Here is a feature article on Stratic Energy..an emerging oil and gas company controlled by Gentry.
STRATIC ENERGY CORPORATION
CDNX: YSZ
Recommendation: (See Below)
12-Month Target: (See Below)
John Clarke
416-644-8123 jclarke@northernsi.com
416-644-8124
It’s Time to Look at Stratic
· We are following Stratic Energy Corporation (75% controlled by Gentry Resources [GNY.TSE]
and insiders) as part of our coverage of Gentry (see our full research report dated December 13,
2000), with a SPECULATIVE BUY recommendation
· Stratic to change year-end to December 31, effective December 31, 2000
· We expect 2001 will see YSZ execute on its international exploration strategy through
participation in two exploration wells and potential acquisitions of producing assets
· Stratic’s drilling plans expose the company to potential oil reserves of several hundred million
barrels this year, from one well in Gabon and another offshore Cote D’Ivoire
· Our $1.00 target is based on a belief that speculative investors will be willing to participate in
YSZ’s attractive exploration prospects as the time-to-drilling horizon shrinks, exposing
themselves to huge potential upside under a success scenario
Gabon
In Gabon, Stratic, with its major partner, Energy Africa, has secured a rig to drill on its Ofoubou-Ankani
prospect. The company, which holds a 35% interest in the 325 square kilometre Block, expects to
commence drilling in July on a structure that could contain over 300 million barrels of oil. The prospect is
about 35 kilometres to the east of a major pipeline terminal which has spare capacity, and is also adjacent to
a main road which could be used to truck early production to the same terminal prior to pipeline
construction. We anticipate that a 20 million barrel pool would meet threshold economics for the
construction of a connecting pipeline, significantly improving economics and enabling higher production
volumes compared with trucking scenarios.
The Ofoubou-Ankani prospect is on a block in a proven hydrocarbon producing area, and is within 50
kilometres of several major oil fields, including the billion boe Rabi-Kounga field, operated by Shell. The
block already holds a discovery well, OFMA-1, drilled by Conoco in 1992, which encountered a 75 metre
oil column at shallow depth, but was not teste
Cote D’Ivoire
Stratic holds an 11% interest in the 793 square kilometer, shallow water Block CI-102, and a 10%
interest in the more than four times larger, deeper water Block CI-103, offshore Côte D’Ivoire in the
Abidjan Margin Basin. Collection and interpretation of seismic data on these blocks continued through
2000, defining a number of excellent prospects. On March 29 th , Canadian Natural Resources (CNQ.T)
announced that its wholly owned subsidiary, Ranger Oil Cote D’Ivoire SARL (“Ranger”), had
discovered oil in deepwater offshore Block CI-40. The Baobab 1X well, drilled to a total depth of 3,074
metres in a water depth of almost 1,500 metres, encountered hydrocarbons in the Albian formation. Two
drill stem tests on selected intervals resulted in a combined flow rate above 6,700 b/d of 22-23 0 API oil,
with a low gas-to-oil ratio of about 300 cubic feet per barrel. Baobab lies just south of the Espoir field,
which is being re-developed by Ranger with anticipated production for 2002, and immediately offsets
Stratic’s Blocks CI-102 and CI-103 to the east, where Ranger is also operator. A 3D seismic survey over
the prospective fairway between Block CI-26, containing Baobab and Espoir, and the eastern limits of
blocks 102 and 103 is currently being processed and interpreted. Upon favourable evaluation, we expect
Ranger to drill one of three potential prospects on Stratic’s interest blocks by year-end 2001. Blocks 102
and 103 are in a proven hydrocarbon-producing fairway, with producing oil fields to the west and east,
and the prospects could contain recoverable reserves of several hundred million barrels. We believe the
Baobab discovery is extremely positive for Stratic, and has likely been instrumental in the recent rise in
YSZ stock price, which hit a 52-week high of $0.55 in the last week of March.
Other
Stratic continues to examine other opportunities, including the acquisition of producing assets, in North
Africa and is focused on key areas in Egypt and Algeria.
Balance Sheet and Financing
As at fiscal year end 2000 (January 31, 2000) Stratic had cash on hand of about US$115,000 and 14.4
million common shares outstanding. We understand that Stratic is changing its year-end to December 31,
and expect the company to issue its newly stated 2000 year-end results soon. Stratic also has 1.6 million
share purchase warrants reserved, expiring September 15, 2002 with an exercise price of US$0.20, and
350,000 agent warrants at $0.50 per share. In addition, YSZ also completed a private placement of
3,500,000 Special Warrants priced at $0.50 in the second half of 2000, which are convertible into common
shares at 1.1 for 1, and raised about $1.75 million. Finally, as part of the company’s stock option plan, YSZ
has about 1.6 million options outstanding with an average price of $0.30. Total conversions result in fully
diluted shares outstanding of about 21.8 million. Gentry Resources holds 40%, and together with its
directors & officers holds approximately 75% of Stratic Energy. As Gentry and associated insiders
participated in the placement of the Special Warrants, we expect their interests in YSZ to remain the same.
(For more detail on the Stratic/Gentry relationship see our full report on Gentry Resources dated December
13, 2000).
Although we expect conversion to common shares for all outstanding warrants and options over time, which
would raise approximately $1.14 million, we would not expect this to occur until the potential upside has
been tested for existing investors. On this basis, we are forecasting year-end 2000 (December 31) cash on
hand was between $700,000 – $800,000, primarily from the receipts from the private placement of Warrants. Depending on
drilling commitments and timing for potential acquisitions, we believe Stratic may
have to raise significant capital in 2001 to pursue its opportunities. We anticipate participation on the Gabon
and Cote D’Ivoire wells alone, will require some US$2.5 million, and thus we expect Stratic to come to
market in the near term to raise additional capital. In our view, this might be accomplished more readily for
an acquisition of a producing property, where investors could anticipate cash flow to backstop exploration
expenditures, as well as realize any near-term development potential on such properties.
We also believe the recent amalgamation of Sloane Petroleum by Gentry (see our morning comment dated
March 5, 2001) has resulted in an increased investor awareness of Gentry, and in turn has raised the profile
of Stratic, which for all intents and purposes is the international exploration vehicle for Gentry.
Recommendation:
<em>We believe it is an appropriate time to look at Stratic Energy and we will be following the company as
part of our continued coverage of Gentry Resources. The market float of Stratic is extremely thin
and, with this in mind, Stratic could be considered by investors as a SPECULATIVE BUY. The stock
has the potential to reach $1.00 or so over the next several months as the time-to-drilling horizon
shrinks. Investors could realize huge potential upside under such an exploration success scenario. Our
potential stock price level of $1.00 implies a 122% appreciation based on current trading levels of
$0.45.</em> |
