My Grandfather will turn over in his grave but
the Oil Sands IMO have replaced the bank savings
deposit. If you think oil will return to $30. a bbl
and we'll discover a bunch of elephants then I'm
wrong. BMD and the Oil sands are your new piggy bank.
Jimymac
Courtesy of Dr. Michael Berry PHD.
MORNING NOTES Tuesday February 7, 2006
Michael A. Berry, Ph.D.
Today’s Notes:
. THE OIL SANDS OF SASKATCHEWAN
. BIRCH MOUNTAIN: STOP WORRYING
. THE METALS: A HARD LOOK AT HARD CREEK
1. THE OIL SANDS OF SASKATCHEWAN
Last week I visited Saskatchewan for the first time. No, it was not the fine city of Regina
that I visited. It was not Saskatoon, Prince Albert, or Swift Current. It was not Melfort,
Moose Jaw or Mossbank. On Thursday, I flew with a group of company officials to Fort
McMurray, Alberta, boarded helicopters and flew at 120 knots for about 40 minutes to
an, as yet, unnamed drilling camp. The camp had been carved out of the beautiful
wilderness by an enterprising and productive group from Oilsands Quest led by CEO
Chris Hopkins.
Oilsands Quest is a private Alberta company that owns 100% of the leases to 864,000
acres of ground in Saskatchewan. The properties of Oilsands Quest stretch over 70 miles
from north to south, 35 miles west to east (at the widest point) and most important, they
are immediately adjacent to Alberta’s oil sands.
According to an October 2004 report, known as the Ranger report, the black, oil sands
have been mapped to within 20 kilometers (14 miles) of the border between Alberta and
Saskatchewan. Suncor’s Firebag West project (in Alberta) will produce 10,000 to 15,000
barrels per day using a SAGD (steam assisted gravity drainage technology) when it is in
full production this year. Suncor’s Firebag plant is located 50 kilometers (30 miles) due
west of the Oilsand’s Quest leases.
Between 1974 and 1976 Gulf Canada and Shell Canada drilled a series of core holes in
the area and identified oil sands or bitumen, the stuff from which synthetic crude is
produced. I am told that Shell drilled holes all the way form the American border north
every mile in the 1970’s. Records show that 24 holes were drilled on the Oilsands Quest
Properties. No one is certain just what Gulf and Shell Minerals were looking for and most
of the core is either lost or unavailable. Two holes were apparently “cored” and
piecemeal data remained from those holes, even though no cores are available. The
Ranger report indicates that,
“Short intervals of both these cores recovered bitumen that assayed up to 11% by
weight bitumen with porosities over 35%.”
This data was tantalizing enough that it warranted a drilling program to determine the
impact of stratigraphic uncertainty and the influx of fresh water into the reservoir.
While I visited the Oilsands Quest camp last week the company was on its sixth hole in
this drilling program. They had hit bitumen on 5 of 6 holes. Yesterday Oilsands Quest
reported results (through public company CanWest Petroleum which owns 69.2% of Oil
Sands Quest) partial results of these core holes. The CanWest report indicated,
“The first core’s initial assay reports a grade of 12% to 17% bitumen (oil) by weight
with an approximate grade of 15%. Final assay reports may change this grade by a
minor amount. ….
The production of bitumen in the Athabasca comes principally form the McMurray
Formation ….
Five of the sixth holes have intersected bitumen-bearing McMurray formation sands
with thicknesses ranging from 5 to 27 meters (16 to 89 feet).”
CanWest Petroleum (CWPC BB $5.35) is the investment vehicle and it is shaping up as
a very interesting discovery investment potential. I grade it 7.5 out of 10 on my scale for
Discovery Potential. Here’s why:
1) The Ranger report indicates “proven” bitumen is defined as 8% or greater by
weight. Initial and early results from the assays indicate the average grade
should about 15%. This is quite a high grade – even relative to the Alberta
sands.
2) The team headed by Oilsands Quest Chris Hopkins and Field Chief Erin
Kimball discovered and helped developed the Synenco field (Northern Lights)
which appears to have many geological similarities to the current discovery.
Synenco was sold to a Chinese company (SinoCanada Petroleum are 40%
owners). It has discovered 1.49 billion barrels of bitumen in place. Synenco
(SYN TSX) plans to produce 100,000 barrels of bitumen per day when in
operation from Northern Lights. There is nothing more important than a
management track record of success.
3) The sub surface valleys of Saskatchewan are in or near “elephant country.”
Oilsands Quest appears to have made an early discovery in these areas.
4) CanWest through Oilsands Quest will eventually own 100% of an area about ¼
to 1/3 as large as the Alberta oil sands leases.
5) CanWest has raised C$16,295,000 for its ownership position in the discovery.
The exploration balance sheet looks adequate. I was impressed with the care
and detail that the management of Oilsands Quest has placed in the effort.
6) The potential for value accretion is large. There is significant interest in any
new oil sands leases as evidenced by prices for leases in Alberta – a few miles
away.
7) CanWest will beef up its board of directors in the coming days.
8) Oilsands Quest is a very good exploration and operations team.
There are still risks to be certain. The economic character of the discovery is not known
yet. Much more drilling will be required. Oilsands Quest is planning for that actively.
MORNING NOTES 3 OF 7 2/7/2006
But management is beginning to understand that the discovery has potential. Technology
for extraction of oil sands is improving each month, as I pointed out yesterday. The
CanWest Petroleum stock is frothy and a little higher than I like. It is likely to be
volatile. But given the potential, the risk reward ratio is very favorable and qualifies in
the Discovery grid. You may get the stock lower but then again you may not. Please do
your own due diligence and please consider this stock as a call on the potential of the oil
sands of Saskatchewan. Aside; my friend Dr. Tom Patton always cautions me that in
exploration “things” either get better or worse. In this case the initial results are better,
much better. Stay tuned.
Quest Drilling 6th
core hole. Feb 2,
2006.
MORNING NOTES 4 OF 7 2/7/2006
2. BIRCH MOUNTAIN: STOP WORRYING
Last Friday night I had the pleasure of dinner with Doug Rowe and Don Dabbs and their
wives in Calgary. If you don’t know these men you should immediately get to know
them. They are, of course, two (of the three or four) key movers in the Birch Mountain
saga. This is a story that is only in its first chapter. Yet brokers are wringing their hands
when the stock consolidates a few pennies.
In addition to eating some wonderful Alberta beef (just what I needed) I had a chance to
see the Flames lose to the Canucks. There were some good fights though. Sorry, back to
reality, it must be my Canadian genes expressing themselves.
Last evening Birch Mountain announced another major news release. This should be a
relief to the broker community who worry about the Birch stock price. Birch reported
yesterday that,
“The size of the Hammerstone project described in the project Update is larger than
contemplated in the original public disclosure document released one year ago.”
“The scope of the project has also increased and includes enlarged lime prodcuing
facilities with hydrated llime and milk of lime plants, as well as a cement plant and a
facility to receive and regenrate spent lime produced in oil sands water treatment.”
Please read the entire news release because it lays out the blueprint for a “cradle to
grave” byproduct and processing system for the Athabasca oil sands region. This is an
important announcement. It sets a new higher bar for the company. I always thought the
company had $15 to $20 stock price potential. I suppose after further study, and a new
This is a helicopter view of the
50 kilometer road into the camp
that the Quest team built.
Looking north it is a very big
property that CanWest / Quest
owns.
MORNING NOTES 5 OF 7 2/7/2006
report, I will have to raise my bar as well. Amongst other issues the Province of Alberta
is becoming a strong cheerleader of Birch Mountain’s potential. This past year a great
deal of cement has been sent south to New Orleans under NAFTA leaving the province
wanting.
Doug Rowe commented, “We received strong support from industry and government to
develop a local supply of cement and reagent limestone products.”
Senior Vice President Derrick Kershaw, who used to stick handle Syncrude,
commented,” We are designing an integrated facility to meet the industry’s needs for
construction products and reagents, as well as providing full-cycle environmental
solutions. For spent lime recycling and gypsum disposal.”
The pot at the end of the BMD rainbow is now much larger. Relative to point 10 on my
Discovery Grid, do you have then patience and the courage to see Birch Mountain’s
value creation journey through? Management is competent and I believe they can
execute and communicate. A cement plant, by itself, will be a significant resource for the
province of Alberta when it comes on stream by 2008 to 2010. If you will think long term
you will be handsomely rewarded, in my opinion. There is a strong global tailwind
blowing in the Athabasca. As one executive from an oil sands producer recently told me,
“Birch Mountain has the Athabasca locked up.”
Birch is a core holding. Buy and forget, in my opinion.
You must like this chart.
Remember when Western
Silver wouldn’t go below $8.
Then, between the end of
November and yesterday it
doubled?
I’m not saying that Birch’s
share price will double but it
seems to find support at about
$7. I am happy that it has
pulled back and is finding
support at that level. It is
becoming oversold and I think
the MACD will turn up. |
