During the past several years, fortunes have been made by early investors in COS and SU, and some of the other major oil sands companies. That was yesterday. Now the "easiest money" has already been made on these stocks, and their pps performance going forward will now be more muted.
Because of my conviction that peak world conventional CL production is now upon us (if not already in the rear view mirror) and is occurring in the face of growing world CL demand, I expect these "oilsands majors" to outperform the overall market by a wide margin going forward. But I don't see any doubles (much less triples) in their pps' over the intermediate term. Enter NPE.
There are many junior oilsands development companies who have staked out lease claims in the Canadian oil sands. Some will succeed brilliantly, but most won't. I think NPE will be among the immense winners, for the following reasons:
1) Resources - NPE's discovered resources total 2 to 3.1 Billion BBLS spread over 86K acres. NPE didn't generate this number- rather, other upstream energy companies did as they were drilling extensively on these lands for conventional CL/NG located at much greater depths. This resource number was also independently blessed by Sproule on Dec 31, 2006.
1a) Economic resources - "discovered resources" are divided into 2 categories - economic and uneconomic. "Economic" are the only ones that count. It is the opinion of NPE's management that at least 2B BBL is economic. The first step in proving this to the world is to establish a pilot CSS project on Block B South (28.8K acres containing 1-1.6 B BBL of discovered resource located 1300 feet underground and having a continuous oil bearing thickness of 25 to 50 feet). NPE has all of the cash on hand necessary to do all the work required up to actually building the CSS pilot. Late this year/early next year, NPE will need to arrange $15MM - $20MM in additional funding to build out the project (how much debt vs. equity is as yet unknown) .
2) Management - IMO a very important strength of NPE is their management and BOD. We're not dealing with a bunch of starry eyed, inexperienced, light weights here (nor a bunch of pump and dumpers). NPE's BOD includes such heavy weights as the CEO of Prime West Energy Trust and the former President of Harvest Energy Trust. With their recent senior technical hires (see link below), they now have some very impressive people with extensive oilsands development experience running the 3 areas required to make this venture a success - thermal, geological and engineering.
http://www.northpec.com/documents/NPE-2007-08-16.pdf
What is just as impressive IMO is that none of these people are earning high salaries right now - even though, with their impressive backgrounds, they could be if they had chosen to work somewhere else. They are very financially vested in NPE's pps performance, as management and the BOD control 20% of the fully diluted shares.
3) Valuation - NPE is extremely undervalued imho. NPE has 46.6MM fully diluted shares outstanding. It last closed at C$2.19. That gives it a market cap of only C$102MM. Assuming a pessimistic scenario -utilizing only the lowball discovered resource estimate on Block B South and thus giving no credit for the rest of the discovered resource base - of 1B BBL of discovered resource and (only) 25% recovery, that results in reserves of 250MM BBL of bitumen. That works out to a present cost of C$.40 / recoverable BBL. If you review page 21 of the NPE September investor presentation linked below, you will see just how cheap this is compared to the valuations of recent oilsands M&A deals.
In addition, I believe that the above valuation is very conservative and therefore understates the value proposition here.
NPE's 80 sq. miles of oilsands concessions had about 600 holes punched into it before they bought it. All the basic log data was on file with the Alberta Energy Board and, they chose which land to buy, with the help of the PetroGeologist from Black Rock Ventures (bought by Shell for $1 per recoverable bbl about a year ago) who now works for NorthPeace.
BTW, they passed on quite a lot of land because the data indicated it had less deposits, some of which was later bought by PennWest, which I think owns some concessions on the border of the NPE property.
The p90 of OBIP (original bitumen in place) is 2.1 billion bbl and the p50 is 2.5 billion, while the p10 is 3.1 billion. Seeing as how the 600 holes (which existed before they started drilling) were not looking for oilsands, the data was not collected to maximize the reserves of oilsands. In addition, when the initial North Peace drilling occurred, they were not the operator. The operator at the time (who sold their interest to Surge, which then sold to NPE) needed to comply with a drilling commitment and so drilled some wells where it was inexpensive to do so. In other words, they picked locations next to existing roads and didn't pick the locations based upon geology in an attempt to increase the OBIP number as much as possible with each hole.
Now that NorthPeace owns and operates the whole 80 sq.miles, they will choose where to drill based upon where it will increase value the most, not where it is cheapest. And, while spending the money on buying property and hype might work to pump up the share price short-term, actually producing crude is how to increase OBIP into "Proven" and "Probable" resources. So getting some production is now the near-term goal, not to get revenue, but to increase the value of the billions of barrels of reserves.
Therefore I see using the 50% probability number of 2.5 billion bbl OBIP as being reasonably conservative.
SAGD should tap into perhaps 40% of that, while other methods like THAI could increase that substantially. Assuming 40% recovery, they have 1 billion bbl recoverable OBIP. Recently SAGD amenable deposits have gone for up to $2/ recoverable OBIP (up from the Shell purchase of BVI at $1), so that implies a buyout value of $2 billion.
Why value the company based on acquisition metrics?
Because establishing the resource and selling out to a major has been the business plan as long as I have been involved with the company.
North Peace is not a company where the principals are bent on loading up on perks and spending money to create an ever-expanding empire where the only gain available to shareholders is from selling their shares. The Board and CEO own substantial shares and their interest in establishing the resource and selling out is aligned with the public shareholders.
Most junior oilsands companies are playing a promotional game. Their focus is mostly on periodically announcing that they have increased their land holdings and the possible size of the oilsands deposits. They are about assembling property to attract investors and to raise money. This is not the North Peace Plan. NPE already has enough resources to make the insiders very much rich(er). One billion recoverable OBIP @ $2/bbl with outstanding fully diluted shares ~doubled to say 80 million- is $25 per share from the current $2.19. Not too shabby, especially if you can do it in a couple of years. Being conservative and cutting the eventual takeout price down to only 1/3rd that value is still pretty significant.
So what does NPE have to do to realize a good sales price (i.e. C$1+/recoverable BBL) if/when it decides to "cash out" in the future? IMO once they get the pilot CSS plant up and running (thus proving commercial viability) and, in addition, further delineate and better define their remaining resource base, the heavy lifting that will be required to make them an attractive acquisition target will have been accomplished.
I view NPE as a potential multi bagger, long term oilsands investment. Even if they should fail, the resource base they're sitting on will only become more valuable over time to someone else.
1) Increased investor interest in oil sands plays, due to very high oil prices
2) Increased exposure for NPE (e.g. analyst coverage)