The following report is from Michael Schaefer's "Outstanding Investments" In the Natural Resource Sector January 1, 1998
For more information on Odessa Petroleum Corp Visit www.odessa-corp.com
From: Todd McMurray Vice President Investor Relations
Odessa Petroleum (OPC.VSE)
In the December 1, 1997 edition of Outstanding Investments, we provided an Overview of Odessa Petroleum (OPC, VSE) an early stage Canadian company with the rights to 80% of a very large proven oil property in the Ukraine.
This is one of the most exciting oil plays we have seen for a long time. I say that because, based on its own testing an analysis, supported by millions of dollars worth of high quality data generated by Soviet geologists who did extensive testing of the area prior to the break up of the USSR, the company's Belolessky Block could contain a reserve of as much as one billion barrels of oil in place.
While it doesn't have the same immediate potential as Range, and there is the political risk of an investment located entirely in the Ukraine, OPC has off-setting values which make it a sure-fire double based on today's price of about Cdn$1.50. You wont have to wait long for a double, as 1998 will be a watershed year for the Ukraine (thanks to new legislation related to foreign investment to be passed in the first quarter), and for OPC, which is quickly gaining momentum and attracting the interest of resource analysts. We believe that, by year 1998, it is very possible this stock could be selling for $5.00 or more.
Here's a simplified analysis. Let's start with Odessa's market capitalization, about US$20 million fully diluted. Against this we have it's 80% interest in the Belolessky Block, a massive 900 square kilometer block with seven identified fields, altogether containing as much as one billion barrels of high quality oil.
What's that much oil worth vis a vis Odessa's current market capitalization? The first step in coming up with a valuation, is to differentiate between the reserves in place and recoverable. "In place" means oil in the ground, not recoverable oil. Typically, a company will be able to recover between 15% and 25% of its reserves in place. If you use 20% as recoverable in Odessa's case - and all the work done so far suggests recoveries of 20% or better - then Odessa will be able to produce as much as 2000,000,000 barrels of oil out of it's concession.
To be ultra-conservative, lets assign a value of just $1.00 per barrel of estimated recoverable oil. That would value the company at US$160,000,000 (80% of $200 million) against a current market capitalization - fully diluted - of about US$20,000,000. With a fully diluted 19 million shares outstanding, Odessa's underlying resource is worth Cdn $11.50 per share.
To give you some idea of how conservative that valuation is, a recent article in Forbes magazine (Nuptial Frenzy, Dec. 1 edition), included a list of the prices paid in recent months to acquire proven reserves. It ranged between $6.05 and $9.61, far more than the usual $4.00. Richard Rainwater of Pioneer Natural Resources, one of the smartest operators in the business, explained why prices were so high. "To meet the energy needs, the world has to add 2 million to 3 million barrels of new oil production every year. Oil is not coming on stream at that rate. Starting in 1999 there will be virtually no spare capacity in the world. The price of oil will have to rise."
So, major oil company's are falling all over themselves to lock up proven reserves at previously unheard of prices. The future of Odessa, with it's potential one billion or more barrels in place, is particular bright. Especially considering it's favorable location and "low lifting costs" - the cost of bringing the oil to the market. In OPC's case, these will be low because the Belolessky Block is connected by all-weather roads and by railway to the port city of Odessa, just 140 kilometers to the northeast. That provides easy access to both the local and export markets. Importantly, the city also boasts a large refinery. That makes a world of difference in the economics of the company, as they are not operating in some remote corner of the world.
A Scenario for Short-Term Production
Here's how we believe the Odessa story is going to play out. First off, this is a smartly run company. While it will have around Cdn$7 million in the bank after the exercise of outstanding warrants, it will most likely conserve it's capital, and greatly speed up production, by joint venturing the development of it's Belolessky Block with a major oil company. Typically, these joint venture's require the major to put up the lions share of the money to bring the project into production, for which they earn an interest of "X" -usually in the area of 30 to 40%. If Odessa's management pursues this option and it's almost certain they will, we could see OPC go from no production today, to better than 5000 barrels a day by year-end 1998, growing to as much as 20,000 barrels per day in subsequent years.
While joint venturing will dilute shareholders, we are starting from such a high level - with a net present value in the area of $160,000,000 against a market cap of $20,000,000, that even if the company had to give up 40% to attract a joint venture, we would still be looking at a per share valuation of around Cdn$7.00. Importantly, by joint venturing, the entire process of obtaining full production, which requires a lot of drilling, would be significantly fast-forwarded.
What really adds icing to the cake , besides the fact that we are getting in very early on OPC, is that the refinery at the port of Odessa has the excess capacity needed to refine up to 20,000 barrels a day, and there is ready local demand for OPC's output. In fact, the Ukraine currently imports about 90% of it's oil supply, so Odessa's production will be very welcomed.
In short Odessa, which trades under the symbol OPC on Vancouver, has all the elements needed for a big win over the intermediate term. If you don't already own it, you should.
Odessa Petroleum Corporation, 543 Granville St, Suite 1200, Vancouver, BC, V6C 1X8, (604) 669 1388 E-mail: odessa@direct.ca |
