop them at some of the lowest costs in the industry. This agreement provides further evidence of the tremendous value that our teams have created in our Cutbank Ridge key resource play, just one of the many large resource plays we have in our company," Eresman said.

Under the agreement, PetroChina would pay C$5.4 billion to acquire a 50 percent interest in the Cutbank Ridge business assets, an interest that represents current daily production of about 255 million cubic feet equivalent per day (MMcfe/d), proved reserves of about 1.0 trillion cubic feet of natural gas equivalent (Tcfe), as at the end of 2010, and about 635,000 net acres of land straddling the British Columbia and Alberta boundary. The planned joint venture infrastructure, on a 100 percent basis, includes about 700 million cubic feet (MMcf) per day of processing capacity, about 3,400 kilometres of pipelines and the Hythe natural gas storage facility. The business assets in this planned joint venture include the majority of EnCana's Montney, Cadomin and other natural gas assets on a portion of the company's British Columbia and Alberta lands. Under the planned joint venture, each company would contribute 50/50 to future development capital requirements. EnCana will initially operate the joint venture's assets and market the production. Following the completion of the transaction, the joint venture would operate under the direction of a joint management committee.

Transaction subject to completing additional agreements and regulatory approvals

The transaction is subject to regulatory approval by Canadian and Chinese authorities, due diligence and the negotiation and execution of various transaction agreements, including the joint venture agreement. The economic adjustment date for the transaction is expected to be January 1, 2011 with the closing date dependent on the various government and regulatory approvals.

Balanced reinvestment aimed at preserving financial strength and flexibility

"With the transaction's anticipated proceeds, EnCana will continue to pursue a balanced approach to disciplined capital investment, maintaining financial flexibility and liquidity, and strong investment grade ratings, while providing strong returns to shareholders through dividends and share purchases under our normal course issuer bid," Eresman said.

Responsible natural gas growth

The joint venture is expected to develop existing EnCana lands at a rate that would be faster than would be achieved without the additional investment. As EnCana pursues its long-term growth strategy, the company remains committed to demonstrating reliability and trustworthiness as it continually pursues safe, energy-efficient, sustainable development. Consistent with its long-standing operating and corporate responsibility practices, EnCana is committed to advancing this planned joint venture with consideration and respect for the people, communities and environments where the company operates.

Wednesday, February 9, 2011

Canacol With a Nice IP from a well in Colombia


Canacol Energy Ltd. has provided an update of its development drilling program at its operated Rancho Hermoso Field located in the Llanos Basin of Colombia. The Corporation has completed two of four planned production tests in the recently drilled Rancho Hermoso 10 ("RH 10") well, with testing of the Ubaque and Guadalupe reservoirs now complete. The Corporation is currently testing the Los Cuervos - Barco reservoir, which will be followed by testing of the Carbonera 7 ("C7") reservoir, a new potentially productive reservoir within the field. The RH 10 well encountered 110 feet ("ft") of net oil pay within 5 different reservoir intervals, which include, from top to bottom, the C7, Mirador, Los Cuervos-Barco, Guadalupe, and Ubaque.

Charle Gamba, President and CEO of Canacol, stated "The RH10 well encountered all of the main producing reservoirs at the structurally highest position yet encountered in the Rancho Hermoso field. In addition to the main producing reservoirs, all of which are oil bearing, the well also encountered a promising oil bearing sandstone within the C7 reservoir, which has exhibited similar characteristics in other wells drilled, yet not tested, last year. A successful test of this interval may result in potential reserves and production upside currently not realized either in reserves booking or in the future development planning for the field. The Corporation recently announced the expansion of the Rancho Hermoso drilling program up to 7 wells in total for 2011 to follow up on the success of the drilling program to date. With strong results from its development drilling program and Rancho Hermoso, and a drilling program dominated by exploration wells in Colombia and Guyana, five of which each target 100 million barrel plus recoverable conventional oil prospects, 2011 is proving to be a very exciting year for the Corporation, and for our shareholders."

Rancho Hermoso 10 Well Results

The RH 10 well was spud on January 4, 2011, and reached a total depth of 10,305 ft md on January 16, 2011 in the Ubaque reservoir, which was the primary producing target of the well. The well was drilled in a record time of 12 days (approximately 40% less time than the Rancho Hermoso 6, 8, and 9 wells) using advanced drilling techniques which will be applied to all future wells drilled in the field in order to lower drilling costs. Good oil and gas shows were encountered in the C7, Mirador, Los Cuervos - Barco, Guadalupe, and Ubaque reservoirs while drilling. Petrophysical analysis of the open-hole logs indicates a total of 110 ft of oil pay within the well: 12 ft of oil pay within the C7 reservoir with average porosity of 21%, 9 ft of oil pay in the Mirador reservoir with average porosity of 25%, 19 ft of pay within the Los Cuervos-Barco reservoir with average porosity of 26%, 25 ft of oil pay within the Guadalupe reservoir with average porosity of 28%, and 45 ft of oil pay within the Ubaque reservoir with average porosity of 25%.

Production Test Results

The Ubaque reservoir at RH 10 contains 45 ft of net oil pay, and was perforated between 10,192 and 10,221 ft md. The well flowed at a final stable gross rate of 8,122 bopd (2,030 bopd net) of 18 degrees API oil with 6 % water cut using an electrical submersible pump ("ESP") set to a frequency of 65 Hz during a 24 hour flow period. Water cut decreased steadily throughout the course of the production test, and based upon the salinity of the water, management has concluded that the water is completion fluid related to the drilling of the well, and not formation water.

The Guadalupe reservoir at RH 10 contains 25 ft of net oil pay, and was perforated between 9,453 and 9,462 ft md. The well flowed at a final stable gross rate of 10,944 bopd (2,736 bopd net) of 32 degrees API light gravity oil with 5% water cut using an ESP set to a frequency of 70 Hz during a 24 hour flow period. Water cut decreased steadily throughout the course of the production test, and based upon the salinity of the water, management has concluded that the water is completion fluid related to the drilling of the well, and not formation water.

Forward Plans

Testing of the Los Cuervos - Barco reservoir is currently underway, which will be followed by testing of the C7 reservoir. A successful test of the C7 reservoir in this well may prove up additional reserves and development options for the remainder of the field going forward. Other wells drilled in the field in 2010 also encountered similar to better reservoir quality and oil potential within the same reservoir, however none were tested. The Corporation will release the results of these tests when they are available. Upon completion of the production testing the well will be placed immediately on production through the permanent facilities.

The RH 10 well represents the last of the 5 well development drilling campaign initiated in the field in mid-2010. The Corporation plans to commence an up to 7 well development drilling program in late second quarter 2011 targeting production from the Ubaque, Guadalupe, Los Cuervos - Barco, and Mirador reservoirs. Should the C7 reservoir in the RH 10 well demonstrate good production potential, the C7 may also form part of the drilling program in 2011.

The Corporation is expanding the fluid handling capacity of the permanent facilities from the current 32,000 barrels of fluid per day ("bfpd") to approximately 200,000 bfpd, and anticipates that the expansion will be complete in March 2011. Among other things, the expansion includes additional fluid separation capacity and an additional 20,000 barrels of oil storage capacity. This will allow all of the existing and future Rancho Hermoso wells to be lifted at maximum rates.

The Corporation, through its 100% owned Colombian subsidiary Rancho Hermoso S.A., operates the Rancho Hermoso field under two Contracts with Ecopetrol S.A., those being 1) a Participation Contract in the Casanare Area whereby the Corporation receives 25% (after royalty) of gross production from the Los Cuervos-Barco, Guadalupe, and Ubaque reservoirs, with Ecopetrol S.A. receiving the remainder, and 2) a Risked Service Production Contract for the Mirador reservoir, whereby the Corporation is paid a tariff for each barrel of oil produced and Ecopetrol S.A. receives the oil.

Maybe Worth a Look

Interview With Sprott Resource Corp CEO - The Energy Report

I sold most of what I had at $5.45.  A nice run from $4 in about 6 months.  Will buy again if it retreats at all or if they add value and the market doesn't recognize it.

Kevin Bambrough founded Sprott Resource Corp. in 2007 to take advantage of a future in which he believes trust in paper currencies will diminish. The idea is to invest in natural resources, including precious metals, energy and agriculture, which represent tangible value from which investors will benefit as necessities become more precious. Unlike closed- or open-end mutual funds, the business is a corporation that can buy private equity to ultimately sell, spin out or even take an active investor approach through majority ownership in publicly traded companies. The company also looks for distressed deals. In this exclusive interview with The Energy Report, Kevin and Sprott COO Paul Dimitriadis share their investment philosophy and ideas on how to protect wealth.

The Energy Report: Kevin or Paul, Sprott Resource Corp. (TSX:SCP) bought $74 million of physical gold in 2008 and 2009, which is held in vaults at Scotiabank. How much is that holding worth today?

Paul Dimitriadis: It's worth roughly $105 million, I believe.

TER: It sounds like you're still bullish on gold. Do you think of it as a hedge, a store of value, insurance against catastrophe or all of the above? What is your investment theory here?

Kevin Bambrough: I believe that it's all of the above; but, more so, it's that I place no value in paper money. Fiat currency is worth exactly zero. Right now, we're in a unique time in history in which the populace, as a whole, perceives currency to have value; so, therefore, it does. But I believe that faith is going to continue to dwindle. Ultimately, investments like gold are a much better store of value.

TER: Do you believe that Sprott's stock price will typically underperform its internal rate of return (IRR) until there is some catalyst that causes dramatic inflation or something similar?

KB: In terms of market volatility, I think the market will overvalue our assets at times. Other times, it will have a very negative view and undervalue our assets. The greatest example is to look at the history of Sprott Resource Corp. When we first started the company, we had basically $1.50 per share in cash—that was it. But sometimes the market traded us above $3/share, so we were trading at 2x cash—having done absolutely nothing.

Then, after making significant gains and during the pessimism of late 2008 and early 2009, the stock traded down to about half cash. We had $3.55 in cash and gold per share and we traded down to the $1.80 range, which made no sense. Our goal is not really to trade in line with our asset value at any given point, but rather to be given some value for management's ability to source transactions, create companies and take them public, which we have already done repeatedly. SCP should get a premium value for our ability to involve the right people, including investors and directors, and marry business plans with high-quality assets so our companies outperform their peer group.

KB: Paul, did you want to add to that?

PD: In the oil and gas (O&G) sector, people have no trouble trading companies above their net asset value (NAV) due to their strong management teams. Investors are willing to pay a premium for that. Our hope is that, over time, they'll also be willing to pay a premium for our stock.

KB: With that in mind, we want to make sure we maintain at least a reasonable valuation relative to our assets. Management has committed and demonstrated that we will buy back our stock when it trades at what we believe is an unreasonable discount to the market. So, that really helps to mitigate the risk. We're very aware of the fact that closed-end type vehicles typically trade at a discount because what they do could be replicated fairly easily. You can look at the contents of a mutual fund or a closed-end fund and say, "Well, I could go buy those stocks." But the difference here is that we create businesses in unique sectors with unique opportunities well ahead of when they're properly valued.

TER: Give me an example of that.

KB: We've gotten some significant gains that have come from what initially appear to be very minor investments or very little capital being committed. For example, Stonegate Agricom Ltd. (TSX:ST). In that case, we started with an option agreement totaling $53,000 that turned into a mark-to-market gain of nearly $100 million over a couple of years. And we have made much larger investments, buying things like PBS Coals Limited (LSE:SVST) or Orion Oil & Gas Corporation (TSX:OIP) that were very cheap relative to the public market comparables.

TER: You wanted to get into the fertilizer business with Stonegate because it's a play on agriculture (Ag), a sector on which you're bullish. But doesn't a mining operation add risk to what you already believe is a relatively safe way of playing agriculture?

KB: Let me first say I agree that resource exploration has got to be one of the riskiest sectors in which to be involved. Typically, the odds are insurmountable but Stonegate is not a grassroots exploration. Both of Stonegate's properties had proven historical merit; and our agreement was structured in very low-risk terms, which would minimize any material damage to our assets or the NAV of our company. We approached the transaction, got involved and advanced the asset to the point of going public.

We started with a small investment of $53,000, which was an option agreement that we rolled into a private company, and we ended up with 80% of that company. We were in a very, very comfortable position as far as the money that we had to put in. Stonegate went public with a $50 million offering and, post-IPO, we retained about 54% of the company. We put $12 million into that IPO, which basically gave us a claim on 54% of $50M through our shareholdings. So, there was very little risk.

TER: You've said you're bullish on uranium. Could you tell me your investment thesis there?

KB: The investment thesis on uranium really stems first from the fact that I'm a believer in peak oil. The major oil discoveries were made in the 1960s and 1970s, and the world's major oil fields on most continents have already peaked in terms of production. Now, the discoveries are getting smaller and those that get headlines from time to time are really irrelevant compared to the scale of global consumption. We still get something like 50% of our energy from oil. That statistic—and the fact that the U.S. is a massive importer of oil and runs a substantial trade deficit—has led me to the view that energy prices in the U.S. will go up dramatically. Also, in looking at the cost of coal production, we don't properly account for the environmental costs. I don't think we've begun to come close to accounting for greenhouse gases or general pollution.

So, I think nuclear fuel and nuclear power will grow out of necessity. There's really no other choice than to see significantly higher uranium prices to spur production to meet what I believe is going to be burgeoning demand. In the U.S. in particular, where 90% of uranium is imported, I believe that it'll become an issue of national security that the government will get behind; it'll advocate increasing production in order to protect our energy security.

TER: How are you playing uranium?

KB: We own approximately 20% of the Coles Hill uranium project in Virginia mostly through a private company, of which Virginia Energy Resources Inc. (TSX.V:VAE) owns roughly 30%.

TER: The stock is up more than 300% over the past six months. Back in mid-October, the company announced an NI 43-101 preliminary assessment that stated the net present value (NPV) of the Coles Hill uranium project was more than $400M. Do you see more upside to this stock?

KB: Well, if you look back on that study, you'll see that with higher-priced uranium, the NPV rises dramatically. That's what we've seen recently, as the price of uranium has moved up. And I think you need to see uranium in the $75/lb. area on a sustained basis to encourage supply. Then I think the NPV will be in the $600 million area. But I don't think that study really optimizes uranium's value because, if you were to increase production rates, you would potentially get a higher NPV; and I think that ultimately is what should happen. The reason it's still trading at such a discount to that NPV is purely due to the lack of a uranium mining law in the state of Virginia. We're hopeful that, eventually, it will be resolved in a positive way so the project can go forward.

TER: Sticking with your peak-oil view, you mentioned Orion Oil & Gas a moment ago. Tell me about that.

PD: We completed the transaction in September of 2009. It was a private company that had been distressed. The banks were closing in on some of its lines. The company was looking for recapitalization. We co-invested with Gary Guidry, who, as CEO of Tanganyika Oil Company Ltd., sold his company to Chinese refiner Sinopec Shanghai Petrochemical Company Ltd. (NYSE:SHI) for CAD$2.2 billion. We purchased 80% interest in Orion for $107 million with a mixture of cash and stock; the total purchase price of the deal was $130 million. We just announced that Orion had released updated reserve numbers demonstrating an NPV of $440M on a 10% pre-tax basis—an increase of $106M over the prior year and a 34% increase in reserves from the prior year. Those results stem principally from the large capital program that was put in place this year. The assets are 50% oil and natural gas liquids (NGLs) and 50% natural gas.

TER: You invested $107M. How much have you made on this?

KB: Mark-to-market, it's more than double today.

TER: Orion is 50% gas weighted. Kevin, you've said cheap gas is a myth.

KB: Gas is cheap today, obviously; I think it's very cheap. But I think it's too cheap compared to the level at which it should be trading. I believe the average gas company is engaging in production despite the fact that it can't make money at current prices; and, ultimately, we may find that reserves are overstated and companies can't produce at these prices.

TER: Then why produce gas?

PD: They're doing it for a variety of reasons. First, they have commitments on leases that they must maintain, so they are forced into drilling those properties even though it may not be economic. Secondly, we've seen some alternative forms of financing emerge in the form of joint ventures (JVs) and other creative-financing techniques that are enabling these companies to continue their drilling programs. But I think, slowly, you'll start to see the switch to more liquids-rich deposits by some of these producers. In order to sustain the production needed to meet demand, we're going to need higher prices than those currently in the market.

TER: What are you doing in private equity?

KB: We have two entities that are the hardest to value but potentially the most exciting assets. Right now, very little value is being given to them in the Resource Corp. share price but, eventually, their value could be very large. These are the One Earth companies—One Earth Oil & Gas Inc. and One Earth Farms Corp., both of which are private. One Earth Farms is something we started working on in 2007. It's taken a few years to get there, but we're very pleased that it'll be the largest farm in Canada and one of the largest farms in North America in 2011. It's also positioned to be one of the largest farms in the world in the coming years.

One Earth Farms has synergistic cattle and grain operations. Its real goal is to change the typical farming model, wherein the average farmer buys retail and sells wholesale. By that, I mean he buys his equipment, fertilizer, etc., from a local dealer or store, and then sells his crop as a commodity at harvest time based on wholesale prices. With the size and scale we've already attained, we've established that we can buy wholesale. And now we're working on the model that can allow us to capture some of the retail margin by partnering with food processors or retail outlets. It's almost impossible to find good investments in the Ag sector, and there are very few corporate farms in which to invest around the world. We're building one that, hopefully, will provide inflation protection, as well as food security for potential investors and partners.

By the way, One Earth Farms is, in our minds, the only way you can invest in Canadian farming in a large way. That's because it is in partnership with the First Nations groups of Canada, which are federally regulated and permitted to allow public companies and foreigners to lease land. Typically, non-First Nations lands in Manitoba and Saskatchewan are restricted under provincial law from public company ownership or leasing or foreign participation.

TER: How will you exit this company in the end?

KB: I think that One Earth Farms is a company that ultimately will be highly valued and coveted by three different types of investors. First, large pension funds might find it very desirable for the inflation protection it could provide pension fund holders. Also, I think that the sovereign wealth funds and the Ag ministries of the world that are trying to get food security for their nations would find this to be very strategic. Lastly, we feel it would be valued by ordinary institutional and retail investors if it were publicly listed.

KB: Paul, would you touch on One Earth Oil & Gas?

PD: The One Earth Oil & Gas concept is related to that of One Earth Farms in that it's in partnership with First Nations of Canada. On One Earth Farms' management team, we have former Grand Chief of Saskatchewan Blaine Favel. He was instrumental in creating One Earth Farms. Through his relationships and knowledge of the First Nations sector, we've been able to sign agreements with a number of First Nations with the hope of developing some of the O&G prospects on their lands that have thus far remained undeveloped for a variety of reasons. We've managed to tie up a significant amount of acreage to date, both in Canada and in Montana. This year, we're in the process of drilling some of those prospects and further defining some of their resources, and then we'll bring on production through various plays.

KB: Just to clarify, when Paul says a "significant land package," we're talking about more than 300,000 acres and growing. We're optimistic that we're going to increase our optioned acreage. This is a very, very significant land package, which, in my mind, gives us an eventual opportunity to have real upside to oil and gas prices as we prove up the plays.

PD: Again, we've invested only about $10 million to date in this business. It's another example of us starting a business for a very small amount of capital that could potentially be worth significant sums of money. The risk/reward, in my opinion, is exceptional.

TER: Kevin, you don't have much faith in paper currencies. Do you foresee a time when people will be holding gold, silver or other metals in bank vaults and writing checks based on their value, or using a debit card based on the value of the resources they are holding?

KB: I think that we're going to come up with different monetary instruments that are reflective of precious metal or other holdings. Sooner or later, I envision we'll have a currency that may be reflective of a basket of commodities that we may trade in units tied to something tangible. Ultimately I think we could have an energy-based currency.

TER: I enjoyed meeting you both. Thank you.

KB: Thank you.

Wikileaks Cables Show US Saudi Diplomat Concerned over Reserves

Locking up Canadian oil reserves seems like a good idea.

Tuesday, February 8, 2011

Dan Loeb Third Point Does Not Support Smurfit Stone Deal

Worth the time to read,

West Coast Asset Management - S&P 500 Best International Play

Pipeline on Rails

The idea of a “pipeline on rails” has been quietly pursued by both CN and CP in recent years. The railways believe their tracks can divert oil to the best possible markets at any given time, freeing energy producers from the constraints of pipelines, which are built to last for decades and as a result cannot quickly be changed to accommodate market shifts.

The idea has gained speed in the past year, as oil prices soaring toward $100 (U.S.) a barrel prompt a spike in crude output, creating new volumes that railroads, which don’t have to wait years to build new capacity, can spike. And the ability to transport oil by rail is now building a competitive threat to Canada’s pipeline companies, which have long been the dominant carriers of crude but are working to expand into markets – such as Asia and the Gulf Coast – that are already well-served by rail lines. Rail could, analysts say, prove a viable alternative to major new projects such as Enbridge Inc.’s $5.5-billion Northern Gateway, which would deliver Alberta crude to the B.C. West Coast.

Though rail deliveries remain modest for now, the ability to deliver crude by track promises to transform the way oil moves inside this continent, and how it reaches untapped customers.

“Our unparalleled market reach and flexibility, we feel, gives shippers, buyers … and refineries new options to explore and new ways to reach different markets,” James Cairns, vice-president of petroleum and chemicals with CN, told an Insight Information conference in Calgary last week.

The company has begun sending oil sands bitumen to California; heavy oil from Cold Lake, Alta., to Chicago and Detroit; and crude from the Bakken, a fast-growing play in southern Saskatchewan, to the U.S. Gulf Coast. Though rail does not have the same reach into production fields as pipe – indeed, rail cars are typically loaded and unloaded by truck, which is costly – CN boasts that its tracks lie within 80 kilometres of five million barrels a day of refining capacity, which is more than double Canada’s entire U.S. exports.

For CN, the Bakken trade alone is now filling 250 to 300 rail cars a month; altogether, the company is moving roughly a unit train worth of crude per week. A unit train typically consists of 80 to 150 cars; each car can hold 550 barrels. That means CN is carrying, at most, just over 10,000 barrels per day, far less than the two-million barrels that pipeline company Enbridge Inc. hauls every day.

And both Enbridge and rival TransCanada Corp. are aggressively pursuing those areas that rail is now tapping. TransCanada, for example, recently signed commitments for 65,000 barrels per day of crude shipments out of the U.S. Bakken play. Enbridge is also spending heavily to build into the Bakken, whose lack of pipeline capacity has opened a window for the railroads. If the pipeline companies are successful, the Bakken rail exports could be temporary.

But CN and CP believe their Bakken trade is just the beginning. CP, for example, now runs 80-car unit trains every week out of the U.S. Bakken, a trade that is “ramping up,” according to Stephen Whitney, the railway’s vice-president of marketing and sales in agri-business and merchandise.

“It will certainly grow to be a multiple-train” weekly business, he said.

CP has also assembled a right-of-way that allows it to lay track to new oil sands processing facilities, called upgraders, northeast of Edmonton. If it builds there, it will have direct access to a major supply source.

“We think that oil moving within North America is a key opportunity,” Mr. Whitney said.

“The key thing for rail in our mind is you already have a network and the infrastructure in place,” he said.

And rail offers several advantages. Because tracks go where pipes don’t, oil producers can use rail to send product to refineries in, for example, California. They can also better react to pricing conditions. If crude is selling for more on the West Coast than the Midwest, for example, rail offers the ability to “dispatch” loads to different destinations.

Rail cars can also ship pure bitumen, the very heavy crude produced in the oil sands. Bitumen is so thick that it needs to be mixed at about a 70-to-30 ratio with a thinner hydrocarbon – called diluent – to flow in a pipeline. Diluent then needs to be returned to the oil sands, creating substantial additional pipe costs. Rail cars, which are already used to transport asphalt, can take undiluted bitumen.

“That creates a real economic advantage when comparing rail,” Mr. Cairns said. If you factor in the cost of piping diluent, he added, “I can tell you that I haven’t come across a pipeline public toll that rail wasn’t cheaper than – if not significantly cheaper than.”

What rail doesn’t have is good systems for handling large volumes of oil, although both companies are spending to develop that. CN is preparing to deploy “rapid deployment units” that cut in half the 45 minutes it currently takes to load a single tanker with crude. It has also begun looking at ways to load oil directly from rail cars onto ships, a step that could make it far cheaper, for instance, to open a crude trade between the oil sands and Asia through ports like Prince Rupert, B.C. Chinese companies have already expressed interest in such movements.

As for cost, railroads have typically been viewed as more expensive than pipe – and both CN and CP acknowledge they can’t compete with pipe that has already been built.

“There’s a lot of talk about is it pipe? Is it rail?” Mr. Cairns said. “Our view is pretty simple. It's a big pie. … It's not either or. It's maybe both.”