₪ David Pescod's Late Edition July 12, 2007
An Update with Canaccord's Clive Stockdale
(From June 14, 2007)
Over the last decade or so, one of our favourite stock pickers
and one of the guys that always was so good at finding that
high risk/high reward oil and gas play that usually created
some excitement was Clive Stockdale. Clive was previously
the oil and gas analyst at Loewen Ondaatche, Pemberton
Securities and Dominion Securities and is currently a Vice
President Corporate Finance at Canaccord. He has had some
huge winners and I guess the one story that stands out to all
of us was Ultra Petroleum, which he discovered at $0.50 and
became what everyone dreams of...a hundred bagger. He
was also “Johnie on the Spot" as one of the first to be looking
at Oilexco, way back at $0.25 a share. Mind you, that might
be a tribute to tenacity rather than acuity, since Clive had
held in during previous incarnations that included wildcats in
Newfoundland and Louisiana and was ready to buy into a
new direction. This year has not been kind to him. He had
what all investors/speculators experience at one time or another,
a “month from Hell” as three of his favourite stories
failed to deliver. Still, all three of those stories offered people
a chance to make a buck, but it's time to check in with Clive
for some of his thoughts at this time.
Dave: Looking at some of the success stories Clive, any additional
thoughts at this time about Ultra and Oilexco?
Clive: Ultra is a situation that, of course, has gone its own
way now and I really am not following it that much any more--
except to note with chagrin its quotes. Yet, it’s worth noting
that the stock didn't go up linearly and smoothly as hindsight
would suggest. If my memory serves me right it went up to
over $5 per share and then checked back to $0.85 per share
and many speculators were shaken out. With Oilexco, the
same thing happened: with the previous plays talked about
before, we went up and down with it twice and then Millholland
came into his own with his early diagnosis of the potential
of the second generation drilling in the North Sea. I think
it's a fair comment to say that I was lucky to see Millholland
not only see the opportunity, but also to have the guts to
seize it. Believe me, there were enough “naysayer’s” at that
time--some of whom are sheltering under his umbrella now.
Maybe, and I use the word "maybe" advisably, the lesson
to be drawn is that being able to hang on and not be
stampeded into selling brings very large rewards. No
guarantees, of course, looking at my portfolio reminds
me of looking at a WW2 bombsite and yet those stocks
that have succeeded have more than paid for the many
mistakes. Hopefully, I will be able to say with respect to
the setbacks this year that the same lessons can be adduced
in support of the stocks involved.
Dave: Let's get down to it. Two of your favourite stories,
International Frontier and Gulf Shores have had little fun
courtesy of a dry hole in the North Sea. But, looking to a
bright side, they have several joint ventures still lined up.
What do you see for them right now?
Clive: I think that the well that was drilled--the Laurel Valley
well--was definitely the one with the most obvious
potential. Yet with the very favorable financial condition
of both companies at the moment, there will be an ongoing
supply of exploration news and, although each individual
project might not have the huge upside appeal of
Laurel Valley, there's certainly enough to sustain market
interest.
Dave: July 15th will see the spudding of a gas play that
some people actually have high hopes for, despite the
fact that it may not be the target that Laurel Valley was.
Clive: That's my understanding--that the probability of
success is quite high since gas has been encountered in
the prospect area. It's the Lytham & St. Annes prospect;
a 972 square kilometer block involving Quad 41, east of
Teeside. Once again, we have the benefit of 3D seismic
which suggests that moving up dip from an earlier location
could encounter three prospective reservoirs, The
area seems to be gas prone, sufficiently so to attract
Lundin Petroleum the operator of the wildcat and the
proposed location is seven kilometres south of a fallow
gas discovery at 41/5-1.
The location being tested could host a prospective resource
of 690 BCF if all three reservoirs are present.
Success here would underwrite the present price of the
stock, but it would also corroborate the idea that several
other structures evident on seismic would also be prospective
and in this respect overall potential reserves of
one trillion cubic feet have been bandied about. Reserves
of this magnitude certainly preserve the idea of GUL and
IFR having a series of prospects with high impact. Their
interests are respectively 10 and 6.25%.
Following on after that, maybe in late September--October,
will be spudding of the Ridgewood prospect where GUL
will pay 15% for a ten percent interest in the 72.5 square
kilometer license and IFR is currently anticipated to have
a 25% interest . In the general Moray Firth area, the prospect
is 35 kilometers north east of the Beatrice Field, and
nine kilometers from the nearest proven Jurassic oil accumulation.
The play postulates a tilted fault block with four
way closure encompassing 1,100-2,000 acres. Filled to
spill point, the potential is for 180 million barrels recoverable
on the upside P10 case. The ten percent interest
would then augment GUL’s asset value by $4.00 per share
and IFR’s by over $10.00--that's the upside, which is ten
times the current price.
And that's not the end. Provisionally, the first quarter of
2008 will see the drilling on Quad 30 for GUL and, in the
background, is the possibility of a further high potential
play participating with senior oil companies. Remember,
Laurel Valley was drilled excruciatingly quickly, but only
depleted the GUL’s cash balances by 12% and with the
further drilling planned it's silly to throw in the towel right
now. IFR, of course, has winter drilling planned in the
North West Territories and has to be presently at a bargain
sale price with its enviable working capital position
of $0.53 per share.
Dave: A second adventure was with TG World Energy, a
stock which nicely better than doubled. They've done exploration
both in Alaska and Niger. Any thoughts on those
two plays and the Company at this point?
Clive: To be honest with you, I don't know when we first
started discussing the TGE because we've definitely been
following it since just above the $0.25 level. I think it went
to well over the $2.00 level, so yes, it was a pretty nice
move. The Niger play has stumbled, but still hasn't yet
been condemned. Its huge potential was what made it so
attractive in the beginning and also the fact that the Company
was being carried by the China National Petroleum
Company on considerable seismic expenditures, and the
drilling of the first three wells. So you had a very cheap
entry for the Company and a very influential partner.
What I liked subsequently, was that they diversified into
the North Slope of Alaska and the North Slope is an area
where huge discoveries have been made--Prudhoe Bay
obviously comes into mind and Talisman and Petro-
Canada have recently announced a “contingent” 300-500
million barrel discovery.
In my opinion, this underlines the management's statement
that fields varying from 20 to 200 are not outlandish.
It seemed to me that it was a look-alike for the North Sea
in that a second generation of activity was starting and
that TGE was in early. That analogy clearly has not been
accepted by the market: the Company’s success at North
Shore-1 was greeted with a so-what response.
Compare that with the way the market reacted to Oilexco's
Huntington discovery. Subsequently, the success in testing
the Jurassic at Huntington has more than justified the
market activity, but it still remains that a discovery in the
North Slope was treated as a non-event whereas the market
has been conditioned to appreciate discoveries in the
North Sea.
Dave: Now the North Slope can only be developed in the
winter time.
Clive: Well that's right if we’re talking about exploration-it
won’t apply to development drilling and, Dave, this is a
problem that we are getting nowadays. We are going further
a field to find interesting plays. Drilling in the North
Sea is within reason a year round prospect, but who’s got
the rigs--well Oilexco for one! Sure you can't drill exploratory
wells all year round on the North Slope, but that kind
of thinking would put nearly all northern drilling down, but
there is a rig available and we'll be turning to the right this
winter. I have seen reserve estimates of the North Shore-1
success of 10 to 20-30 million barrels --for the potential
field that is. Giving oil here at $10 per barrel and the value
to TGE runs from $0.50 to$1-$1.50 per share, but, they are
participating in over 300,000 acres and can decently hope
for more discoveries. As I said before, the area is highly
petroliferous, the North Shore -1 success offset the Mobil
Gwydyr Bay South discovery which tested 2263 barrels
per day on a restricted choke.
Dave: So this coming winter could see a good move in
the stock?
Clive: Entertain this as a thought (1) further evaluation of
the North Shore-1 success indicating a larger structure
than originally thought (2) a sidetrack at the Sak river location
is successful and (3) another success, at Gwydyr
South. Add to that that the “contingent discovery” might
be brought into the main stream giving reflected glamour
to the overall theatre. Looked at it that way, the Niger play
is pure gravy!
Dave: What kind of odds do you give for success in Niger,
having missed twice now?
Clive: It has to be wildcat odds. Do you think it should be
one-in-three? Anyway that's all academic, because in my
opinion you are getting it free at the current stock price.
Dave: What kind of odds are you looking at for the North
Slope as well?
Clive: Maybe I'm pushing the analogy too hard, but a bit
like the Oilexco tactics are being used. The North Shore-1
offset an earlier success and, hopefully the same is true of
the West Gwydyr location. You go close to where there's
been success and that lowers the odds significantly.
Going back briefly to the Laurel Valley duster, the interesting
thing about that play that made you happier at taking
the chance was that Oilexco departed from its basic approach
and took a chance on a wildcat on a prospect which
may not be completely dead from latest soundings.
Dave: What are your thoughts on oil and gas prices for the
next while, Clive?
Clive: I've always tried to respond to the question of oil
prices. When you asked me last time I said it would hit $80
before it hit $40 per barrel and I was sweating when it
touched $49. I could say now that it will be at $100 before it
hits $50 per barrel. Now that's being mealy mouthed and I
think one should be bolder in one's forecasts because it's
the elephant in the room. Basically, I'll make a point estimate
and forecast $85 per barrel by the end of the year and
if I am wrong I'll be on the low side.
Dave: Why so optimistic?
Clive: Why so pessimistic you mean. Who is going to meet
the increased oil demand, given the strong growth estimates
for this year, the oligopolistic position of OPEC, Non-
Opec running hard to stay still and the continuing underinvestment
in the oil industry from a world perspective?
Dave: You're not off the hook yet. What about you rushing
in where angels fear to tread by recommending not only a
diamond stock, but a play in Greenland, Hudson Resources?
To be fair, it did run to over $2.00 per share.
Clive: Yes, well there's no end to my temerity. It has come
off--badly. The euphoria that accompanied the announcement
of the 2.4 carat diamond gave way to disappointment
that carat grade looked low. But, and this is the important
point, few would deny it's a bona fide play. Accept that,
and it's hard not to consider it cheap compared to its
peers.
Dave: Would you expect Hudson to repeat its upside run?
Clive: I think that's a very definite possibility, however, I
am much more confident that buying at current levels will
garner a good return as the company busies itself about its
2007 season.. I'm looking for a 50% move just based on
field activity.
Dave: Why so confident?
Clive: They went to raise three million dollars and got six
million. Consequently they have the ability to mount a
much greater exploration effort than hitherto and, say what
you like, we now know their hunting ground to be significantly
diamondiferous.
Add to that they will be further evaluating the Garnet Lake
discovery with on site, in house processing ability which
will dramatically compress that tedious time between sampling
and evaluation. Without that, March 08 would have
been a reasonable timetable for results.
Dave: But, Greenland!
Clive: It's far easier to access than the current prejudice
assumes and that's better appreciated in Europe. The political
stability of the Government of Greenland (and Denmark)
and their pragmatic approach to permitting has allowed
Hudson's exploration activities to advance at a faster pace
than other Canadian diamond projects.
Dave: What would be your top three picks at the moment?
Clive: Oh Boy! You always like to stretch me on the rack!
I’ve just gone over the last battlefields and you don’t expect
me to mention them – or abandon them maybe?
Dave: Yes, yes, yes, but…
Clive: Maybe this will help. I now hold more shares of Gulf
Shores and no less shares of International Frontier than I
held before the Laurel Valley well. I am buying TG World
Energy and it’s easy to see that I took down $100,000 of the
recent Hudson financing. I’ve already mentioned my liking
of Oilexco. Apart from other considerations, if oil prices
move up it will be a proxy for them, just as Ranger Oil was
in previous oil markets. Bow Valley seems to be attractive
as it gets the best of both worlds – the North Sea and the
North Slope. Tusk Energy is worth a nod.
I would never say abandon selectivity, but, if I’m right about
the short term future of oil prices, then there will be more
toleration of mistakes by the market and those investors
with appetite for risk may be treated with more than the
usual kindness.
Dave: Thank you so much Clive!
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