₪ David Pescod's Late Edition 6/02-6/06/08
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David Pescod's Late Edition June 2, 2008
SAN GOLD CORP. (V-SGR) $1.68 +0.02
KIRKLAND LAKE GOLD (T-KGI) $10.10 +0.19
ANDINA MINERALS (V-ADM) $3.99 +0.05
The charts on San Gold and Kirkland Lake Gold show you that the world can still care if you can come up with oscillating drilling results. It's been a tough time for gold bugs over the last year, as even though gold soared to $1,000, many junior/intermediate golds did not participate...only the bigger ones like Barrick, Goldcorp, Kinross and the like. Now with gold correcting to $850, gold seems to have lost a lot of fans, interest appears to be waning, but what comes next still matters. Another change to $1,000 and people will care.
In the meantime, the world is looking at two Canadian stories, and with recent drilling results, are saying good work!
Canada's golds have not had an easy time being hit by the rising Canadian dollar, much higher costs, shortages of skilled and any labour plus perceived competitive disadvantages with many other areas of the world. Those perceptions might be changing, as so many other countries of the world increase royalties, or increase what the host country considers theirs and delays in building projects for all sorts of reasons may make people turn back to Canada. Plus some spectacular drilling results.
San Gold continues to work at Bissett Manitoba on underground working that is assumed to be e extensions of the Red Lake Districts, but recent drilling results have been enticing. How about 1.66 oz per ton gold over 4 metres. That's not even the best part. The best part is that that hole was a mere 200 feet from surface, on their Hinge Zone.
If you want rich though, how about Kirkland Lake, drilling on their producing area in the Porcupine Timmins Camp and announce 43.3 ounces of gold over 10.4 feet. Yes, you read that right. One of the richest holes ever drilled anywhere (wish they could find that in our back yard).
One of our favourite gold stories though remains Andina Minerals, not in Canada, but in mining friendly Chile. Almost four months late, they are expecting a new resource number to be released, probably this month, and one should take their numbers seriously. Seven or eight million ounces of gold, is a very serious number, and with positive recovery numbers being released lately, this is a huge project. A big project that might just be on the verge of becoming bigger, as it always had a sulphur asset in the project, but with sulphur at $75.00 a tonne, it wasn't worth much.
Now with sulphur at roughly 4 times that price in just over a year, they may be sitting on a second asset that could be worth $5 to $7 a share. Or not! Stay Tuned!
SHANGHAI COMPOSITE:< u>
HO CHI MINH (VIETNAM INDEX):
We are off in Asia to take a firsthand look on a combination/business/pleasure trip to see if Asia really is developing as so many prognosticators have suggested and not just a “Don Coxe” commentary. So far our tour from Thailand and Vietnam have shown us firsthand that this area of the world truly is booming. But in Vietnam in particular, one thing they are coming up with more of than any other country in the area...is people!
There is a virtual explosion in population as Vietnam now has almost 85 million people and most of them are young.
It is interesting to see this population because you swear at any given time, driving on the roads in this country that there are millions of them and everyone one of them is on a motorcycle and everyone of them is coming right at you. But while we are here, there is one thing that’s attracting a lot of attention as the former communist/socialist country is definitely going the capitalistic route, but it’s experiencing some of the pain as well.
Their stock market which was one of the better performing ones over the last few years has hit the ditch and is now one of the worst. We see in the Vietnam news which is the English paper distributed throughout the country, that the headline in the paper is “Stockbrokerages struggle to meet payrolls” as the stock market has stumbled an amazing 65% over the last while.
They note that in May, the stock exchange dropped an amazing 20% in just one month. While we have had a correction back in Canada as well, which turned out to be an opportunity for many investors, one wonders if it isn’t the same for this country.
We can’t believe as we drive along, to see the huge new factories being opened by companies like Cannon and even a huge Chinese company that has moved here because they feel labor is much cheaper in Vietnam than even in China. It’s about $150 a month for wages for women working in one shoe factory that we drove by and you should see the thousands of people lining up at shift change to start their work.
The good news about the stock market here is that anytime a market is down 65%, that’s usually an opportunity, don’t you think? How much lower it goes? Well, who knows, but one assumes that if the energy of the area is something to go by, anytime you have a correction in a market, it’s probably an opportunity.
When of course, is the big question as the correction we experienced in Canada was a painful one and some companies have been bitterly hurt, but it certainly proved an opportunity for many investors who took the chance. Now the question is, should a person with no fear of going international also be looking for bargains in Vietnam.
Interestingly enough, in the last week for the Vietnam Exchange, the only good news was that the computers were down and the Exchange was closed! How about that for a correction!
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David Pescod's Late Edition June 3, 2008
Q&A WITH PACIFIC ENERGY PRESIDENT
DARREN KATIC
(As of May 31, 2008)
Like many oil and gas stocks over the last six months, Pacific Energy is taking a licking, but now it looks like it could be bouncing back with the record prices of oil. We have quoted Andy Gustajtis of Dominick and Dominick frequently here as several of his stock picks of last year were top performers and then of course the asset-backed mess hit courtesy of Wall Street and things got ugly.
So it’s time to get caught up with Darren Katic, President of Pacific Energy and it’s a Company that has been plagued with some concerns about its current high debt levels.
David Pescod: Darren, we are glad to have you today from California. Our first question is that it looks like the platform offshore California and the wildcat play in Wyoming for gas was what started the Company. Now it looks like the offshore platform is finally in production, but Wyoming looks like it could be a bit of a disappointment. Time for an update…
Darren Katic: David thank you for having me on again and it is a pleasure to talk to you. We have not given up on the Green River play, although the Paladin well was indeed a disappointment especially in light of the data we had. However, it does not completely condemn the acreage, but does in our mind significantly increase the risk. There remains large potential in the deeper shale horizons that potentially blanket the lease. In light of the increased risks we proposed to our partners a change in the commercial terms of the farm in arrangement, although at this stage we have not been able to come to any agreement. As far as exploration is concerned, we are focusing our efforts on the Alaska Corsair prospect which has a much lower risk and higher potential reward. As for the Beta field offshore CA we have made huge strides and I am happy to report that platform Eureka, after being shut in for 9 years, is now back in production.
In the first phase we expect to ramp up to 1000 to 2000 bbls/day by the end on June and the goal is to have all 34 wells on by the end of the year with a target production rate of between 4 and 5 thousand bbls/day. Target exit rate this year from the entire Beta field is 7000 bbls/day.
David Pescod: The purchase of assets in Alaska certainly surprised the market, but the price of oil has doubled since then and while royalty rates in Alaska have also gone up, we have to ask, what it was that you saw in Alaska?
Darren Katic: Because we produce in the Cook Inlet, which has certain tax exempt status, we have not been affected by the increase in state royalties. As far as what we saw in Alaska, and in particular the Cook Inlet, was an area that we could continue to deploy our strategy of acquiring mature fields from sellers where the assets have been historically non-core, undercapitalized and thus possess material 1 and 2 P potential. We unfortunately were caught up in the credit crunch and ended up with a very expensive financing which has been somewhat offset by higher crude prices. We have begun to make significant progress in our de-leveraging plan and positioning the company for a recap later this year or early next.
David Pescod: The big concern with Pacific Energy is leverage/huge debt…like really big debt. How might that work in your favor or is this still something that the market should be worrying about, particularly since a little bit of the debt was just taken care of.
Darren Katic: The good thing is the credit market has begun to recover and as you mentioned we are currently planning a sizeable pay down funded by the sale of non core assets. As we continue to execute the de-leveraging plan we get closer and closer to the point where we can recap the company with a more traditional financing with which the investment community is familiar with. Once we accomplish a reduced debt load, the cost of the remaining debt will be substantially less, leaving much more cash in the business.
The opportunity for investors is that the risk associated with our ability to execute this strategy is minimized with every step we take and is further helped along with the high oil prices. The name of the game today is reserves, and that we have, and in North America. The Company has significant reserves all in the United States, with potential to add additional reserves with minimal risk. Our challenge is our balance sheet which is a manageable problem when the underlying asset is so strong.
David Pescod: What kind of production numbers do you see for the Company down the road and are these numbers one can predict with some degree of certainty?
Darren Katic: We are currently forecasting a 2008 exit rate of between 10 and 11 thousand BOE per day and this is adjusted for recent divestitures of about 1000 BOE per day. With our current reserve base we feel confident that we can reach 20,000 BOE per day in 2011.
David Pescod: One big concern is that this is an American Company with all-American assets, but trading on a Canadian Exchange. Americans tend to only trade stocks that trade on their own exchanges, so when do you see a listing finally happening down south? It can’t be soon enough.
Darren Katic: We filed our registration statement with the SEC in February of this year and are through the first round of comments and are revising the statement and adding in our first quarter numbers. The asset sale will delay the process slightly but we still expect to go effective this summer and assess the US listing shortly after that.
David Pescod: These current high oil prices are hard to figure. We kind of think most stocks are being priced as if oil was $90.00 to $100. But what do you see for oil and gas prices down the road?
Darren Katic: I feel that PFE is still priced at $50 to $60 per barrel but that does not address your question. Last we talked in April of last year I punted on this by playing it safe and saying oil will be in the $60 to $70 range;. I ultimately feel that we are in for a new era of sustained high prices and it is a simple supply and demand issue. Demand will continue to grow robustly in Asia, the Middle East and FSU while production continues to fall in many OPEC nations. Mexico and other major producers such as Russia are using more domestically and exporting less; there are fewer and fewer discoveries worldwide and the lead time needed for the equipment to develop the discoveries we do have (such as the ones offshore Brazil) will be hard pressed to arrest the natural decline. I predict that world oil production will not be able to grow much above current levels. I feel oil is going to $200 a barrel in the next 24 months.
David Pescod: If you could only buy one stock, other than your own and with no conflicts of interest, what would it be? Of course, a two-bagger would nice ….
Darren Katic: Check out Dune Energy (AMEX:DNE), they have been really beaten up over the last several months, not sure its at the bottom yet but if they can fix a few issues they have with their balance sheet they could be a $3 to $4 stock.
David Pescod: Thank you so much Darren!
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David Pescod's Late Edition June 4, 2008
STERLING RESOURCES (V-SLG) $2.77 +0.20
QUESTERRE ENERGY (T-QEC) $5.13 -0.17
DELPHI ENERGY (T-DEE) $2.72 -0.03
OILEXCO INC. (T-OIL) $16.05 +0.05
For those who follow Josef Schachter, in his recent issues put out by Maison Placements, he takes a monthly look at some of the high risk/high reward plays around the world and folks, some of them definitely appeal to your sense of greed. You do remember greed ... that was something you thought about a year ago or maybe even eight months ago. We are referring to stocks that actually went up when commodity prices went up.
The last correction has beaten greed out of an awful lot of people, but with the recovery in the market lately and of course with a couple of oil and gas stocks that we like having recovered smartly, all of a sudden you can feel that twinge of greed sneaking back into people’s minds.
Whether it’s a twinge that’s going to lead to something hitting you over the head or not is a possibility, but in the meantime, Josef Schachter’s latest issue talks about Sterling Resources. Now when we say he looks at a lot of the high risk/high reward plays around the world, you have to remember that high risk implies the chance that some of these companies could definitely go the wrong way in a big way. Take International Frontier Resources (IFR) a company that has many high risk/high reward plays in the Northwest Territories and the North Sea. You don’t see Schachter covering them anymore, because they have had so many misses. So keep that as a reminder.
But back to that twinge of greed. He is talking about Sterling and he details some of their many plays around the world. The bad news with Sterling of course is that they’ve had several delays. Some people have been hoping that some of their high profile plays would have started as soon as April. Not any more. Now most of them are in the second half of the year.
But why don’t we look at some of the suggestions of Josef Schachter. He notes that their 210-29/30 play in the North Sea which should spud in September, could increase the valuation in Sterling by $10.00 a share.
Now just remember the important fact is, what chance of success does this play have. Schachter may be generous in giving it a 25% chance, or for that matter might be being tough on them. But then there is the East Breagh target which could be as much as 450 Bcf and add potentially as much as $4.00 a share. He expects it to spud around July of this year, and once again, gives it about a 25% chance of success. The West Breagh play starts in September and again, if successful, could add $3.00 a share in asset value to Sterling. You get the drift …
The East Breagh area is once again a significant play and once again was one that he gives a 25% chance of success.
But then we get to the Black Sea which is expected to be spudded sometime early in 2009. We are not even going to mention what it could do to the share value of Sterling if Schachter is right. It just appeals to that twinge again. And I’m sure most people are simply way above mere greed.
In the meantime, Schachter has taken quite a look at commodity prices for both oil and gas and it’s been interesting to see what’s happened in the markets in just the last few months. It’s hard to believe just six months ago, he was one of the aggressive people in natural gas, suggesting he could see $9.00 down the road ... way down the road. In the interim it seems, every Tom, Dick and Harry on Wall Street has been talking about $125 oil, $200 oil, pick you own number….it’s been that kind of change in scenario. But Schachter was one of the first and one of the most convincing in his argument that things were going to turn for the industry.
So in this months issue, it is interesting to see his change in long-term commodity prices. It’s hard to believe but one thing he has done is move his target on oil from $70.00, up to $100.00 and his target on natural gas is up to $9.25. Even those right now, seem a long way away from what the market is currently sitting at.
As far as natural gas, he points out that is has recovered from depressed prices over the last nine months, but he also points out that there has not been an awful lot of drilling done over the last while and this has hampered any building in inventory.
He also suggests that for those looking for the bullish cause, the he wouldn’t be surprised to see the U.S. decide to become more self-sufficient or even focus on cleaner fuels which would be good for natural gas. Then he wouldn’t be surprised to see the price of gas and the ratio between oil and gas change much more so in natural gas’s favor to say eight to one. So he wouldn’t be surprised to see gas hit prices like $12.50, which suddenly isn’t that far away from current levels.
But down the road, he also suggests $16.00 wouldn’t be absolutely outrageous.
As far as oil prices, he points to the commodity hitting all-time highs recently of $135 a barrel, but the numbers he has been looking at to justify increasing his commodity prices, were inventory levels. Going into this shoulder season, he hasn’t seen adequate increases in inventory levels and hence the major reason for his increases in expectations of oil and gas prices.
He wouldn’t be surprised to see oil correct to $100 sometime over the next while, but he suggests it wouldn’t last long.
Back to the importance of high risk/high reward plays and he was also one of the ones looking at the Quebec plays that we mention frequently and Questerre Energy (QEC), which has really been on a tear, he reminds folks that he only gives it a 25% chance of success.
Meanwhile, every monthly issue he picks two stocks, one of an international nature and one of a domestic interest and he usually has a short list of preferred stocks, but Delphi Energy is his local pick. He notes that their Bluesky, Cadomin and Nikanassin multi-frac horizontal development wells that could come in as much as 15 to 20 Bcf a section with potentially 86 prospective sections, could make a huge difference to the Company, particularly in a good gas market.
He suggests that the risk here is actually in development costs. The play starts the second half of this year and we note that Delphi’s target (at least for him) is $6.00 a share. There are lots of analysts that follow Delphi — there are very few that have targets anywhere near his. But just in case he is (once again) correct, we pick up a few.
For those who would like a copy of the most recent issue of Schachter’s report, just e-mail Debbie at debbie_lewis@canaccord.com.
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David Pescod's Late Edition June 5, 2008
DELPHI ENERGY (T-DEE) $3.13 +0.41
BANKERS PETROLEUM (T-BNK) $2.15 +0.07
Yesterday we were talking about Delphi Energy because Josef Schachter was picking it as one of his top picks for the past month for Maison Placements. We should also point that it was back on December 11, 2007 Schachter and ourselves made a bet on our two favorite stocks and once again, whoever wins is expected to collect a good bottle of wine from the loser.
At this point his selection of Delphi is up 88% while we are up 136% (Although the best closes December 11, 2008). Our pick of course was Bankers Petroleum and it’s about to go through some significant corporate changes over the next while, particularly with its annual meeting coming up near the end of June. It’s expected that the Company will announce that they will split the Company in two. And this is probably for the better.
There are definitely investors who prefer their assets in Oklahoma and most of those investors tend to be Americans.
Meanwhile, there are international investors that think highly of their heavy oil in Albania, particularly since they have so much. Some people suggest somewhere between two and three billion barrels, although the percentage of what will be recoverable is still open to debate and this is quite an asset considering Abby Badwi’s history with heavy oil. Remember Rally Energy and where he did so well.
Anyway, Bankers Petroleum’s stock once the American assets are split up is expected to be consolidated, which is usually not good for a stock. Usually a $1.00 stock is rolled back three for one. It doesn’t trade at $3.00, but probably at $2.50. For Bankers though, it could be quite different as it’s a story a lot of people like.
And with what some of the weird rules for corporations are—their current stock trading at $2.00, many institutions, funds and the like are not allowed to invest in stocks that trade at less than $3.00 or $5.00 or well you get the drift.
It’s not just us that like Bankers Petroleum, there are lots of other analysts that enjoy the story as well and one of them is Jamie Somerville of Genuity Capital. He wrote just the other day, “We maintain our BUY rating with a target price of C$2.50.
Our valuation appears increasingly conservative based on sustained high oil prices; our fully-risked NAVPS would increase from C$2.53 to over C$5.00 if we used current futures for oil and gas. Bankers Petroleum remains one of our favorite picks despite recent share price strength.”
He had a very interesting look at the Company.
CORRIDOR RESOURCES (T-CDH) $10.50 +0.03
The chart on Corridor Resources shows you that it, like many other stocks, suffered a bit over the recent market correction. In fact, it got swacked quite a bit. There were more than a few whining about it, but there were a few others that took advantage of a two-for-one price sale and have benefited nicely from it.
Meanwhile, shale gas is one of the stories of the day and Corridor has a big chunk of it in New Brunswick and most of their holdings they own 100% of, instead of the small fractions you hear about in Quebec and northeastern British Columbia.
The other day there was some pretty significant news out as they announced “three widely spaced shale gas appraisal wells are planned to be vertically drilled at locations currently defined by 2-D seismic. Each well will be designed to penetrate and core the full Frederick Brook shale gas section, including a full suite of wireline logs.
The logs and core data will be evaluated for lithology, porosity, permeability, organic content and thermal maturity in order to determine the most favorable intervals for shale gas production in this massively thick shale.
Following evaluation of the cores, a well will be drilled horizontally into the most prospective part of the Frederick Brook shale for a distance of up to 1000 metres. The appraisal program includes multiple fracs in the vertical wells and the horizontal well and also includes a 65 square kilometer 3-D seismic program over the most prospective area. The program is anticipated to cost approximately $32 million…”
It’s interesting to note that the brokers obviously love the story as a financing of $55 million is announced, to enable Corridor to hurry up the program and get an answer to the question a lot of us are wondering about and that is, just how productive their natural gas shale could be? It’s an enormous holding, but how productive could it be? Corridor remains one of our bigger holdings and we will be following this story closely.
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David Pescod's Late Edition June 6, 2008
Q&A WITH DAVID REID
PRESIDENT AND CEO, DELPHI ENERGY
(As of June 5, 2008)
We are with Dave Reid who has gone through a couple of bounces over the last few years because of natural gas prices, which have had a huge range over the last few years because of weather and other factors.
David Pescod: Dave, Delphi’s stock a year ago was getting hurt because of low natural gas prices. It was a warm winter. Now gas prices are $12.00 and Delphi is fairing well. Just how does a Company President play these swings in gas prices? And what do you expect next?
David Reid: Yes, Delphi’s share price did get beaten up more than most junior gas weighted Companies, with two years of sub $7.00 natural gas prices and a balance sheet levered more than our peer group average. I am very proud of the fact that we not only weathered the long downturn but actually grew through 2007, (I must say on both an absolute basis and more importantly on a per share basis), while reducing our debt and performing better than most of our peers. We did this by protecting our cash flow and capital programs through our hedging program which over the past 9 quarters beat AECO pricing by 25% and generated about $22 million in hedging gains. While the stock market was bucking hurricane force winds, Delphi was in the eye of the storm focused on growing our business. We are now well positioned with tremendous growth opportunities, strong cash flow, and a solid balance sheet to accelerate growth as natural gas prices rebound. Exciting times ahead for Delphi.
David Pescod: We note the Alberta Government had made Alberta less attractive to investors and suddenly Saskatchewan with Bakken, BC with shale gas and Quebec shale is popular. Any thoughts on the Alberta Government actions?
David Reid: Obviously, the economics of conventional oil and natural gas exploration and development has been negatively impacted. With a large portion of any commodity price upside removed by the royalty changes our business strategy must adapt to remain viable in Alberta.
What that means for Delphi in Alberta is 1) our exploration risk tolerance to dry holes is much less now, hence our capital spending focus turns to more predictable outcomes and less wildcatting, and 2) much, much greater discipline around our cost structure going forward with significantly less tolerance to inflationary pressures (that always are experienced during the good times). It is a challenge, but with our quality of assets and growth opportunities I am confident we will continue to grow successfully.
David Pescod: As far as production down the road, any corporate goals set and will you still be mainly gas for the near future?
David Reid: We continue to forecast excellent growth with approximately 6,100 to 6,300 boepd (87% natural gas) for 2008 up from 5,323 boepd in 2007. Our preliminary 2009 numbers are looking like 7,200 to 7,600 boepd. I do not expect any significant change to our natural gas weighting simply due to the nature of our core areas.
David Pescod: Time for a tough question. Your debt levels did get rather high. Your previous company Renata also had some problems with debt and some analysts remember that. Any New Year’s Resolutions on debt in the future?
David Reid: Never any tough questions! Our more aggressive use of the balance sheet in conjunction with our hedging strategy, improving our overall cost of capital in pursuit of growth although an effective business strategy has never been well received in the public markets. It was a 2006/07 New Year’s resolution to reduce our debt exposure and take a more conservative approach to our use of the balance sheet. We are very close to where we want to be with respect to our debt and debt to cash flow ratios and very much in line with our peers. Mission accomplished and new strategy intact.
David Pescod: We note the analysts have targets on Delphi all over the place, but Josef Schachter has a target of $6.00 and a particular weight on your Hythe play. Do you have any thoughts on his rather aggressive stance for your Company?
David Reid: I know Josef has a very good handle on our growth opportunities and believes in our ability to execute. Delphi currently trades at a significant discount to most all of its peers by most all measures. Even receiving current average multiples of our peer group would put Delphi’s share price in the $5.00 to $6.00 range. It becomes a simple exercise of us continuing to execute and grow quarter over quarter and the market will wake up and recognize the value in Delphi. So, I don’t believe Josef is really being at all aggressive in his stance on Delphi.
David Pescod: We always ask for a stock pick and we note that a while ago, Schachter picked Delphi for his bet and we picked Bankers Petroleum. There is always a chance you could pick Bankers Petroleum, if you so want for this question?!
David Reid: I would choose Terra Energy (TTR) as my bet. They will likely be one of the great winners in the BC Montney “goldrush” by actual selling their significant Montney rights rather than drilling them up. They have a great “Exploration Team” and are starting to show good operational execution. |
