Description
Primary Petroleum (TSX.V: PIE, OTCQX: PETEF)
Primary Petroleum is a Calgary based oil and gas exploration and production company focused on Montana. The company holds a significant prospective land position in the Alberta Basin Bakken Fairway in Western Montana and in the Northwest area of the Williston Basin in Eastern Montana. Primary's mandate is to partner with an industry expert to develop its prospects and sell the company by the end of 2012. Holding play economics constant and taking the lowest comparable peer valuation per acre, Primary Petroleum should be trading at $800/acre or $1.50/share. That implies 87.5% upside from today's stock price.
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Capital Structure
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Price
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.80
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Shares Outstanding
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158.00
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Market Cap
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126.40
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Debt
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$0.00
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Cash
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-$14.00
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EV
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$112.40
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Investment Highlights
- The Largest Contiguous Alberta Bakken Company without a Joint Venture Partner. In aggregate, the company has approximately 290k gross acres at 100% working interest in the Alberta Bakken Fairway in Western Montana. Primary also owns 20k net acres in Eastern Montana, NW of Elm Coulee Field and 64k net acres of multi-zone potential in Montana.
A Joint Venture is Imminent: Primary Petroleum has entered into a non-binding LOI with a "Major U.S. Industry Partner on its southern Alberta Basin Bakken fairway lands in NW Montana". "The completion of the transaction is subject to title and environmental due diligence and final documentation. It is expected to close on or before October 3rd 2011, when specific details of the formal agreement will be disclosed."
Why is this Important?
- Mike Marrandino (CEO) has stated that unconventional shale expertise is much desired
- A Major E&P company brings an extensive geological technical team that will be able to unlock the reservoir code
- Mr. Marrandino has discussed a potential Joint Venture structure and had prior discussions with multiple private/public companies. Based on the structure of his Saturn JV as well as Bowood's JV deal, we believe the Alberta Bakken Joint Venture will consist of an initial upfront payment plus an earn-in.
- Deal will unlock the true value for contiguous acreage. Today land packages <2,000 acres are going for $350/acre. There aren't any large land packages to the north of Primary's land position. Companies will have to pay a large premium over public land sales to enter this play.
- Over $500MM has spent to date on land, JV's and exploration in Southern Alberta since 2010. Substantial sums of money have been committed to this emerging play. $230MM+ has been spent since April 2010 with land going for an average price of $820/acre. Reputable companies that have acreage positions in Western Montana & Southern Alberta include: (Western Montana) Rosetta Resources, Newfield/Stone Energy, Anschutz, Quicksilver, Abraxas, American Eagle Energy, (Southern Alberta) Crescent Point, Royal Dutch Shell, Murphy Oil, Nexen, DeeThree, Bowood, Argosy.
- Southern Alberta Basin is Arguably Better than the Williston Basin
- Similarities
- Stratigraphically equivalent
- Hydrocarbon saturated in large continuous reservoir or petroleum system
- Close proximity to source rocks
- Low water saturation in the petroleum system
- Development and exploitation of the petroleum system requires horizontal drilling and fracking
- Differences
- Fairway consists of other multi-zone formations that are oil bearing (Sunburst, Madison and Nisku)
- Bottom seal is a massive anhydrite
- Kevin-Sunburst Dome, Sweetgrass & South Arch natural stratigraphic trapping mechanism
- Suitable drilling rigs are available - Alberta Bakken doesn't need the high performance +1000 horsepower rigs to operate
- Bakken encountered at significantly shallower depths; not as over pressurized, costs less to drill/ft because of less wear and tear on rig equipment
- Primary continues to Trade at a Significant Discount to Peers. Not only is Primary the largest net landholder, the company is trading at less than half of its closest peer. Primary will further derisk its acreage position this year and next through a planned work program of shooting 3D and drilling horizontal and vertical wells. A joint venture partner is another catalyst towards a revaluation of the stock. IF TRUE and the Western Montana Bakken is as good as the Williston Bakken, one could anticipate a takeout bid north of $4k/acre.
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Comparables
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Total Acres
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EV ($mm)
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EV/Acre
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Primary Petroleum
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290,000
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$112.40
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$388
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DeeThree
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250,000
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$195.68
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$783
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Bowood
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64,218
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$109.45
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$1,704
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Argosy
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54,035
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$84.86
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$1,570
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American Eagle
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36,182
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$31.22
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$863
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Comparable Companies:
- DeeThree is an emerging producing oil and gas company with the vast majority of their acreage, 220k located on the Canadian side of the Alberta Bakken Fairway. DeeThree has drilled 4 wells to the Alberta Bakken, and will be evaluating the production profiles of these wells before proceeding to their next round of drilling.
- Bowood Energy currently holds 100k net acres, all in the Canadian side of the Alberta Bakken. The company has found a joint venture partner with Legacy Oil and Gas. After Legacy's ongoing commitment to drill 14 more horizontal wells is completed, Bowood will have farmed out a total of 50% of acreage and retain approximately 100 sections of land.
- Of Argosy's acreage, approximately 30k is in the northern area of the Alberta Bakken. The company is also in the early stages of testing their acreage.
- American Eagle holds 21,210 net acres on the right portion of the Alberta Bakken, with the remainder of their acreage in the Williston Basin area.
Land Acquisition Strategy: At a recent auction during the first week of April of 2011, PIE acquired 32k of the 45k for sale. All the properties acquired were contiguous to their existing properties. Primary paid as little as $1.50/acre to as high as $390/acre for the southwestern portion of their previous land. The land surrounding the Indian reservation was being sold in a range between $200-360 an acre. More recent auctions have suggested $300/acre as the new average. However, it is virtually impossible to find large blocks of land (north of 5,000 acre blocks) for sale.
Primary's Outlook for the South Alberta Basin Prospect (290k net acres) 2011/12:
- Complete Farmout and JOA Agreements with U.S. Major Industry Partner
- Primary is presently completing due diligence, anticipate closing on or before Oct. 3rd 2011
- Outline, Permit, and shoot up to 100 sq mi 3D Seismic: CAPEX ~ $4.5 to $5.0 MM
- Continue Land Acquisitions: CAPEX ~ $2.0 MM
- Primary will continue to acquire long term leases based on continued geological merit, including seismic
- Vertical Drilling Testing Program: CAPEX ~ $6.0 MM
- Drill 6 vertical drill test wells through to the Nisku to evaluate the multi-zone formations including: Sunburst, Madison, Lodgepole, Bakken, Three Forks and Nisku. (spud first well end of Sept. / early Oct. 2011 and drill the rest by year end)
- Log, core, analyze and test to better identify source rocks for horizontal program to exploit oil bearing formations over their acreage.
Primary's Outlook for the Saturn Prospect (20k net acres) Outlook 2011/12
- Continue to seek an industry partner
- Shoot a minimum of 15 sq. mi. of 3D Seismic
- Drilling Program of 3 vertical wells to a depth of approximately 7500 ft
- Prospective formations - Mission Canyon; McGowan & Bakken
Industry News
Rosetta has completed their initial vertical well drilling program on their Alberta Basin acreage, and plans a 7 horizontal well program. Their base case economic model, based off their 11 delineation wells drilled, is as follows:
250 IP
185,000 BOE EUR
160-acre spacing
$4M well costs
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Per Well Economics (BFIT)
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Pricing ($bbl WTI)
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85
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95
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ROR(%)
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21.3
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35.1
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NPV10% ($m)
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931
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1,926
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F/D ($/BOE)
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27.46
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27.46
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Newfield has also been active with their drilling program. During Newfield's second quarter conference call, the company reported that it has drilled 7 verticals and 2 horizontals, with all wells encountering oil over a very large areal extent. Newfield also announced they would fracture 4 of their vertical wells.
Primary Petroleum Catalysts
- Closing of the JV agreement with the U.S. Major
- Completion of approx 135 sq. mil of 3D Seismic over their leases
- Results from 6-7 well vertical drill program for the Lodgepole, Bakken and Three Forks, with secondary evaluation for the Sunburst, Madison and Nisku formations.
- Inception of a multiple well HZ program based on the findings from the Vertical Well program
- Evaluation and acquisitions of further prospective acreage positions inside and outside the AMI that will be in place with the U.S.
Industry Related Catalysts
- Reservoir and production data from NFX, ROSE and FXEN
- HZ well results from the 7 HZ wells that ROSE has drilled and fracked
- HZ well results from the 2-3 HZ new wells that NFX has drilled and fracked
- Possible NFX production results from their two existing well in producing wells
- Development program from NFX, ROSE and possibly FXEN on their next CAPEX drilling program
- Fairways Exploration and & Production recently received their permit to drill the horizontal portion of a well 1 township west of Primary's acreage, Primary is in talks to share geologic data
- Further results from Bowood/Legacy, Deethree, Argosy
Map of Primary's Lands and Surrounding Area
Catalyst
