₪ David Pescod's Late Edition March 8, 2007
DIAMOND TREE ENERGY (T-DT) $3.20 +0.05
RALLY ENERGY (T-RAL) $5.40 -0.05
If the chart to the left looks ugly it is. There are an awful lot of other charts that look quite similar and many of them have a common problem…for the natural gas producers in the market it hasn’t been fun. But, maybe things are changing. If you recognize the name Diamond Tree it’s because it has been frequently mentioned as a stock pick by Dick Gusella, President of Connacher Oil and Gas.
The veteran has spent his whole life in the oil and gas patch one way or another and knows a lot of folks working there. He has been suggesting two stocks strongly over the last while, one of which was Rally Energy run by his good friend and former partner Abby Badwi. And Rally keeps hitting new highs in the stock market. Rally is oil in Egypt and gas in Pakistan.
Diamond Tree, his other pick hasn’t been hitting new highs. Its been ugly for many of these gas players but as we have suggested frequently, we think there is a time coming shortly where maybe the worst is over for the sector as we watch for the charts to start bottoming and heading the other way - hopefully sometime this late spring, early summer. The sector has suffered incredible high service costs that in Canada have ballooned out of control. (In the United States service costs have gone no where nearly as high) and at the same time, natural gas prices that were flying in the winter 2005/06 hitting twelve, thirteen, fifteen dollars have been flirting with $6.00 or $7.00 sometimes as low as $5.00.
With the high costs in the business you can’t make much money at those numbers. Now gas seems to be putting in a bottom although as we get to spring when demand is traditionally at its weakest. See if the 40 or 50 natural gas stocks do start heading the other way, at least those that survive.
As far as Diamond Tree we catch up with Company President, Kelly Ogle, and he suggests that the company has an aggressive $28 to $35 million capital expenditure budget for the coming year. (Which is fairly aggressive for a company with only 25 million shares out) He had mentioned they have had a couple of things that happened possibility beyond their control.
The first was the winter of 2005 when the hurricanes hit the Gulf of Mexico and cut back American Natural Gas production so badly much of the good production practices in Canada were curtailed for awhile so production could make up for the drop from the Gulf. That meant one particularly enormous well that Diamond Tree had was put on production at the equivalent of almost 1300 barrels a day, which gave them a huge spike in production, to 4000 barrels equivalent and beyond.
Needless to say, when things changed (when things got back to normal) that well was cut back dramatically to a mere 300 barrels a day. Now the company is producing roughly 3000 barrels a day equivalent, but Ogle suggests that when the financial reports and other information on the company comes out in a few weeks, things could be looking better. Needless to say, he can’t say much publicly until that event and information is released, but they have publicly announced a target of 3700 barrels a day equivalent by year-end.
One thing that had Ogle optimistic was the drop in service costs and pointed to one well they recently completed that cost nearly $1.1 million, and now a look-a-like well is being quoted at $850,000. At its current price around $3.20, some of the brokers think there is upside here with Emerging Equities giving them a target of $4.69 and Salman Partners giving them a target of $4.50, although that is a cut from $6.00. If this stock does turn, it will definitely be one to watch, but probably one of scores of other natural gas stocks that might be aided by increasing depletion rates, lower drilling costs, and natural gas prices that could be a lot higher by next fall and winter.
CORRIDOR RESOURCES (T-CDH) $7.45 +0.15
We figure this is the perfect story for Walt Disney or someone like it to make a movie. The phenomenal story that is Corridor Resources… I mean you can’t make this kind of stuff up. A potash company faced with big problems with water disposal decides to drill a water disposal well on property owned by Corridor and discovers gas, and apparently lots of it. Twenty plus wells later they discovered they have lots of natural gas in that way off place called New Brunswick.
While they’re drilling to test a much deeper zone (Dawson Settlement) that could be many times the size of the McCully. They have the bad fortune of not making it to total depth. However, on the way down they find 1000 metres of shale that has lots of natural gas in it. You can’t make this kind of stuff up.
The interview we did recently with Andy Gustajtis, is the one person following this story that seems to have a good handle on it and the one story we call the most intriguing story “in any sector we can find”. The problem of course is that this is a company with a very, very lean management team and trying to track them down is hard and they don’t say much either.
So what is happening next, and how many big rigs do they have, and how significant could this shale discovery be and when are they going to drill for the deep stuff and…?
While there is a whole bunch of unanswered questions right now in the market place for this tantalizing story, we hope many of the questions will be answered in a web cast which will be on the Corridor website at www.corridor.ns.ca, as President Norm Miller addresses the RBC Energy Conference in Banff and I suspect there is going to be more than a few people interested in an update that I am sure promises to be more than a little intriguing. The company has an aggressive $28 to $35 million capital expenditure budget for the coming year, which is fairly aggressive for a company that has only 25 million shares out.
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