NATURAL RESOURCE INVESTOR
& WORLD GOLD STOCK REPORT
/ / / FAX ALERT #14, Vol. 1999 / / /
(company sponsored investor relations report)
DEREK RESOURCES CORPORATION (VSE:DRS)
MAJOR COUP FOR CANADIAN OIL JUNIOR:
BATEMAN ENGINEERING GROUP AGREES TO DEVELOP DEREK'S 75% OWNED 100-150 MILLION-BARREL-RESOURCE WYOMING OIL PROJECT; AND TO DELIVER UP TO $US 5-MILLION PROJECT FINANCING. SAGD SITE CONSTRUCTION SEEN STARTING IN EARLY 2000.
Feasibility Studies Show Recovery Costs of Less Than $6/Barrel;
Sales of All Production Seen at Non-Discounted W.T.I. Prices.
At Long-Term Prices of $US 20/bbl, Project Pro Formas Show
About $US 1.6-billion in Revenues, $US 750-million Net to Company.
FAX HOTLINE FOR MARKET HOURS 9 / 15 / 99
We first highlighted Derek Resources Corp. (VSE:DRS) back in January, as a promising junior in the field of enhanced oil recovery. That was because it had acquired on bargain terms a 75% working interest in a Wyoming field with an estimated 100 million to 150 million barrels of oil resources. And these resources looked to be in excess of 72% recoverable with very attractive economics by proven steam-assisted gravity drainage ("SAGD") techniques according to expert studies.
Even with oil prices hovering in the $10-$11 basement ranges at the start of 1999 (remember?), the company's economic analysis for the project called for close attention. With oil now at $24/bbl, that's doubly so:
* Independent engineering analyses of the company's Wyoming oil deposit have projected an all-in recovery cost of only $US 5.76/bbl for the oil with the use of the "paired multiple-well" approach. And these costs are seen going even lower as economies of scale come into play (centralized steam units serving numerous well-pairs).
* The company has said it can sell all oil produced at the field at a full non-discounted price equivalent to the benchmark West Texas Intermediate (WTI) light oil price. In fact, an agreement from Texaco offers to buy all oil produced at the field at this price, and with no transportation deductions from the WTI price because a refinery is located just four miles off the field.
* The unusually attractive margin between recovery costs and non-discounted WTI sale price stands in strong contrast to most heavy-oil projects: Lower-quality heavy oil is usually saleable only at discounts of as much as $8/bbl from the WTI price. By contrast, Derek's high quality medium oil from the LAK Ranch Wyoming project contains no paraffin, is very low in sulfur and, being napthetic, is also in great demand as jet fuel feedstock. Hence, the non-discounted WTI price it can command. This unique factor made the project potentially attractive and profitable even in a depressed oil price environment, and certainly much more so at today's oil prices.
* Based on independent engineering studies, the LAK Ranch field is said to have a productive life of 15 to 21 years, ultimately utilizing 84 well-pairs (set up in 42 units). As we previously reported, Derek estimated that taking a long-term average price of only $US 13/bbl at WTI prices, the project would produce just under $US 900-million in gross revenues and net income of about $US 350-million for the company's interest.
With oil prices now at $24/bbl., this outlook leverages enormously to the upside. Today, Derek estimates that the project is capable of generating gross revenues of about $US 1.6-billion in gross revenues and a net of about $US 750-million to the company's interest, at long-term average prices of $20/bbl WTI.
* Giving an added measure of confidence to Derek's attractive evaluations of its LAK Ranch project, the company's management reflects some of the most highly regarded experts in North America in the field of enhanced oil recovery. Orchestrated by president Barry Ehrl and CFO Frank Hallam, this group has unquestioned recognition in the industry:
The technical leadership for the project is provided by Dr. John K. Donnelly, director of Derek and vice president-engineering, who is globally recognized for his expertise in the design and use of enhanced oil recovery techniques. Among other projects, Donnelly was the primary SAGD technical consultant to Blackrock Ventures, which recently completed a successful SAGD pilot plant and announced a $12-million SAGD expansion of its project at Cold Lake, Alberta. Donnelly has worked closely on such projects for Shell, Chevron, BP Canada, and Alberta Energy, to name just some.
Dr. Paul Trost, Derek's U.S. vice president-operations, is also a recognized industry expert in oil recovery. He was also previously a co-founder of an enhanced oil recovery company and has operational experience across the USA from Kentucky to Oregon.
George Pouska, field manager, has designed and constructed a number of commercial enhanced oil recovery systems. He has 28 years expertise in the business.
Dr. Ken Kisman, a third party engineer, retained by Derek to review all data and further advise the team. His independent report has confirmed Derek's in-house engineering.
Punchline? When these guys talk, the majors listen. People like Donnelly, Kisman and Trost are among the authorities in the industry for the recently developed steam-assisted (SAGD) and gas-assisted (GAGD) processes.
Bateman Completes the Picture
And now, the exciting recent developments: Notwithstanding the unquestioned technical excellence of its management, and of the LAK Ranch project, what Derek still needed in order to realize its big potentials was (a) project development capital on terms that would not be excessively dilutive to the company, and (b) a larger industry partner with proven capability to undertake large heavy engineering construction projects.
The key to unlocking Derek's wealth of resources is $US 3-million to $US 5-million in project capital to construct and successfully operate the first well-pair to recover oil on a pilot production basis. Effective production from the pilot would validate the overall economics of the project beyond question. And, even more important, with a reserve audit based on pilot production, Derek will be able to reclassify its estimated 100-million to 150-million bbl. oil resources to the status of a proven resource according to SEC requirements. This step would give the company a very large, quantifiable asset value on its books and re-rate the company's values accordingly.
Even as oil prices steadily rose through the spring and summer, Derek's management examined a number of joint-venture and funding ideas with a variety of potential partners, all with a careful eye to dilutionary implications for its shareholders. Then, about a week ago, the search finally ended as Derek announced both a blue-chip construction group for the LAK Ranch pilot project and a committed financing of up to $US 5-million on terms that may require little or no dilution to Derek shareholders.
Entering the picture to develop the LAK Ranch oil project with Derek are Bateman Engineering, Inc., and Silvertip Project Partners, Inc., both of Denver. The two associated Denver-based companies agreed to deliver up to $US 5-million in non-recourse-type development financing for the project, and to construct, develop and operate the field under the technical supervision of Derek's SAGD experts, Messrs. Donnelly and Trost.
The partners are now planning to swiftly move to the stage of actual on-site pilot plant construction within several months, by early next year. Meanwhile, development planning, permitting and licensing for the project are starting immediately.
Silvertip has been appointed Project Manager by Derek and will be responsible for overall project management under the guidance of Derek's expert personnel. Bateman will provide turn-key design, construction and start-up of surface steam production and distribution systems, oil recovery and separation systems, raw water supply and wastewater injection systems. Bateman and Silvertip will fully self-finance their services until the committed development financing is completed, which is expected by later this year.
Derek obtained very attractive terms for the deal. Bateman and Silvertip will be compensated for their services at LAK according to fair market rates. In addition, together they will share a participating interest equal to 0.05 times the Company's 75% working interest in LAK upon delivery of a non-recourse style project development financing (i.e., Bateman 1.875%, Silvertip 1.875%). The amount to be financed will be determined upon completion of a formal budget, but it is expected to total approximately $US 5-million. Bateman and Silvertip will also be granted the right to design, construct, start-up, operate and maintain future expansions or additions to the Company's facilities located at LAK according to fair market rates.
Established in South Africa more than 75 years ago, Bateman Engineering, Inc., is an internationally recognized firm with considerable resources and expertise within the mining, oil, gas and power generation industries (see www.bateman-am.com). Silvertip Project Partners, Inc., is an associate company of Bateman's which specializes in the development of technology-based projects from the pilot stage to commercialization. Together these two firms have extensive technical and operational skills which are applicable to the LAK Ranch oil project, and also enjoy the extensive support of major financial institutions.
Right Place, Right Time
Derek's management believes it's pulled off a coup in bringing the prestigious Bateman Group in to finance and develop the attractive LAK Ranch oil project -- and on terms that put a real smile on the faces of Derek shareholders.
Maybe it's a case of being in the right place at the right time. We're reminded of the terrific deal that Derek first made in initially acquiring its 75% LAK Ranch interest. This was in September 1997 for a commitment to make property payments of just $US 500,000 and to spend up to $US 3.5-million on development before Jan. 1, 2001. Since that time, the company spent an additional $200,000 redrilling and reverifying reserves and recently completed the $500,000 payment. Considering the current potential NPV values in the project, Derek believes it's bagged an elephant with a peashooter. Now, with Bateman joining the project to quickly advance it to pilot plant production, Derek's exceptional process of value creation for shareholders can take a very big next step.
As background, we should add that the right timing with technological innovation also makes this story possible. What would have been an uneconomic project in the Seventies can be highly valuable today. The key to unlocking the huge economic values of this 6,360-acre property are two technological advances in oil recovery.
The first is the recently developed steam-assisted recovery process ("steam-assisted gravity drainage," or "SAGD"), concerning which the company's technical experts are recognized authorities. This process utilizes pairs of horizontal wells placed ten to twenty feet apart and extending up to 3,000 feet along strike near the base of the reservoir. The upper well pipe injects the steam to liquefy oil; the lower well pipe, situated just below the steam pipe, then sucks up slightly heated free-flowing oil.
The success of this process is, in turn, made possible by a second technological advance. That is the development of new and more accurate horizontal drilling technology, which completes the ability to use SAGD efficiently. This entire process is further enhanced by the shallow reservoir depth (from surface to 2,500 ft.) and the dip angle of the reservoir beds (30*) allowing the oil to flow by gravity down to the horizontal producing well.
Together, management believes these technologies transform the LAK Ranch project into a significant-size, commercially viable oil field, even at oil prices much lower than today's. Hence, because Derek was in the right place at the right time, it was able to pick up the project at a bargain price, taking advantage of considerable prior drilling on the property by Texaco, Conoco and Surtek. These companies proved up major reserves which were not viably recoverable with older technologies. Timing, as they say, is everything. This created the basis for Derek's new partnership with Bateman.
Outlook
Derek's management recently completed the company's 20F filing with the SEC, and the company is now fully reporting in the U.S. We also anticipate a considerably wider following for Derek with the oil analyst community, now that it is firmly moving toward construction and development to exploit its large LAK Ranch oil resource. Management says this is only the first step in a plan to build up the company into a significant multi-field production company because the combined Derek/Bateman group has unique capabilities to develop additional enhanced recovery projects.
The company seems remarkably well structured for its accomplishments to date, suggesting a healthy stinginess about dilution. Right now, Derek has about 7.0 million shares outstanding, plus 5.8 million warrants at varying exercise prices. The company recently announced it has completed a $CDN 1.25-million interim financing. Taking all shares, warrants and issuances into account, Derek has 16.0 million fully diluted shares. Using this number and a discount rate of 10%, management estimates that Derek's shares could have a net present value in excess of $CDN 25.00 per share. Based on comprehensive resource calculations by the company, Derek likely has over 2.7 net saleable barrels of oil per share. DRS has recently traded in the $CDN 0.90 range.
For immediate corporate information call 888-756-0066. *NRI/WGSR
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