---This is a thinly traded microcap Canadian company - will be most interesting either for your PA or traded as a mispriced call option. ---

 

Westbridge Energy (WEB CN) is a micro cap E&P company focused on two areas - the US gulf coast and offshore Namibia. Yes, offshore Namibia. It is interesting because the stock is cheap on the basis of the US gulf coast, and could have significant upside just from activities there, while 5.6 million contiguous acres in Namibia provide the potential for a 10-100x return. And a well is currently being drilled adjacent to Westbridge's acreage, which could dramatically increase the value in the near term.

 

Westbridge has 1 mm boe proved, 56% condensate, on the Gulf Coast and 3 mm boe in 2p reserves. At a current $15 per boe, it is priced significantly below most public companies on a proved reserve basis (obviously it is smaller, so that affects potential liquidation value, but it is at least helpful to know where the company stacks up vs comps). The company's presentation (http://www.westbridgeweb.com/i/pdf/ppt/WEB_Presentation-Apr2014.pdf) reviews their activity there in detail, but the idea behind it is simple. As larger companies are more focused on either drilling shale fields or exploring for new properties, Westbridge (and Black Pearl, the entity they just merged with) are using seismic to drive redevelopment of exisiting fields.

 

In conversations with management, they are highly confident regarding their first prospects. They are drilling their highest probability projects first (unlike another couple small E&Ps I wrote about previously on VIC, which were too aggressive, took too much risk, and unfortunately blew up). Slide 11 of their presentation probably best illustrates their near term activity - they know the zone is there, they know is it productive in an analog field, and are simply deepening an exisiting well that already demonstrated the strong resemblance to the analog field in higher zones. This type of asset is available to them because it is small and requires a reasonably high degree of sophistication to figure out relative to the prospect size - perfect for a company with Westbridge's strategy.

 

And that strategy is to grow a small acquire and exploit company on the gulf coast while the company's 5.6 million acres in Namibia's Walvis basin are de-risked by competitors drilling dollars. With a well in process by Repsol / Tower and another being spud shortly by Chariot (see slide 27 of the presentation), more information is being discovered about the basin, while Westbridge has minimal necessary expenditures to hold the acreage for years.

 

The logic of acreage and development in the Walvis basin is that geologic models (and well results across the west coast of Africa) indicate substantial similarity / parallels between the west coast of Africa and the east coast of Brazil. In theory, the Walvis basin in Namibia corresponds with the Santos basin in Brazil. This theory drove the drilling of multiple offshore Namibia wells in the past couple years. These wells were mostly unsuccessful, leading to the blow-up of HRT (which was previously written up on VIC) and leading to most other Namibian focused stocks crashing. However, more than one well showed oil "shows", which means that there had been significant oil present previously but the potential reservoir in the area was missing a "seal" (basically, instead of the oil being trapped in the reservoir, it was able to escape through porous rock to other reservoirs or to dissapate into the ocean over millions of years).

 

Having seen oil shows, major oil companies are deploying hundreds of millions of dollars on leases and drilling to further test the basin. The potential is huge, as indicated by Tullow's multi hundred million dollar value farm in in 2013 (Tullow has one of the better exploration track records in the industry), by Repsol's well that is in progress, and Chariot's well that is planned to spud this year. It is hard to know what may be found, but if Santos is any indication, there may be billions of barrels of resource in the Walvis basin, and Westbridge has a massive, disproportionate position there.

 

Tullow's August 2013 farm in is a comp for Westbridge's position in Namibia. With a $200 million implied value, this implies a >10x potential valuation uplift for Westbridge if its acreage is merely farmed out. Obviously the offshore Namibia acreage market is incredibly illiquid and idiosyncratic, but the comp is at least directionally helpful. And if there happens to be success in either of the two wells being drilled in the basin in 2014, that value could go up another 5-10x. Thus the upside to Westbridge is theoretically 10-100x, without having to spend a dollar of capital. Obviously it is difficult to determine timing of a transaction, and my understanding is that there were transactions with BP and one other major oil company that got close and weren't completed in the last two years. It is unclear if it makes it more or less likely for a farmout deal to get closed, but its at least a start, and an indication that while it may be difficult to assign a probability of success, the probability is greater than 0.

 

In the meantime, Westbridge's Gulf Coast activities are logical and could accrete enough value to increase the value of the company and make the investment worthwhile even if Namibia ends up as a total bust. Management mentioned the potential for their first well (which is in progress) to have initial production of over 200 bopd, which could be a game changer in terms of production, cash flow, and market valuation. Even if it fails, the capital plan on page 30 of the company's presentation indicates 2 other wells will be drilled, each of which should have a greater than 50% probability of success.

 

One of the positive aspects of Westbridge's dual Namibia / Gulf Coast strategy is that either asset could be sufficient to raise additional capital to extend the Namibia option. In conversations with management and with the board member who raised the initial rounds of money to launch Westbridge, there is additional capital outside capital available to keep the company going if necessary (in the unlikely scenario that all 3 Gulf Coast wells fail). While this would be dilutive to shareholders buying in at current levels, it could preserve the option of the Namibian acreage and could still offer an attractive risk/reward based on the upside potential from the acreage.

 

Obviously, there are numerous risks associated with this investment idea. However, the MASSIVE upside potential from the Namibian asset, plus the reasonable Gulf Coast "acquire and exploit" strategy with talented management, capital in place and additional available, makes the risk reasonable relative to the potential return. I have made this a small position, which could become a significant position organically (and perhaps overnight) if either a competitor's well in Namibia achieves success, or a farmout of acreage is completed, or if an outsized well is brough on on the Gulf Coast. I think the expected value here is substantially higher than the current share price, which coupled with the $/boe discount, makes this an attractive small investment. Caveat emptor.

Well results by competitors in Namibia

Well results from Gulf Coast drilling activity

Completion of a farm out arrangement in Namibia