NiMin Energy (NNN.TO, NEYYF.PK) -- this stock is a rare combination of a solid oil resource play, combined with virtually unlimited upside from a potential technology breakthrough (heavy oil EOR).
Wyoming Resource Play -- better economics than the Bakken
These are 4 heavy oil fields in the Bighorn Basin, and have about 9 mmbo of proved reserves, the large bulk of which are PUDs. The oil is in shallow formations, about 4,000 ft. down, and can be accessed with a simple vertical hole, and a single small frac (if that). The company estimates it will cost about $3-4/boe to drill out these fields. Differentials for heavy oil in the Bighorn have been holding pretty steady in recent years at about 85% of Nymex.
California Heavy Oil EOR
Presently, if heavy oil is any deeper than, say 3,000 ft., there is no way to recover any more oil after the primary recovery has depleted. For shallower formations its possible to do steamflooding, but once you get too deep it gets too cold for the steam to be effective. So right now there are tons of depleted heavy oilfields sitting out there, where only something like 8-10% of the original oil in place has been produced, and the remaining 90% is just sitting there, with no way for us to get it to the surface.
NiMin has a fascinating experiment going that is trying to solvle this problem. They are injecting CO2 together with foamed oxygen down into the top of the formation, with the hope that that will start an in-situ combustion process that would be sufficient to force the heavy oil to start flowing down to some horizontal wells that have been drilled to locations below the injector wells. After about 10 months of injecting they have gotten only a small response, but still believe the process can work.
If this process works these guys would have the keys to the kingdom. There are literally billions of barrels of oil left behind in heavy oilfields that are totally worthless because there is no way to extract the oil at the time.
Finances
Until Thursday this was a great story stock but no much more since they had no money left. Then on Thursday they raised $10M through Thomas Weisel, with a potential 15% oversubscription option. They are also looking to get a $36 M term loan, part of which would pay off an existing $23 M bridge loan that comes due at the end of the year.
These financings change the whole picture for this company, IMO. Before, all the PUDs in Wyoming were great to hear about, but it was hard to put a value on them since the company had no means with which to drill them out. Now they do.
Once they close the term loan I believe they would be able to actually get not 1, but 2 rigs going over in Wyoming, in a continous drilling program. It costs about $1.5M a month to keep a single rig going there, and with $10M from the equity raise plus another $13 M (net) from the term debt, they would be in a position to drill a mess of wells over there, after which point, further drilling could be financed from cash flow. The optimum way to drill out the fields there would be to use 2 rigs at once, since it takes 2 weeks to drill a well there and 1 week to complete it. With 2 rigs doing the drilling, you could then have a dedicated workover rig follow behind the drilling rigs, completing 1 well a week nonstop.
Conclusion
I know a lot of folks here tend to shy away from the Canadian-traded junior stocks, for good reason. But I believe there are rare occasions when it makes sense to look into this sort of stock, and NiMin is one of them. In fact this is now my largest position, by far. The fact that they chose a US-based company, Weisel, to be their financiers corroborates my belief that they intend to list on a US exchange at some point. In fact I would be surprised if this has not occurred within a year from now.
So far the stock is only covered by Fundamental Research Corp., see their latest report on NiMin at researchfrc.com . Their report, which came out just before the equity raise, derived a "fair value" of $4.16/share (ignoring dilutive securities). I strongly suspect that part of the deal for NiMin using Weisel for the equity raise was that Weisel would agree to initiate coverage of NiMin with an Outperform rating in the near future.
There are about 11.5 M warrants that are exercisable at the current quote ($1.55), and these expire in Sept. '11. Given the torrid pace of drilling that will transpire starting very soon, I strongly suspect these warrants will all get exercised, which will help delever the balance sheet.
In conclusion, this stock is very undervalued even if you only counted its Wyoming play. The California EOR play provides some massive optionality, and right now none of that upside is priced into the stock. |
