Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
UK Corona Catastrophe Trend Analysis - 2nd Jun 20
US Real Estate Stats Show Big Wave Of Refinancing Is Coming - 2nd Jun 20
Let’s Make Sure This Crisis Doesn’t Go to Waste - 2nd Jun 20
Silver and Gold: Balancing More Than 100 Years Of Debt Abuse - 2nd Jun 20
The importance of effective website design in a business marketing strategy - 2nd Jun 20
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20

Market Oracle FREE Newsletter


Oil Stock Valuations Increasing-and Not Just From Higher Crude Oil Prices

Commodities / Oil Companies Nov 25, 2009 - 10:56 AM GMT

By: Keith_Schaefer


Best Financial Markets Analysis ArticleI have noticed valuations in the junior oil sector creeping up – sometimes to the point where I have to blink.  But it’s not just the increase in the price of oil this year that has driven up valuations. 

Technology is increasing how much oil or gas companies can produce from a well in a day, and in the overall amount of oil or gas they can recover from a given formation – essentially how fast and how much they produce.  Technology is giving investors more leverage to the price of oil.

This is especially true of the hot new “tight” plays that are being developed in western Canada and the US, where I have been focusing the subscriber portfolio.

(“Tight” just means the oil is held in rocks like shale or sandstone, as opposed to the more conventional type of looser sands that hold hydrocarbons, and from which almost all the world’s production has come from in the last 100 years.)

As an example of valuations increasing, in August 2009 TriStar Oil and Gas merged with Petrobank’s Canadian operations, and was valued at about $109,000 per flowing barrel, which was almost double its average peer group valuation at the time.  They were a 20,000+ bopd producer, and the larger the company, generally, the larger the valuation.

But now I am seeing junior producers one tenth that size – 2000 bopd or even 1000 bopd producers – get valuations in the $90,000 – $110,000 per flowing boe (barrels of oil equivalent) range.  Most of these are in the 3-year-old Bakken play in Saskatchewan, or the several-months-old Cardium play in Alberta.  Several Canadian brokerage firms have issued reports saying these two oil plays have the best economics of any in Canada.

And as long as the big producers in these basins, like Crescent Point Energy (CPG-TSX) trade at $193,000 per flowing boe, there can be lots of money making take-overs for investors.

The Bakken oil play, located in the Dakotas and Saskatchewan, is a great example of how technology is constantly improving economics. 

Three years ago, expected recoveries were 10%.  But as companies are learning how to better frac these wells (sending fluids down at very high pressure to break up the rock that holds the oil), recovery factors (RF) have gone up (so far) to 22.5%.
Independent consultants gave each Bakken well a proven reserve of 50,000 barrels in 2007.  Now that’s up to 100,000 barrels, and likely to go higher.  The play is only three years old.

Initial Production (IP) rates have increased, as fracing techniques have evolved. The number of fracs a company does in a formation from one drill pad has increased, in several stages, from five to 40.

These production increases from technology are happening in natural gas plays as well.  RBC Dominion, Canada’s largest securities firm, puts out a detailed chart every week outlining the IP rates in gas wells in the Haynesville-Lower Boissier shale in Louisiana.  It shows the average IP rate of a well there in Q1 2008 was 2.4 mmcf/d (million cubic feet of natural gas per day). The Q2 average was 6.3 mmcf/d.  Q3=10 mmcf/d.  The average so far in Q4 2009 is 14.6 mmcf/d.  The average IP rate has increased in nine consecutive quarters.

Also in the Bakken, the decline curves of these wells are not as steep as they used to be.  Wells decline in production every year, but in these tight rock formations, the production levels decline rapidly – up to 70%-80% in one year, before flattening out. This big elbow in production is called the decline curve. 

Petrobakken (PBN-TSX), one of the leaders in technology advances in fracing, has a slide on their most recent powerpoint that shows almost no decline in production for their recent wells over the first six weeks (at a very high 340 bopd!).  I couldn’t tell if this was a statistically significant sample or not, but this is rare, if not unheard of, for this play. These tight oil and gas formations are characterized by initial steep decline rates.

While overall costs are up, costs are lagging increased revenue with all the new technology; i.e net cash flows per well are increasing. 

Wells in the Bakken with one vertical stem and four horizontal legs coming off it are not that much more expensive – $9 M each – than drilling 4 vertical wells. 

These are several reasons why, according to both Haywood Securities in Canada and UBS Securities in the US, these Bakken wells have 300% IRR with all costs factored in. 

This is at least twice what any other play is generating.  And this is why the valuations for even the small, junior producers are well above what most investors are used to.  Better production.  More cash flow.

As well, these formations have a high repeatability factor; once one well hits oil or gas, and geologists can see the oil formation underground with seismic, companies can give the market a high degree of predictability on what future production and cash flows will be.  Investors are clearly willing to pay up for that.

And as long as Crescent Point trades at $193,000 per flowing barrel, (still only 1x NAV, according to the most recent BMO Nesbitt weekly report) these highly valued juniors will make investors money, because CPG or Petrobakken will end up buying them all up at some point.

So the high-priced junior trading at $110,000 per flowing barrel theoretically can still have a 75% capital gain left in it, plus whatever organic growth it can create.

In one of my upcoming issues, I will outline which junior producers have land packages in these new plays, and what kind of production growth subscribers can expect from each of them. Many of these highly profitable juniors are brand new, have just raised money (so little to no debt), and are run by proven management teams who have built and sold E&P (Exploration & Production) companies before.  As production grows, these ground floor opportunities will soon be gone.

DISCLOSURE: I own 200 shares of Petrobakken.

Why Subscribe to Oil and the Gas Bulletin?

Capital Gains since June 2009 (as of Oct 10):
Issue #1 Stock Profile: +40%
Issue #2 Stock Profile: +80% and +166%
Issue #3: +97%
Issue #4: +17% and +41%
Issue #5: +40%
PLUS, of the two profiles from the public blog, Wavefront Technology has quadrupled and Rock Energy has tripled!

About Oil & Gas Investments Bulletin

Keith Schaefer, Editor and Publisher of Oil & Gas Investments Bulletin, writes on oil and natural gas markets - and stocks - in a simple, easy to read manner. He uses research reports and trade magazines, interviews industry experts and executives to identify trends in the oil and gas industry - and writes about them in a public blog. He then finds investments that make money based on that information. Company information is shared only with Oil & Gas Investments subscribers in the Bulletin - they see what he’s buying, when he buys it, and why.

The Oil & Gas Investments Bulletin subscription service finds, researches and profiles growing oil and gas companies.  The Oil and Gas Investments Bulletin is a completely independent service, written to build subscriber loyalty. Companies do not pay in any way to be profiled. For more information about the Bulletin or to subscribe, please visit:

Legal Disclaimer: Under no circumstances should any Oil and Gas Investments Bulletin material be construed as an offering of securities or investment advice. Readers should consult with his/her professional investment advisor regarding investments in securities referred to herein. It is our opinion that junior public oil and gas companies should be evaluated as speculative investments. The companies on which we focus are typically smaller, early stage, oil and gas producers. Such companies by nature carry a high level of risk. Keith Schaefer is not a registered investment dealer or advisor. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer to buy or sell the securities mentioned, or the giving of investment advice. Oil and Gas Investments is a commercial enterprise whose revenue is solely derived from subscription fees. It has been designed to serve as a research portal for subscribers, who must rely on themselves or their investment advisors in determining the suitability of any investment decisions they wish to make. Keith Schaefer does not receive fees directly or indirectly in connection with any comments or opinions expressed in his reports. He bases his investment decisions based on his research, and will state in each instance the shares held by him in each company. The copyright in all material on this site is held or used by permission by us. The contents of this site are provided for informational purposes only and may not, in any form or by any means, be copied or reproduced, summarized, distributed, modified, transmitted, revised or commercially exploited without our prior written permission.

© 2009, Oil & Gas Investments Bulletin   

Contact Us:
Customer Service: 1-877-844-8606

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules