This latest East Breaks news is very exciting, and has finally compelled me to jack up my price targets. I'm reiterating my "Strong Buy" on Panaco, with new price targets of $5 by Halloween, $6 by Thanksgiving, and $7 by Christmas.
The big impact of this well is what it sets up for future drilling in this area. In the IPAA presentation that PNO did in April they included some amplitude charts of this area, which showed 4 undrilled fault blocks in the TW3 sands, all looking about the same. This first well has proven that their interpretation of those fault blocks is correct. They had estimated that those fault blocks would contain 75 BCFE of gas if their geological interpretation was correct. So now the market will start to give some value to not only this well but also the remaining undrilled sites in this area.
With the 12 month futures strip at about $5, what should we be using for the value of an mcf of gas in the ground? I would venture that it should be upwards of $2. So take the 75 BCF and multiply times 83% NRI, then multiply times $2/mcf, and you get a whopping $125 M for the value of the reserves that they've just proven up, or north of $5 per share.
Granted, some of this value has already been baked into the stock price. But I believe that only $1 or so of the current stock price is due to the potential of Panaco's East Breaks play. Ergo the likely $4 increase once it becomes obvious that this play is working out (i.e., once the second well gets drilled and completed and the third well is in progress).
We will not likely get any analyst coverage on this stock for quite awhile, given the departure of Larry. But my feeling is that the stock can still move up substantially without such, just based on its drilling performance.
With natgas prices being so high for September, Panaco may even end the quarter with positive working capital, for the first time in eons. This would be very bullish, since a lot of investors screen out all stocks with deficits in working capital. |
