Derek Resources, recent summary from STOCKHOUSE:
Derek Resources Corporation (CDNX:DRS)
Derek Announces $CDN 6-Million Financing to
Start Production at 75%-Owned Wyoming Oil Project
We have previously called our readers' attention to Derek Resources Corp.
(CDNX:DRS), a promising junior in the field of enhanced oil recovery. Derek
has a 75% interest in the LAK Ranch Oil Project in the prolific Powder
River Basin of eastern Wyoming.
Previous exploration activities at the LAK Ranch have been conducted by
Texaco, Conoco, Parent Oil, Mapco and Surtek, Inc. (previously Exoil
Services). Surtek conducted field mapping studies, the drilling and coring
of numerous wells, and a resource estimate based upon their work and all
previous drill hole data. In 1984 Surtek estimated that the LAK Ranch
contained a resource of 100+ million barrels of napthenic oil, in place.
Recovery of this oil has not yet been proven to be economic. It is
anticipated that approximately 50% of the oil in place is recoverable.
In 1998 Paul Trost (now a consultant to the company holding stock options),
B.Sc., Ph.D., of MTARRI, Inc., under contract to Derek Resources, conducted
a four well drilling and coring program at the LAK Ranch. Based upon the
resulting logs/cores and a review of the Surtek data and conclusions, Dr.
Trost is in agreement with the Surtek estimate of a 100+ million barrel oil
resource.
In 1998 two independent consulting engineers reviewed Derek's LAK Ranch
project, evaluating the technical and economic feasibilities of recovering
this napthenic oil by utilizing Steam Assisted Gravity Drainage ("SAGD")
techniques. SAGD technology has been extensively developed and tested in
Canada, and proven to be economic for recovery of heavy oils in other
fields. Ken Kisman, P. Eng., Ph.D., and Mr. Ken Heer, P. Eng., reviewed the
SAGD economic assumptions and conclusions of John Donnelly, P. Eng., Ph.D.,
(consultant and board member to Derek who holds stock options in the
company). Both concurred with the conclusions of Dr. Donnelly. Dr. Donnelly
and Dr. Trost both believe that SAGD technology, in conjunction with Gas
Assisted Gravity Drainage ("GAGD") technology proposed by Dr. Kisman, will
recover approximately 50% of the oil resource at LAK Ranch.
The company's primary objective at this time is to install an initial SAGD
production facility at the LAK Ranch in order to prove that the oil there
can be economically recovered. Once this has been accomplished, the company
can then work towards reclassifying the appropriate portion of the oil
resource at the LAK Ranch into proved and probable reserves in accordance
with SEC guidelines in the USA and National Policy No. 2-B in Canada. More
delineation drilling and/or seismic work would be required to fully define
the resource for which SAGD and GAGD technologies are applicable.
The project represents a potential bonanza for tiny Derek (recent price,
about $CDN 0.75 with 9.7 million shares and about 6.0 million warrants and
options currently outstanding). The company's engineers believe that oil
recovered using SAGD and GAGD methods, on a pilot basis, from the LAK Ranch
will cost about $US 10.00 per barrel in total. On a multiple well basis
they believe the cost per barrel will fall to about $US 6.00. Assuming the
working assumptions put forth by the company's engineers are validated by
field testing, an informal estimate of cashflow to the company can be
calculated. On potential recoveries of 50.0 million barrels, a simple
projection based on a $20.00 oil price indicates that the project could
generate net revenues to the company of about $US 525 million for its share
of the project. While this is not a formal feasibility study, it does
indicate the order of magnitude in returns that this company is aiming for.
That's why our update on Derek today is worthy of closest attention by
investors who have followed the company's progress since our initial report
more than a year ago. Derek announced week before last that it has now
lined up $CDN 6.0-million ($US 4-million) in production equity financing to
install the initial production well and SAGD steam-generating facility at
the LAK Ranch Oil Project.
Upon the financing closing within the next 30 days, as expected, Derek will
be in position to start project construction leading to early production
tests to validate the company's economic assumptions and recovery
estimates. Expectations are high for successful results with possibly
significant re-ratings of the company's values.
The punchline here is that project capital is the key to unlocking Derek's
potentially significant values. This will enable the company to construct
and operate the first facilities to recover oil on a pilot production
basis. Effective production from the pilot would validate the overall
economics of the project. And, importantly, with a reserve audit based on
pilot production, Derek would also be able to reclassify a significant
portion of its estimated 100+ million bbl. oil resources to the status of a
proven reserve. This step would give the company a very large, quantifiable
asset value on its books and re-rate the company's values accordingly.
Derek has consistently demonstrated the merits of its project objectives by
its ability to attract credible partners to the venture. Among these are
the U.S. branch of Bateman Engineering, a South African-based global
engineering and construction firm with expertise in mining and oil and gas
construction and production. Bateman signed on last September to manage the
construction, development and operations of the LAK Ranch Oil Project,
including the initial pilot plant production.
Strong Project Management and Equity Partners
Moving to secure the pilot production financing, on March 10 Derek
announced the appointment of two financial advisors to assist the company
with funding completion. These are T.J. Heggeli & Company, an international
corporate finance firm in Oslo, Norway, with expertise in the shipping,
maritime and offshore oil sectors; and the London-based firm, Resource
Management and Finance Company Ltd., an international resources sector
financial firm working closely with Bateman on the financing of the LAK
Ranch project.
For the $CDN 6.0-million financing announced by Derek on March 21,
strategic partner Bateman Engineering will contribute $CDN 360,000 ($US
250,000) in equity financing. And Masefield AG, of Zug, Switzerland, an
international oil-trading firm specializing in petroleum and
petroleum-based financial investments, will participate with an equity
contribution of $CDN 720,000 ($US 500,000). Masefield also becomes a Derek
strategic partner, and will assist in marketing and price risk management
of future production as well as further expansion capital if and when
appropriate.
Derek's management recognizes there will be some dilution to the presently
outstanding share capital to finance the initial production at the LAK
project. The company is issuing up to 8 million units at $CDN 0.75/unit.
These each convert into one share plus one full two-year purchase warrant
exercisable at $CDN 1.00 in the first year and at $CDN 1.25 in the second.
On a fully diluted basis, the company's shares outstanding (now 9.7 million
plus about 6 million warrants and options) could get to about 32 million
(along with a potential cash infusion of some $CDN 12-million to about $CDN
16-million from full exercise of warrants and options). However, if proven,
it appears that the production values of the LAK Ranch Oil Project are so
enormous, they can strongly catapult the company's value, even after
factoring in all dilutionary impact of the present financing.
Analysis of Project Characteristics
To recap, here are some of the key reasons the Derek play is worth an
extremely close look by readers at just this pivotal time:
* In-house engineering analyses of the company's oil deposit have
projected an all-in recovery cost of only about $10/bbl for initial
production and about $6/bbl on a larger scale with the use of the
"paired multiple-well" approach. Ultimate costs are seen going even
lower as even greater economies of scale come into play (centralized
steam units serving numerous well-pairs).
* The company has demonstrated that it can sell all oil produced at the
field at a full non-discounted price equivalent to the benchmark West
Texas Intermediate (WTI) light oil price. Limited primary production
from the field has been sold at around the WTI benchmark for over ten
years. In fact, a standard marketing agreement from Texaco offers to
buy all oil produced at the field at this price, and with no
transportation deductions from the WTI price because a refinery is
located just four miles off the field.
* The unusually attractive margin between recovery costs and
non-discounted WTI sale price stands in strong contrast to most
heavy-oil projects: Lower-quality heavy oil is usually saleable only
at discounts of as much as $10-$8/bbl from the WTI price. By contrast,
Derek's high-quality medium oil from the LAK Ranch Wyoming project
contains no paraffin, is very low in sulfur and, being napthenic, is
also in great demand as jet fuel feedstock. This unique factor makes
the project potentially attractive and profitable even in a depressed
oil price environment, and certainly much more so at today's oil
prices.
* Based on in-house engineering studies, the LAK Ranch field is said to
have a productive life of about 15 years, ultimately utilizing up to
80 SAGD well-pairs (set up in 42 units). With oil prices now in the
$26/bbl range, the outlook leverages enormously to the upside. In
addition, the LAK Ranch oil resource is not yet fully defined.
Additional delineation drilling may increase the known resource.
* Giving a measure of confidence to Derek's evaluations of its LAK Ranch
project, the company's management reflects some of the most highly
regarded experts in North America in the field of enhanced oil
recovery. Orchestrated by president Barry Ehrl and CFO Frank Hallam,
this group has unquestioned recognition in the industry:
The technical leadership for the project is provided by Dr. John K.
Donnelly, director of Derek and vice president-engineering, who is globally
recognized for his expertise in the design and use of enhanced oil recovery
techniques. Among other projects, Donnelly was the primary SAGD technical
consultant to Blackrock Ventures, which recently completed a successful
SAGD pilot plant and announced a $12-million SAGD expansion of its project
at Cold Lake, Alberta. Donnelly has worked closely on such projects for
Shell, Chevron, BP Canada, and Alberta Energy, to name just some.
World-Class SAGD Project Team
Dr. Paul Trost, Derek's U.S. vice president-operations, is also a
recognized industry expert in oil recovery. He was also previously a
co-founder of an enhanced oil recovery company and has operational
experience across the USA from Kentucky to Oregon.
Other key members include: George Pouska, field manager, has designed and
constructed a number of commercial enhanced oil recovery systems. He has 28
years expertise in the business; and Dr. Ken Kisman, a third party
engineer, retained by Derek to review all data and further advise the team.
His independent report has confirmed Derek's in-house engineering.
Punchline? When these guys talk, the majors listen. It's a measure of
Bateman Engineering's respect for this team that Bateman will manage the
project under the advice and supervision they provide. People like
Donnelly, Kisman and Trost are among the authorities in the industry for
the recently developed steam-assisted (SAGD) and gas-assisted (GAGD)
processes.
The right timing with technological innovation also makes this story
possible. What would have been an uneconomic project in the Seventies and
Eighties can be highly valuable today. The key to unlocking the huge
economic values of the 7,400-acre LAK Ranch oil property are two
technological advances in oil recovery.
The first is the recently developed steam-assisted recovery process
("steam-assisted gravity drainage," or "SAGD"), a process with which the
company's technical experts are recognized authorities. This process
utilizes pairs of horizontal wells placed ten to twenty feet apart and
extending up to 3,000 feet along strike near the base of the reservoir. The
upper well pipe injects the steam to liquefy oil; the lower well pipe,
situated just below the steam pipe, then allows the slightly heated
free-flowing oil to flow to the surface.
The success of this process is, in turn, made possible by a second
technological advance. That is the development of new and more accurate
twin horizontal drilling technology, which completes the ability to use
SAGD efficiently. This entire process is further enhanced by the shallow
reservoir depth (from surface to 2,500 ft.) and the dip angle of the
reservoir beds (30 degrees) allowing the oil to flow by gravity down to the
horizontal producing well.
Together, management believes these technologies transform the LAK Ranch
project into a significant-size, commercially viable oil field, even at oil
prices much lower than today's. Because Derek was in the right place at the
right time, it was able to pick up the project at a bargain price, taking
advantage of considerable prior drilling on the property by Texaco, Conoco
and Surtek. These companies proved up major oil resources which were not
viably recoverable with older technologies. Timing, as they say, is
everything. This created the basis for Derek's current promising
situations.
Outlook
Derek's management has completed the company's 20F filing with the SEC,
File No. 0-36072, and the company is now fully reporting in the U.S. We
also anticipate a considerably wider following for Derek with the oil
analyst community, now that it is firmly moving toward construction and
development to exploit its large LAK Ranch oil resource.
Once the company has validated this exciting project, as it is confident it
will do, management is envisioning a broader horizon. It hopes to build up
the company into a significant multi-field production company because of
the Derek/Bateman capabilities to develop additional enhanced recovery
projects, and says that it has identified a number of attractive further
candidates for this type of development.
Conclusion? Don't let this one off your radar screen:
CDNX:DRS.
__________________________________
For immediate corporate information,
call 888-756-0066.
E-mail address: mailto:info@derekresources.com
Website: derekresources.com
Corporate Information
Derek Resources Corporation
Exchange CDNX
Symbol DRS
Recent Price Range $CDN 0.73 to 0.81
Shares Outstanding 9.7 million
Shares Outstanding -
Fully Diluted 15.7 million
Market Capitalization $CDN 11.46 million
Phone (888) 756-0066
(604) 331-1757
Website derekresources.com
E-mail mailto:info@derekresources.com |
