Description
Shares out 138.9m FD
A purchase of Grove shares represents a timely and compelling speculation
right now. I believe there is an opportunity to make a very high percentage
return in a relatively short time frame. On a risk adjusted basis, I value the company in excess of $C 1.20 today.
Grove is a well financed development stage company that currently has no revenues and no reserves booked. However, the company has assembled an impressive resource package that, if proved up, could transform the valuation of the company.
Grove believes there is a significant opportunity to arbitrage smaller gas fields in Continental Europe that may be too small for major oil
companies to bother with, but can be quite meaningful for a smaller company.
Junior explorers got a new lease on life when the majors exited the shallow Gulf of Mexico. Oilexco is implementing an analagous strategy in the North Sea and has seen its stock rise substantially.
By pursuing opportunites in Continental Europe, Grove may be doing them one better, in my opinion. Because of the advancements in drilling technology in recent years and the sometimes primitive methods used by eastern european countries historically, Grove has a real chance to create value by applying modern methods to fields that have not been given the proper attention. Grove currently has prospects in Italy, Romania and Slovenia.
The CEO, Glen Whiddon, has put a good chunk of his own cash into the deal and owns over 6 million shares. He has an entrepreneurial background and is complemented by solid technical people.
Property Portfolio
Slovenia
is now a member of the EU (formerly part of Yugoslavia). The gas
field the company is developing is located in a panhandle wedged between
Hungary and Croatia. Recoverable reserves have been pegged by a third party engineering firm at between 150 and 400 BCF. Since gas prices run about $US 5.40 per mcf, and are readily marketable, reserves discovered here would be quite valuable indeed. Grove owns a 45% interest in the field.
The first well "D-14" reached total depth in October of this year. Fracing operating are now ongoing. When fracing is completed the wells will be flow tested. Indications are that the fracing is going extremely well. There should be additional information released within days. Plans are underway for a second well already, which indicates management likes what they see so
far.
Valuation:
Taking the low end of the engineer’s report of 150 BCF x 1 euro mcf value x 1.62
Exchange rate to CAD = 243m $C – Capital Cost (15 wells at 2m euros each) $C 49m
= $C 194m x 45% = 87m / 138.9m shares = 63c share x .8 chance of success =
= 50c share
Alternatively one could use the market value of GRV’s junior partner in Slovenia to value Grove’s position. Loon Energy (LEY in Canada) owns a 10.5% interest after an initial accelerated payout.
Loon’s current market cap is almost $C 19m. Since the stock has moved a bit and there are a few assets outside of the Grove deal, let’s call it $C 15m. This market value of Loon implies an EV of the Slovenian field of about $C 142m x 45% = 64m = 46c share
Italy-
San Marco concession, Abbadesse- well spudded in November and should reach total depth within the next week or so. After reaching certain thresholds, the company retains a 94% interest in the well and is obligated to sell the Gas to Blugas, an Italian Gas company. Grove was looking for 80-100 BCF in two zones. While no results have been released, I believe there is a very high degree of excitement with what's been encountered so far. An analyst report has indicated a $1 dollar per share in value to the company should the company find success here.
Grove has identified additional prospects that would be pursued should the current well prove successful.
Valuation: 30% chance of $1 per share = 30c per share
Offshore Sicily -
The company is shooting seismic on this prospect which is located off the island of Pantelleria, located not far from the Tunisian coast. Should seismic confirm potential, I would look for the company to bring in a partner. While a play like this could have home run potential, it’s a bit premature to assign much value to it.
Romania-
While the company only secured the deal recently, drilling is ready
to begin this January. This is a high impact opportunity. Target is 40-50 million bbls of oil, of which Grove's interest would be 30%.
Valuation: 40mm bbls x .3 interest x .3 confidence level x $C 10 bbl = $C 36m
Balance Sheet – Grove has conducted a number of financings in the last year, including the most recent AIM listing in London in early December. The company indicates there should be 20c share left in the kitty after financing the Slovenian and Italian wells currently drilling.
Sum of the Parts
Slovenia 46c
Cash 20
Italy 30
Romania 26
Pantelleria 0
Current Risk Adjusted NAV 1.22 per share
Website: www.groveenergy.com
Catalyst
drilling results to be released shortly
additional research coverage
Romanian well to be spudded in January
announcement of additional deals possible
move from TSX-V to TSX would increase visibility
Longer Term - sale of the company, or developed fields