Keith Schaefer’s “A Natural Gas Play Better than Oil”

Sharing Myron's solution to a Natural Gas teaser

By Travis Johnson, Stock Gumshoe, July 10, 2013

I’ve had a number of questions from folks about the latest pitch from Keith Schaefer for his Oil & Gas Investments Bulletin, which is all about a natural gas pick — somewhat contrarian in these days when gas prices remain low and energy producers are bending over backward to prove to investors that they’re focused on oil instead of gas (or, at least, on natural gas liquids — far more valuable than the “dry” gas).

Schaefer’s pitch is similar to others he’s made, and like the others he says he’s also added this one to his own portfolio — he has had a few very strong teased picks over the past year, including the refiner Northern Tier Energy (NTI) that he now says he sold at $32 back in March (which would have been the perfect time to sell that one) … so what’s the latest one?

This is how he touts it:

“How could a natural gas play… be better than oil?

“When the wells in that play pay out in just over 6 months – even at low gas prices.

“Compare that to 2 full years – the average payout time for natural gas and oil wells.

“And I know which producer has not one, but TWO plays like that.

“And I just made it one of my largest positions.

“You see, this isn’t your normal 
natural gas producer.

“This company’s wells are HUGE. Boomers.

“One of them produced a full
billion cubic feet of natural gas… in only 4 MONTHS.”

So who is it? Well, we could drive you through the teaser de-secretification here in our typical Gumshoe style — but this one has actually already been covered. We brought on longtime reader Myron Martin to write a monthly column for the Irregulars, and he wrote about this very pick in his most recent column a couple weeks ago, so we’ll let him jump in with his words here. The original ad, in case you want to sift through it yourself, is here.

Here’s what Myron had to say about this one on June 28 in his last piece for the Irregulars:

Here are some points made in the Keith Schaefer teaser for his Oil & Gas Investment Bulletin that got my attention. First, he claimed that the company he was teasing would be profitable even if natural gas fell back into the $3.00 range and had a 40+ year high ROR drilling inventory, which sounds pretty good. Then came the statistics for the past four years, which are equally impressive: 254% production growth; 335% liquids (NGL) production growth (raises return over dry gas), almost as profitable as oil itself; 294% reserve growth per share; 431% cash flow increase per share.  All told, a pretty impressive record.

I am certainly not as knowledgable as Keith in respect to junior oil and gas companies, or understand all the lingo as well as he seems to, but I do follow the sector and have a substantial portfolio of juniors that have given me good returns, so I wanted to identify this one.  It was not as difficult as some of the numbers I had run across before. You can see the company’s presentation from which I have taken my information here.   The company is Bellatrix Exploration (BXE and BXE.TO), and its stated strategy is “to have a large land base with significant inventory of low risk/high rate of return drilling opportunities to drive a substantial upside — exercising prudent financial management in volatile times through commodity hedges and debt-to-cash flow maintenance,” indicating good managers.

This is not an “iffy” startup, they are covered by at least a dozen analysts for major financial institutions, and have an estimated capital budget for 2013 of $230 to $240 million.  Cash from operations in 2012 was $111 per share, with a 2013 estimate of $175 – $185 y/y +58% . Cash per share 2012 is $1.03, with a 2013 estimate of $1.65 – $1.70  y/y +60%.  The average annual production, barrels of oil equivalent per day (BOE/D), is 16,886, with a 2013 estimate of 24,000 – 25,000 y/y +44%. The exit rate for 2012 was 19,500 BOE/D, with a 2013 estimate of 30,000 – 31,000 BOE/D, y/y +54%. All this is supported by some very impressive charts for the past four years showing steady growth in production with a declining cost basis. Revenue has grown 325%, cash flow per basic share is up 431%, and most importantly, they are adding to their reserves after production, something even some of the majors have not been able to do in recent years in spite of high expenditures.

They have an extensive undeveloped land base of 206,638 net acres in the Cardium, Notikewin and Duvernay (British Columbia) fields known for liquids-rich gas that assures their profitability above strictly natural gas producers. Cardium-based wells cover 20,000 square miles and have produced 1.3 billion barrels where they have a $300M joint venture with a Korean firm.

In the Duvernay they have drilled only 17 wells, with only five on production, but have a 300-location inventory. All told their drilling inventory is valued at $2.8 billion and they are not only a low cost operator and reserves finder, they are a pioneer in employing the latest multi-well pad drilling technology that saves $2.4M by drilling eight wells from one pad. With an inside ownership of 13.3% of  the 107.9 million shares and a reserve life of 12.4 years Bellatrix Exploration should be an attractive addition to any portfolio.

Back to Travis here. The company has had an eventful few weeks and a strong stock price of late, with a new joint venture announced between the time Myron submitted his note to us (they had their previous joint venture fall apart when the South Korean partner couldn’t come up with the cash) and the time it was published, and a relatively optimistic note from the company regarding progress toward their goals in light of the soggy spring breakup and this year’s flooding and other challenges in Alberta.

I have checked the details quickly and I agree Bellatrix is a likely match for Schaefer’s “secret” pick here, but I can’t say I’m 100% sure after my quick look and I don’t know the company or their business prospects particularly well … so I’ll leave you and Myron to form your opinions on the stock (he did not own the stock at the time we published his note, but could have changed that position by now). So what do you think, is this natural gas play a good contrarian investment on improving natural gas prices (and a decently profitable pick for the current low prices), or is it not your cup of tea? Let us know with a comment below.

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