Skip to content

Posts from the ‘Second Wave Petroleum (SCS)’ Category

Can’t stay away: Arcan Resources and Second Wave Petroleum

If you remember, I sold both Arcan and Second Wave a week ago Friday.  That lasted about a day and a half.

Sometimes selling a stock can make you think about it more clearly.  Such was the case with both Arcan and Second Wave.  In fact I spent last weekend working through their prospects.  I hope to post on this soon, but for now, let me just say that the work reiterated to me just how much potential these two companies have.

The main reason for not owning both of these Beaverhill Lake producers is because they are spending a lot more then they are taking in.

They really have been spending a lot more than they take in.  The original reason I reduced my position in both companies last fall was because with Europe appearing on the precipice, being invested in companies in need of capital seemed like a poor proposition.

However Europe seems to be back on the back burner.  For Arcan and Second Wave, spending a bit more then you make is not such a bad thing anymore.  It can actually be perceived as a good thing; growth and potential and all that jive.

The reality is that the prize at Swan Hills continues to prove itself up, and the NAV of both companies will likely continue to rise as they drill more wells.

Perhaps the kicker for me was the news release put out by Second Wave last Monday.  In the release SCS announced a number of new boomer wells in and around the existing boomer wells that they (with the JV with Crescent Point) and Coral Hills have been drilling.   But more importantly, SCS announced the success of a well drilled far to the south of this existing “sweet spot”:

[Second Wave] completed its 100% working interest 01-17-062-10W5 Beaverhill Lake light oil well in south Judy Creek with an initial two day flow test rate estimated at 800 bbl/d of light oil further delineating the Company’s south Judy Creek land base.

The 01-17 well (big red circle) is well to the south of the existing sweet spot and it opens up a whole mess of land in between.  A lot of those southern sections are 100% interest for SCS as well:

While we are somewhat away from proving up the sections in between, the 800boe/d success gives me a lot of confidence that they will be proved up over time.

I ran the cash flow numbers on 2012 based on their expected average production of 3,850 boe/d and $95 oil and I figure they can generate around the $85M mark of cash flow.  I will post that cash flow analyis more thoroughly in a later post.   For now, suffice to say that my estimate compares favorably to the $85M CAPEX estimate that the company had in their February presentation.  Perhaps the days of spending in excess of what you make are soon to be over for Second Wave?

Future Catalysts?

I see a couple of catalysts for Arcan and Second Wave that made me want to stay out of the stocks.

I think that the biggest catalyst to get me back into both stocks in short order was the spector of the upcoming reserve report of both companies.  I suspect that the reserves for both Arcan and Second Wave are going to show some excellent numbers, potentially with NPV10 estimates decently above the current share prices.

Arcan has the additional catalyst of the waterflood of Ethel.  I posted late last year how quickly Ethel production was declining without waterflood.  I wrote:

If you look at the average Ethel and DMU production curve, you can see the effect of the waterflood taking place at DMU versus Ethel.  Ethel wells do appear to stabilize at a lower level. The following chart looks strictly at horizontal Ethel and DMU wells drilled after Jan 1st 2010 (I didn’t want to confuse things by adding data from old completions) averaging out the monthly production for all wells at that point in their decline.  Producing day rates are used.

Now it has to be pointed out that the post 6 month data for Ethel is a single well (the 10-27).  So we are not dealing with a large dataset here.  Still, I think the conclusion can be made that Ethel wells drop off quicker and stabilieze at a lower rate without the waterflood.

Presumably with waterflood one would expect that Ethel type curve would shift up to where the DMU curve is.  One mitigating factor to this improvement might be reservoir quality.  The sands at Swan Hills have often been thought to thin to the south.  On the other hand, Arcan’s completion techniques have improved quite dramatically lately with the move to the larger acid fracs (another detail that was provided in the Q2 MD&A).  This is witnessed by the significantly higher IP30 and IP60 results produced by these presumably thinner sands at Ethel.  So this may help the Ethel wells outperform.

Its a bit of a guessing game until you get some data.

So what does it mean to production?  Two things.  First, with the waterflood implemented you would expect that the existing wells at Ethel would deliver a higher rate.  I’m going to speculate that, on average, this would be about 40bbl/d for the post 2009 drills.  This would add about 350bbl/d of production to Arcan.

Since that time Arcan has drilled a number of additional wells at Ethel.  I would estimate that once in full operation, if the 40 bbl/d per well increase number holds up one could expect around 500 bbl/d extra production from Ethel.  But it could be more, and at least in the short run, likely will be more.

Advertisements

Letter 25: Tax Loss Buying

I am on vacation with limited computer access so this is going to be a short letter.

There was some good news for the oil stocks in my portfolio this week.

News that should help Equal

Equal Energy has not performed very well lately.  I don’t expect much from the stock until something is announced with the companies Mississippian lands in Oklahoma.  While we wait, Sandridge, the biggest landholder in the Mississippian, jv’d 363,000 acres of their land to Repsol this week for $1B.   That works out to $2,754/acre.

SandRidge will sell an approximate 25% non-operated working interest, or 250,000 net acres, in the Extension Mississippian play located in Western Kansas and an approximate 16% non-operated working interest, or 113,636 net acres, in its Original Mississippian play. The 363,636 net acres in total will be sold to Repsol for an aggregate transaction value of $1 Billion. Repsol will pay $250 million in cash at closing and the remainder in the form of a drilling carry. In addition to paying for its working interest share of development costs, Repsol will pay an amount equal to 200% of its working interest to fund a portion of SandRidge’s cost of development until the additional $750 million drilling carry obligation is satisfied.

Admittedly, this is a little on the low side compared to some of the earlier deals.  That is because this deal included 250,000 acres of the second Mississippian play that Sandridge is involved in.  The second play is newer and riskier.

The fact that Sandridge was able to get $2,750 per acre while only including 113,000 acres of the prime land (in Oklahoma the heart of the Mississippian is Grant, Alfalfa and Woods) provides another positive data point for Equal.

Equal has 20,000 acres of land in the heart of the Mississippian.  This is another deal that suggests that the land is worth around $70M.   At $4.50, the stock trades at an enterprise value of $300M and with a market capitalization of $150M.  It is clear that that the Mississippian land is not priced into the stock.

I bought some more Equal on Thursday at $4.50.  I believe the recent decline in the share price is simply tax loss selling.  I believe that the stock would be undervalued at $7/share.  At $4.50, its a little ridiculous.

Coastal Energy News

Coastal Energy has been the best performing stock for me over the last few months.  They have hit on well after well after well.  The string of success continued with the B-09 well news released on Tuesday.

“The Bua Ban North B-09 well encountered the largest pay zone we have seen to date in this field. We are particularly excited that we have encountered oil across five Miocene zones. This confirms the lateral extent of the deeper pay zones below our main producing reservoir. Following this successful result in the deeper zones, we plan to drill further appraisal wells to continue testing the 63.0 mmbbl of prospective resources defined in the RPS report ofNovember 15, 2011, which are incremental to the 67.0 mmbbl of 2P volumes defined in the report.”

What is most important about the result is that it begins to prove up the lower miocene sands.  First Energy noted the following:

The Bua Ban North B-09 well discovered 3-4 mmbbl in deeper Micocene sands which could open a new play for Coastal with an overall prize of 63 mmbbl prospective resources.

The Miocene sands that Coastal is drilling into are actually a number of layered sands as shown in the illustration below.  Up until the B-09 well, Coastal had been focusing on the upper two layers.  The B-09 explored the lower layers.  The RPS report distinguished between reserves and prospective resource in the Miocene.  While the news release did not say so specifically the above snippit implies that most if not all of the prospective resource is in the deeper sands.

There is an excellent summary of the Micoene sands that Coastal is drilling into that was posted by Oiljack on the Investorsvillage Coastal board.

Midway gets us Excited and then…

The moment I noticed that Midway Energy was halted I went out and bought shares in Second Wave.  I thought for sure that the halt was due to a takeover bid and that there would be a subsequent boost to the other Swan Hills players (Arcan and Second Wave).  Unfortunately, while a takeover bid may indeed be in the works, the clarification by Midway left the waters muddied.

Midway Energy Ltd. (“Midway” or the “Company”) announced today that it has become aware that information may have entered the market with respect to certain potential transactions. The Company has not entered into any definitive agreement with respect to these transactions and will issue a press release when and if a successful transaction has been negotiated.

Nothing like clarity.  Nevertheless the stock popped when it opened and Second Wave popped along with it.

I think I will hold onto Second Wave for a while; their latest update was mildly disappointing with a few of the recent wells producing at far less than the earlier more prolific Crescent Point JV wells.  However according to an Acumen Capital report, the lower production rates can be attributed to a failure of the packer equipment during the frac operations, while the 100% WI well drilled to the south (08-23-062-10W5) was limited to 100bbl/d by the surface pumping equipment.  I’m not sure I understand that second one entirely, I mean why would the company install insufficient surface pumping, but nevertheless I hold out some hope that the going forward results for SCS will improve on these numbers.  Meanwhile SCS does not appear to be as encumbered with infrastructure requirements as Arcan is in the short term, so  capital is going to be spent drilling wells.

Unfortunately, as seems to happen from time to time, the practice account I post here had my SCS order rejected because of a lack of margin, something that clearly isn’t the case (I don’t think RBC spends much time updating and debugging the practice accounts functionality).   I am reluctant to try to re-buy the stock now after the pop so for the moment I will not have my SCS position reflected unless it falls back to the $2.45 range that I bought it at in my actual accounts.

Gold Stocks

I am not sure if it was a smart thing to do but I added positions in a couple of gold stocks this week.  These should not be considered long term positions; they are simply me trying to take advantage of what I see as the severe underperformance of the stocks when compared to the bullion.  I added a position in Semafo at $6.40.  Semafo is a mid-tier producer that has generally held up well in the market but that got taken down to new lows of late.  I also added a position in Canaco.  Canaco has had a rather spectacular decline from over $5 a share to a low of a $1.  That is where I bought it.  The company has what looks to be a decent deposit in Tanzania.  Moreover, at $1 they have a market capitalization of $200M and with cash on hand of $115M.

Portfolio

Comparing the Oil and Gas Juniors

Earnings season should be upon us shortly for the Oil and Gas junior companies.  To prepare for the onslaught of earnings reports over the next month, I have updated and published below my junior comparison spreadsheet. I’ve added a few new companies to the list of those I follow, with those being Pinecrest and Galleon (now Guide Exploration).

A few things jumped out at me after having reviewe the spreadsheet:

  • We’ve had a big move in Equal Energy from $4 to $6, but even with that move the stock is trading very cheaply on pretty much any metric
  • Skywest really looks cheap compared to its peers.  I used to own Skywest, but I sold it when it looked like they were headed for a cash crunch.  I think it is worth looking at again at these levels.
  • Arcan trades at a premium to its peers.  Just something I like to point out to be aware of.  I believe that it should trade at a premium, but its worth remembering because it suggests that any production hiccup will be severely punished
  • Reliable Energy is starting to look interesting again.  They had some interesting drill results in their last update and are reaching that critical production level (1,000bbl/d) where they will begin to generate the cash flow needed to ramp their production up on a consistent basis

 

Big News for Arcan (and Second Wave)

I’ve owned Arcan Resources (ARN.v) since November 2009, when Sculpin2, an Investors Village poster, introduced me to the company.  Its been a love, hate relationship, with the hate culminating during the second half run last year when pretty much all stocks went up but Arcan did nothing.

Now, I am rarely so patient but in this case I was, and I held on to Arcan through it all, increasing my position in the stock until it was (and is) the largest in my portfolio.  Why?  Because it was clear that the Beaverhill Lake formation had a lot of untapped oil, I was confident that clever reservoir engineering now equipped with the new weapon of horizontal mult-fracs would eventually figure out how to tap that oil is a consistent and profitable way (being one of these myself I may be biased in my enthusiasm here), and it was clear that Arcan had a wonderful land position to take advantage of that success.

Well it looks like that investment is really beginning to flower now.  Last night Crescent Point Energy released this news release.

  • Identified the Beaverhill Lake formation around Swan Hills as an emerging oil resource play that they have taken a large position in
  • Announced the “acquisition of ownership and control over 16,750,000 common shares of Arcan, representing approximately 19% of the issued and outstanding common shares of Arcan”
  • Announced three recently successful wells in the area producing well above their expectations, “with average first-month production rates exceeding 1,000 bopd gross.”
  • Significantly expanded their capital budget to drill wells into the Beaverhill Lake, saying they “could spend up to an additional $100 million on capital expenditures in the play this year”

This is all great news.  The evidence is suggesting that Crescent Point may eventually take Arcan out. But maybe not.  I’m not in Arcan for a short term takeover so I would be equally happy to let the company continue to drill out their land and increase production. I suspect there will be more surprises (like these recent 1,000+bbl/d IP wells) as the engineers and the geologists figure out better ways to optimize getting the oil out.

Second Wave is looking better and better as well.  I’m glad I bought what I did a few days ago, but I do wish now that I had been even more aggressive.  Oh well, that’s how it goes.

There was also a good post on Seeking Alpha about Arcan that came out last night, discussing the possibility of a takeover.

Update

I caved and bought more Second Wave this morning.  It probably sounds stupid to buy a stock up 10%.  Maybe.  But this is a case where there are good well results coming out, where the stock is still trading within the range it has traded at before the news came out, and you should start to see more investors take an interest in the story as they hear about the Crescent Point interest in the play.  I am betting this 10% is the first of many.

Comparing Oil Juniors

I posted a spreadsheet I keep that compares oil juniors on the ARN.v Investors Village board today.  It generated a little controversy on the subject of bean counters.

The truth is that I like to use spreadsheets to compare companies in a sector.  I have a number of them.  One for oil juniors, another for gold producers, another for oil services companies, for trucking companies, and so on and so on.

But please don’t misunderstand me.   I am not someone who relies strictly on quantitative analysis, ratios and such,  to pick stocks.  I always look for the story first.   Numbers are a useful tool, but the market is not so rational that you can use them with disregard.  I have learned this lesson after having invested in too many undervalued stocks that have continued to remain undervalued for far longer than I have had patience.

What spreadsheets are useful for is understanding how the market is valuing the story when compared to other stories.  Stocks with good stories are always going to command premium valuations.  Take Arcan as an example of that.  Arcan trades at 155K per flowing boe one of the highest of the stocks I follow and one of the highest in the sector I’m sure.  But Arcan has a unique land position on a developing play (Beaverhill Lake) that is likely to lead to strong growth and eventually a buyout.  You can’t capture that in a spreadsheet and so you would miss the boat if you had only looked at Arcan through the eyes of an accountant.

So what else does this spreadsheet tell us?

Well it tells you just how much you are paying for growth with Second Wave Petroleum (SCS.to).   You can’t justify the current price of Second Wave based on their reserves found so far, or their current production.  You have to look ahead to their potential in the Beaverhill Lake play and realize you are paying for some of that success in advance.

So does that make it expensive?  Well some might say so, but it depends on what that potential success actually becomes.  I’ll tell you what, I just read a report explaining the success of Coral Hills (a private oil co also with a sizable land package in BHL that surrounds SCS land and is also a  farm-in partner to SCS on some of their land) and the IP’s coming from Coral Hills last couple wells, which basically surround the land owned by Second Wave, have met the expectation of the first boomer well (news release here).  Now nothing is a sure thing and it could be that these are small sweet spots and that succes won’t translate to SCS, but I wouldn’t bet on that sort of pessimism.  The bottomline to me is its an impressive result and it overrides any concern about the valuation of SCS being too high.  I plan to pick up some Second Wave this morning.