Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Dow Stock Market Dow Trend Forecast Current State - 22nd Apr 21
Gold Rebounds Amid Positive Economic Reports - 22nd Apr 21
China's record first quarter fuels strong expansion in 2021 - 22nd Apr 21
Gold Price Next Key Level - 22nd Apr 21
Here's What to Look For When Hiring a Real Estate Agent - 22nd Apr 21
Ethereum EIP 1559 and Raven Coin - 21st Apr 21
Gold, USDX: The Board is Set, the Pieces are Moving - 21st Apr 21
World Economies Need to Find a Lot More COPPER! - 21st Apr 21
DogeCoin CRASH! Time to Start Mining BOODGIE Coin! Crypto Mania 2021 - 21st Apr 21
Pausing Stocks and Gold Fireworks - 21st Apr 21
Precious Metals and Miners Start of New Longer-Term Bullish Trend - P2 - 21st Apr 21
Looking For A Mortgage Broker? Here Is How To Hire One - 21st Apr 21
Amazon AMZN Stock PRIMEDAY SALE! Trend Analysis - 20th Apr 21
Stock Market Sentiment Speaks: You May Not Believe My 2021 Targets - 20th Apr 21
Stock Market Phase Two Projection - 20th Apr 21
Are Precious Metals & Miners Starting A New Longer-Term Bullish Trend? - 20th Apr 21
Inflation: First the Gain, Then the Pain… - 20th Apr 21
8 Stock Market Indicators in 1: Here's the Message of the Panic/Euphoria Model - 19th Apr 21
Gold - You Can Win a Battle, but Still Lose the War - 19th Apr 21
Will Interest Rates Rally Further Push Gold Price Down? - 19th Apr 21
Gold Fireworks Doubt the Official Inflation Story - 19th Apr 21
YuanPay Team Discuss The Process Of Crypto Diversification - 19th Apr 21
Central Banks May Ramp Up Gold Buying - 18th Apr 21
How to Get Rid of Driveway Weeds With Just WATER! 6 Months later NO Weeds, Ultimate Killer! - 18th Apr 21
State of the European Markets - DAX, FTSE, CAC, AEX, SMI, IBEX 35, S&P/MIB, Euro Stoxx 50, RTS - 18th Apr 21
Einvestment Fund: What You Need To Know About Investments - 18th Apr 21
Google Alphabet (GOOG) AI Deep Mind Stock Trend Analysis - 17th Apr 21
Stocks and Bonds Inflationary Slingshot - 17th Apr 21
Best Smartphone Selfie Stick Tripod Review by ATUMTEK Works with Samsung Galaxy and Iphone - 17th Apr 21
How to Give Budgie's First Bath | Easy Budgie Bathing and Water Training with Lettuce - 17th Apr 21
Record-breaking Decrease in New Passenger Vehicle Sale in Europe - 17th Apr 21
US Stocks Climb A “Wall Of Worry” To New Highs - 16th Apr 21
Gold’s Singular Role - 16th Apr 21
See what Anatomy of a Bursting Market Bubble looks like - 16th Apr 21
Many Stock Market Sectors Are Primed For Another Breakout Rally – Are You? - 16th Apr 21
What Skyrocketing US Home Prices Say About Inflation - 16th Apr 21
Still a Bullish Fever in Stocks? - 16th Apr 21
Trying to Buy Coinbase Stock on IPO Day - Institutional Investors Freeze out Retail Investors - 15th Apr 21
Stocks or Gold – Which Is in the Catbird Seat? - 15th Apr 21
Time For A Stock Market Melt-Up - 15th Apr 21
Stocks Bull Market Progression Now Shows Base Metal Strength - 15th Apr 21
AI Tech Stocks Buy Ratings, Levels and Valuations - 14th Apr 21
Easy 10% to 15% Overclock for 5600x, 5900x, 5950x Using AMD Ryzen Master Precision Boost Overdrive - 14th Apr 21
The Current Cannabis Sector Rally Is Pointing To Another Breakout - 14th Apr 21
U.S. Dollar Junk Bond Market The Easiest Money in History - 14th Apr 21
The SPY Is Nearing Resistance @ $410… What Is Next? - 14th Apr 21
The Curious Stock Market Staircase Rally - 14th Apr 21
Stocks are Heating Up - 14th Apr 21
Two Methods in Calculating For R&D Tax Credits - 14th Apr 21
Stock Market Minor Correction Due - 13th Apr 21
How to Feed Budgies Cucumbers - Best Vegetables Feeding for the First Time, Parakeet Care UK - 13th Apr 21
Biggest Inflation Threat in 40 Years Looms over Markets - 13th Apr 21
How to Get Rich with the Pareto Distribution - Tesco Example - 13th Apr 21
Litecoin and Bitcoin-Which Is Better? - 13th Apr 21
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

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