Reprinted with permission:
biddingonbaystreet.com
*BAY $TREET BYTE$* May 18: NEW: PINNACLE OIL (PSFD,NASDAQ BB:$15.75)
"IDENTIFICATION EXTRAORDINARY"
What if a high probability of the presence of very substantial underground
oil and gas reserves could be spotted relatively quickly and inexpensively,
over large geographic areas, from an airplane?
Pinnacle Oil says its proprietary technology ("SFD")can do just that and
has the potential to become "an industry accepted mainstream oil and gas
exploration tool." The addition of two men from senior level executive
positions in high profile US and Canadian oil and gas companies
(Renaissance; CamWest) to top Pinnacle management positions may be providing
a wake-up call to industry analysts to take a very close look at this firm.
Quote from new President & CEO: "During the course of the past two years in
which Pinnacle has operated the technology over Renaissance's and CamWest's
exploration areas, the coincidence of SFD features with known
seismically-identifiable subsurface structures and proven oil and gas pools
has been extraordinary."
There are always a fair number of possible new features coming my way, as
well as many companies I am aware of and monitoring for signs the situation
is improving or the companies may soon warrant a closer look. Timing of
when (or if) to bring a new company to BBS reader attention is always a
tough call. I want to alert readers while there is still excellent value to
be had (i.e. the stock is still cheap), but also when events are such that
visibility & price appreciation is relatively imminent.
I have been following Pinnacle Oil for at least six months as a very
interesting story. I planned to introduce the company as a "watch" in
January, and even sent a brief write-up to mail subscribers in the January
'99 BBS issue, with plans to release it within days by e-mail. However,
sensing drill tests would not progress as quickly as previously planned the
Pinnacle story was set aside as a 'wait'.
A press prelease May 3 reawoke my interest, for reasons I will outline in
Part II of this feature. Today PSFD announced closing a US$6 million
financing and begins to look like it has everything in place to move this
technology forward. Pinnacle does not look cheap at just under US$16, but I
suspect if it proves its technology, the stock will move into the
'investments of the third kind' (very large potential upside) category. For
a BB company, it has remained at a remarkably strong price level for a very
long time.
Below is the feature written in January outlining the story. Some of the
information may have changed since then but it provides the general picture.
The feature is followed by comments on Monday's news release and a copy of same.
January 1999
PURELY SPECULATIVE:
ENERGY SERVICE STOCKS
A SINGLE EXCEPTION?
There is a strange phenomenon in the Oil & Gas Service Industry. This whole
sector has been down and out - and for good reason with oil and gas prices
at 12 year lows and no early end to the weakness in sight. It is a sector I
like to watch whenever it is down, as there are some very strong companies
which, when they are good are very very good and there is usually plenty of
time to climb on board when a cyclical recovery in commodity prices begins.
The last time BBS featured a basket of Canadian stocks in this industry was
June of 1995 and the group performed well beyond expectations.
Unless one believes the energy sector will never come back again, it is
always a good idea to keep an eye out for bargains here. The leaders in the
US are companies like Haliburton (HAL,N) and Schlumberger (SLB,N); I like
smaller US companies: Veritas (VTS,N), Tidewater (TDW,N) and Noble Drilling
(NE,N). On Toronto some stocks to watch are Precision Drilling (PD),
Enertec (ERS), and Ensign (ESI), all suffering the effects of low oil/gas
prices with stock prices diminished & very low P/E ratios based on last
years earnings.
PINNACLE OIL INTERNATIONAL INC.
PSFD,US OTC BB: $15
12.4 million shares outstanding
Lynda Easton 403-264-7020; fax: 264-6442
www.pinnacleoil.com; invest@pinnacleoil.com
There is one little known company in this industry that has been stubbornly
defying the current trend and the reason why is fascinating. Pinnacle Oil
International Inc., new kid on the block, finished 1998 hitting all-time
highs. Pinnacle is a technology company with exclusive rights a new
proprietary technology/tool for use in oil and gas exploration. High risk,
and no longer cheap, it may none-the-less be worth following. Should PSFD's
technology prove successful in the next few months, this stock is going to
move much higher. There should still be time for those on the sidelines to
get in for substantial gains, even if prices move higher, and the risk will
be reduced . It takes an open mind and a big leap of faith to assume PSFD
will be successful, but it costs nothing to keep up with events.
"BLACK BOX": THE STORY
Pinnacle has developed a new technology to identify and rank commercially
viable accumulations of oil and gas. The technology involves use of a
proprietary "Stress Field Detector" or "SFD" device. Data is generated by
the SFD and is used with the company's proprietary electronic data
acquisition and global positioning systems, together called the "SFD Survey
System", to define structures and hydrocarbon deposits. Expensive and time
consuming 2-D and 3-D seismic surveys are being used for this purpose now.
The exciting part of the story is the claim that the SFD Survey System is a
'black box': a 'revolutionary' new technology, that dramatically improves
upon the shooting of seismic in the search for oil, in a fraction of the
time and at a fraction of the cost of conventional methods. Management
claims the Stress Field Detector can locate hydrocarbon reserves from an
airplane flying over potential sites and can differentiate between oil and
gas. The estimated cost of an SFD survey is in the $5000 per day range or
$5 to $12.50 per linear mile. 2D seismic costs $5,000 to $25,000 per linear
mile; 3D costs $15,000 to $100,000 per square mile and traditional data
acquisition can be operationally difficult.
THE COMPANY
Pinnacle is a US company with its head office in Calgary Alberta and top
management is Canadian. The majority of its shareholders reside in the U.S.
It is a "remote sensing technology company principally engaged in the
business of hydrocarbon (oil and gas) exploration, and through their
strategic partners, the exploitation of hydrocarbon accumulations identified
by Pinnacle U.S. and Pinnacle Canada" (from SEC file). If SFD-qualified
prospects prove to be commercially viable, revenues to PSFD will be
generated through royalties or working interest income.
Management has announced new in-house advancements including data
processing, signal conditioning and interpretation & interpretation software
algorithms which give technicians the ability to process and interpret the
presence of SFD anomalies within days after the completion of SFD survey
Approved seismic data collection and interpretation takes months and costs
millions. PSFD has recently acquired an SFD survey airplane for its crews.
Debt-free, the company held US $5.3 million in cash at the end of September,
which should allow it to meet capital and operating expenditures over the
next 3 - 31/2 years, unless financing is needed for land acquisition.
WHY BOTHER?
As usual it is the people/companies involved which drew my interest. I have
not met Pinnacle management in person but it is more the players outside
the company which provide credibility to the story at this early stage.
PSFD's strategic partners are two well known Canadian firms: Renaissance
Energy and Encal Energy Limited; and CamWest Limited Partnership in the US.
Pinnacle Oil has exploration agreements with both Encal and Renaissance.
Encal president Dave Johnson has worked with Pinnacle for over two years and
says "we've put a lot of time and effort into it ... you never touch the
ground, you can do wide area reconnaissance to evaluate ... it's fast and
cost efficient." (Sword: PEQ) PSFD has a 3 year deal with Encal and has
participation or over-riding royalty options on projects identified with
SFD. A shorter-term 'survey aggreement' has been made with Renaissance.
The Stephens Group Inc. completed a US $6 million investment in convertible
preferred stock of Pinnacle Oil in April 1998, with an option to purchase up
to 200,000 shares of the common stock of Pinnacle Oil. Stephens Group Inc.
is the parent of Stephens Inc., an investment banking firm that is a member
of the National Association of Securities Dealers and the New York Stock
Exchange. It is one of the largest non-Wall Street investment bankers. The
Stephens Group holds several direct investments, with emphasis upon the
fields of media, telecommunications and energy, including control of the
largest private gas reserves in the United States. Jon Jacoby, an
executive vice-president of the Stephens Group and Rick Turner, a Stephens
Group vice president who is also chief financial officer and a director of
CamWest, have joined the board of Pinnacle.
Pinnacle Oil has signed an exploration and development agreement with
CamWest Limited Partnership of McKinney, Texas, a Stephens Group affiliate.
CamWest has oil and gas reserves in Kansas, Wyoming, North Dakota and
Montana. The agreement between PSFD and CamWest has a primary term of four
years and gives CamWest the exclusive airborne exploration rights for the
SFD over 2 million unspecified square miles worldwide. If PSFD and CamWest
choose to develop a prospective site PSFD can earn up to 45% if it shares
land acquisition costs, or can receive a sliding scale of royalties up to
8%, with CamWest as operator.
Arkansas Business journalist David Smith, in an April 20 article says
"CamWest had two representatives, a geophysicist and a geologist, who did
not believe the detector would work, design a test for the machine. They
went 180 degrees after the test was done." On the other hand, a Barron's
article last February did a hatchet job on Pinnacle ("a new force or a new
farce?") quoting several geologists, physicists, geophysicists and other
scientists whose reactions were skeptical to the point of being amused.
(None of the experts had tested the detector or even seen it.) A similar
reaction can be expected from anyone in the field who has not been involved
in the evaluation of the technology and in fact this has been my experience.
Barron's quotes from the experts include: "it would have to be a phenomenon
far outside of all things that we have experienced so far"; "if it works it
will put us out of business" (from the largest seismic company in the
world); "I hear about a new black box every month.". What is not clear is
how many 'black box' technologies actually make it to the point where after
2-3 years of testing, at least two highly reputable oil and gas companies
are actually going to drill test sites selected with the new technology.
EARLIER TESTS
The SFD technology has been undergoing development and testing for nearly
three years. In the initial stages, tests were run out of a van along roads
throughout southern and central Alberta using a "blind field test" over a
dozen fields. The evaluation period was only 12 days from acquisition to
interpretation. SFD anomalies on twelve existing pools showed strong
repeatable oil and gas signatures, with 2 exceptions which showed a
questionable SFD anomaly.
CamWest conducted a blind airborne test of the technology within the United
States. CamWest determined that the Stress Field Detector accurately
identified 85 percent of known oil and gas fields covered. The 15 percent
not detected involved fields with reserves of less than 1 million barrels.
A test was done in Southwest Saskatchewan in which the initial ground-based
SFD survey yielded 38 SFD anomalies. Renaissance Energy selected five of
these anomalies to test SFD and requested SFD airborne surveys of all five
locations, both during and after drilling. The Pinnacle analysis confirmed
SFD anom- alies at all five well locations but according to Pinnacle's
ranking system, all were considered marginal with low probability of
commercial viability. Drill results at all five wells proved none to be
commercially viable.
In Alberta, seven exploration well locations identified by conventional
geological and geophysical methods were surveyed by Pinnacle. Pinnacle
conducted detailed analyses on six and a cursory analysis on a seventh
location. These analyses indicated none of the seven were likely to be
commercially viable in the primary zone. After drilling, the primary zone of
interest in all cases was abandoned.
An independent report on the Alberta and Saskatchewan surveys by highly
regarded Gilbert Laustsen Jung Associates Ltd., Independent Petroleum
Consultants of Calgary, Alberta states: "The drill results of the twelve
wells are consistent with the predictions resulting from SFD surveys in the
primary zone of interest." But unfortunately these tests served only to
'prove a negative'. The ultimate test of SFD technology will be "when
highly ranked anomalies identified by SFD have been drilled" (Lausten Jung
Assoc.).
DEFINITIVE TESTS
PSFD "is now at the stage where the company is bringing the technology into
the mainstream with submissions of 16 SFD qualified prospects to industry
partners for seismic confirmation and subsequent drilling ... the projects
submitted by the company identify exploration ideas on untested oil and gas
prospects" (Malcolm Sword: Petroleum Explorer Quarterly, 09/98). The
reason the stock price has been going up is that testing is about to begin
and results will be known near term. Investors willing to gamble are
placing their bets. Encal and CamWest are ready after 18 months of
working/ flying with PSFD to drill upwards of 20 SFD chosen targets during
this quarter (inCanada and the US). Encal, with its partners Mobil, Hunt and
Pan Canadian, is drilling an expensive ($10 million) SFD-confirmed well on
Shoal Pt. in Port au Port Peninsula in Western Newfoundland. PSFD'S
compensation for the survey will be an 8% gross overriding royalty on
Encal's interest. Encal is paying 37.5% to earn a 25% interest in the
Newfoundland project and an 8% royalty is extremely generous for this
industry (<1% is customary).
"Earlier this year, Pinnacle performed extensive airborne SFD surveys for
Encal in the Gulf of St. Lawrence region. These flights also represented
the first time the SFD was used over a large body of water. Pinnacle
advised Encal that of all the SFD anomalies identified in the survey, the
Shoal Point SFD anomaly, which is centered in an Off-shore area, was the
best indicator of a large hydrocarbon bearing structure in the entire
surveyed area. Although the Shoal Point SFD anomaly is centered offshore
and corresponds with the location independently targeted using seismic
methods, the initial exploratory well is being drilled directionally from an
on-shore location for economic considerations. If the exploratory well is
successful, it is likely that subsequent wells will be drilled off-shore."
(September 18 '98 release)
THE SFD SENSOR
The SFD sensor is described as a "non-electromagnetic passive sensoring
device"; it is a "passive transducer capable of detecting changes in stress
within the subsurface." (This may mean something to more technical readers
- it is not in the realm of my own personal expertise). It registers a
reaction and deduces properties from that reaction.
Because it can be used from a vehicle or, more efficiently from an airplane,
it is a "wide-area exploration tool" . SFD can be used:
1) As an 'inferential' detection tool to identify changes in geologic
structures and features and porosity levels from which the presence of
hydrocarbons may be deduced.
2) It is also a 'direct' detection tool which can identify the actual
presence of oil, gas and water, and the relative amounts of their
accumulations. Larger pools appear to have a larger stress field and are
more easily detected by SFD than smaller pools.
Based on a 100% confirmation rate over several years by Pinnacle's strategic
partners, management believes that at a minimum SFD has been proven "to
inferentially detect hydrocarbon accumulations by identifying through their
unique stress fields seismically-detectable geologic structures and features."
DISCUSSION AND CONCLUSIONS
There is no need to get too excited until more information is available. At
the current price level investors should realize PSFD is still highly
speculative and should be treated as such until news of drill results are
released. The odds are always against black box stories but in the event of
success big gains can be made. And since early results can sometimes
subsequently be reversed, one should protect capital as one goes.
PSFD management considers the technology to have entered "commercial
production mode." Pinnacle has now moved from blind field tests to actively
identifying SFD-qualified, previously untested, potential hydrocarbon
deposits for each of its three strategic partners. SFD is first used to
identify prospects; seismic is then used to confirm the prospects and
deliniate the shape of the reservoir to decide where to drill; and partners
are ready to drill test these prospects.
Those evaluating the company are said to be astonished by how well SFD seems
to work but no one is able to explain the physics behind it. How accurate
it is at land depths greater than 12,000 feet or offshore has not yet been
determined. So far it has indicated an ability to identify off-shore
hydrocarbon accumulations in the Gulf of St. Lawrence at depths of up to 500
feet.
The advantage to Pinnacle's partners if SFD proves successful will be a
tremendous reduction in their 'finding costs', now $5 per barrel of oil /
oil equivalent (5 year average). Cost reduction will be in the form of
reduced seismic cost and the cost of acquiring land (not to mention the
efficiencies possible if partners concentrate efforts on larger hydrocarbon
pools). Even if seismic is required to support SFD data, the area under
examination will be significantly reduced. Always important to the bottom
line/cash flows, cost reduction is even more critical during cyclical downturns.
PSFD'S near-term intensions are "to limit its exploration efforts to ...
current strategic partners." The company has chosen its partners carefully
for their ability to continue to explore and exploit numerous SFD-confirmed
prospects in the future. The strategic partners are responsible for
conducting and managing all drilling, production and marketing activities to
exploit an SFD prospect. A more conservative investment in the new
technology could be in one of the strategic partners - like Encal which
would enjoy a competitive exploration advantage if the technology is valid,
and which has an exploration agreement extending over three years.
Results of initial drilling should be in over the next quarter or so, and if
discoveries result at industry levels or better, Pinnacle will 'be in play'.
There may be drilling delays in some of the projects due to conditions in
the industry (continuing low oil & gas prices). Whether SFD proves to be
useful in finding anomalies and increasing the efficiency of
traditional/accepted methods or as a stand alone indicator with the ability
to define hydro-carbon structures without backup seismic information, it
will have massive implications on the industry. The giants of the Oil & Gas
Service industry would have little choice but to attempt to acquire control
of the technology. Director, Chief Executive Officer George Liszicasz and
Director, President Dirk Stinson own 70% of PSFD shares; a takeover would
have to be 'friendly'.
The company is still trading on the Bulletin Board, but is now 'fully
reporting', and has made application to and is responding to questions in a
final review by NASDAQ, toward achieving a Small-Cap listing on the NASDAQ
exchange.
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