I was on track to write something else this morning, but the deluge of emails and the mysterious name drew my attention to the “Illinois Project” teaser … think what you like about Stansberry & Associates, but they’ve certainly got some of the more creative copywriters churning out their tasty treats for the Gumshoe.
So the ad is for Matt Badiali’s S&A Resource Report, which is one of their “entry level” newsletters at about $50 a year. And to be fair, it’s pretty well-reviewed by my readers … but still, who wants to subscribe just to find out what an “Illinois Project” is and get a few stock ideas? That’s what your friendly neighborhood Stock Gumshoe is for!
Without further ado, then, the pitch:
“I predict that any day now, the CEO of a small, Illinois based company will take the podium…
“And make an announcement regarding a technological breakthrough so extraordinary it could, almost instantly, spell billions in profits for his tiny firm.
“As I see it, an announcement would be the end result of more than 30 years of research and development in a remote region of Southeastern Illinois.
“In short, this small company is finally making possible something the U.S. Government has wanted (and tried) to do for the past 3 decades. A project that, until now, was technologically impossible.”
Oooh, a podium! This must be big news, indeed. What are they talking about?
“Now… not only are the townspeople of Illinois getting excited about what this technology can make possible… and how it could make them all rich… but the companies and smart investors involved with this project are beginning to see the dollar signs…
“According to independent forecasts, this technology could single-handedly bring in more than $2.7 BILLION for this small firm.
“That’s more than 12-times the value of the company (which we estimate could give investors as much as a 455% gain… maybe more).
“The good news for you is that, so far, this announcement has only been hinted at in small, local Illinois newspapers, like The State Journal-Register and The Pantagraph.”
“But we believe when this technology goes public any day now, all that will change. ”
The Pantagraph is a pretty cool name for a newspaper, no? Even if it does register as a misspelling now.
But anyway, all that and we didn’t even get to the actual business we’re talking about … which is oil. Yes, there’s oil in them thar … flat plains. Southern Illinois, like Pennsylvania a forgotten pioneer of the early oil industry in the US, apparently still has a lot of oil lying in the ground, and this “Illinois Project” is the effort of one particular company to get it out.
“Why haven’t you heard about Illinois’ supposedly rich oil fields before?
“..And what happened to all that oil?
“Well, when oil prices dropped to $10 a barrel in the 1980s, the majors left town.
“You see, at the time, there wasn’t a technology available that allowed companies to produce oil cheap enough to make a profit, in case oil prices bottomed out.
“So, Exxon, Chevron, and Marathon pulled out to look for oil in places where it’d be cheaper to extract.
“Illinois fell off the radar, where it’s been for the last 30 years.
“And what happened to all the oil?
“Well… that’s where things get interesting.
“You see, the majors ended up leaving behind a lot of unfinished projects… and therefore, a lot of untapped oil.
“According to the Interstate Oil and Gas Compact Commission, of the 600,000 oil and gas wells that had been drilled in the region, including Illinois, less than 3% had gone deeper than 6,000 feet.”
So the Illinois State Geological Survey, according to Badiali, thinks that Illinois still has 10 billion barrels of oil in the ground, and investors have no idea.
And of course, one company has the inside edge on this technology and the big forgotten oil fields of Illinois, and Matt’s ready to tell us all about it …
“But what’s unique about this situation isn’t necessarily the amount of oil trapped beneath Illinois.
“Instead, it’s the work of one small company in particular…
“You see, what almost no one knows right now is that one small company has developed the technology to extract the remaining oil in Illinois economically… even if prices drop to $15 a barrel.
“This is a major advancement in the oil industry… and could be absolutely huge for the state of Illinois.
“In short, this is the technology that Illinois has been waiting for… the technology that could finally allow the state to unlock its remaining reserves of crude oil.
“‘It’s a miracle,’ says Lori Chase, a local real estate agent.
“Even ‘Big Oil’ is starting to take notice…
“Howard Mayson, VP of Technology for British Petroleum calls this technology, ‘The prize for the next half-century.’
“Right now, you have the opportunity to invest BEFORE the general public knows about the new technology… or the tiny company that’s developing it.”
Now that’s what we like to hear, that’s what gets the visions of caviar and sunny beaches locked into the Gumshoe’s cranium … now, to find out who this company is, a few more clues, please:
“… it’s the work of one company in particular, that’s causing all the excitement in Illinois… and in the oil community.
“You see, not only have they acquired what is probably the richest oil property in the state (a massive oil field known at one point to hold 1 BILLION barrels of oil), but they’ve also achieved a major technological breakthrough in the area of oil extraction.
“In short, this company has developed a way to extract valuable crude from Illinois’ massive underground oil formations… WITHOUT the use of traditional drilling equipment: oilrigs, derricks, or even drill bits.
“Essentially, this means the tiny firm could extract the remaining crude in the Illinois basin… at just a fraction of the normal drilling costs….
“Let me explain how…
“You see, in late 2007, this small company began ‘pilot’ testing this new technology in two remote fields of southeastern Illinois – areas known to hold large quantities of untapped oil.
“These tests confirmed 2 things:
“First, they showed significantly reduced oil extraction costs. For example, with this technology the average cost to build and operate a well is just $250,000. That’s pretty substantial considering, in the oil industry, well costs can reach as high a $270 MILLION per well – which is about 1,000-times more expensive!
“Because of this huge cost advantage, this company says it can extract Illinois’ oil economically, even if prices drop to $15 a barrel.
“REMEMBER: No other company, to this point, has been able to achieve this feat in Illinois.
“Second, and more importantly, the ‘pilot’ tests showed production-level quantities of oil could be pulled from Illinois’ fields. In other words, these tests confirmed the company could begin full-scale production.
“And that’s what the upcoming announcement is all about:
“You see, any day now, the first major oil operation in nearly 3 decades will commence in the Illinois Basin….
“… in March, the company behind it announced it had finally completed the manufacture of the plant that will make the implementation of this new technology possible.
“It’s a very big deal for this small firm. They have sunk a fortune into not only perfecting this technology, but also building it out in the real world. The only steps left are to announce it to the public… and begin the work in Southern Illinois.”
OK, so that’s the announcement we’re looking for, and the “Illinois Project” is this company’s effort to use their new technology to extract oil from the Illinois Basin. So who is it?
Well, it’s hard to be certain with those clues, and it looks like they might be mixing things up a little bit if I’m right, but I think we’re almost certainly looking at Rex Energy (REXX).
Rex Energy is a relatively small oil and gas company (market cap of about $300 million, about $15 million in debt and $85 million still available on their bank credit facility), but they’re the biggest producer in the Illinois Basin — most of their capital expenditures at this point are actually in their other main focus area, the Marcellus Shale, but they do have an interesting technology they’re testing in Illinois, and they are also maintaining solid production in that basin through conventional drilling.
It seems likely that what we’re talking about here are the ASP projects in the Lawrence Field — this is the biggest producing field in the Illinois basin, historically, and Rex Energy is the biggest producer in that field right now, though it’s generally still just relatively shallow oil wells they’re drilling.
Which is where it gets a little bit confusing, if you go by the letter of the ad — the ad tells us that these technologies let them drill for about $250,000, and produce oil at a cost of about $15 a barrel. Both of those numbers are tied to Rex — they have recently stated that $250,000 is about what it costs them to drill new wells in Illinois, and in presentations they have said that their “Finding and Development” (F&D) costs are about $15/bbl. But those numbers apply to the shallow “pay zones” that they are still drilling for relatively conventional secondary production.
The big money potential here, according to how I read this teaser, is in turning the previously unrecoverable reserves in the Illinois basin into recoverable reserves, not in continuing to do piecemeal production from wells that are relatively small but still profitable with current oil prices. And that means that I think he must be talking about Rex’s “Lawrence Field ASP Project.”
ASP stands for Alkali Surfactant Polymer, which is something they inject in the well to help the oil get, um, more find-ly as they flood the field with water and try to force the oil to the top. They’re also trying a “colloidal gel” in conjuction with water flooding in these ASP projects. And no, I can’t explain exactly what those technologies are or how they work chemically.
And these kinds of enhanced oil recovery technologies, the technology and techniques that allow for extraction of more oil from existing fields, are what that BP chief was referring to as the “prize of the next half-century” — if you’re interested in that general concept, the quote is from a good Wall Street Journal article from this past Spring.
So that’s how I read this one — I think that if we’re looking for a boost in the share price based on booking new reserves because of continued successful testing and preliminary production from the ASP flooding projects, you’ve probably got a bit of time. Rex is doing more drilling this fall in the Illinois Basin, according to their recent presentations — 10 to 15 conventional shallow wells — but I don’t think it’s the ASP stuff, that seems to have a “first half of 2010” timeline for launching their full scale injection.
So when will we hear this “announcement” that will send the shares rocketing? If it’s an announcement of booking more reserves because their ASP Flood is working in the Lawrence Field, I have no idea when it will come — they say they’re injecting in 2010, and I guess it will be up to them and their consultants about whether further test drilling validates those reserves first, or they have to actually start production, I’m certainly no geologist and I can’t tell you much about that timeline.
But if you just want to hear the next time Rex Energy CEO steps up at a podium, you can actually do that today — he’s presenting at an industry conference in California this afternoon. I wouldn’t hold my breath that he’ll make a big announcement there, and I expect the impact of today’s conference presentation is likely to be less than what I imagine is the impact of Matt Badiali’s recommendation this week — a recommendation that might well have come out after the market closed yesterday (the stock was up big after hours yesterday, and up about a dollar this morning on no news, with big volume).
Otherwise, Rex Energy is investing pretty heavily in drilling several more wells this Fall in the Marcellus Shale, so they’re going to be increasingly leveraged to gas prices on current production — their production right now is about 3/4 oil thanks to those conventional wells in Illinois, but with more focus on the shale gas in Pennsylvania that’s likely to change … at least until they are able to prove that the ASP can really boost oil production in Illinois. That’s tough when gas prices are low, of course, but perhaps it also represents an opportunity — they have already hedged a lot of their production going out several years, so they can afford to make these capital investments in both Marcellus and Lawrence without panicking too much about abrupt changes in prices … as long as oil and gas don’t fall for many years like they did back in the 1980s, which I don’t personally expect (what is my expectation worth? Not much — I sure didn’t think oil would get below $40 early this year, either).
So that’s about all that I can wrangle out of this ad — it seems likely, though not 100% certain, that he’s teasing Rex Energy, and I think the ad probably overstates the urgency (wouldn’t be the first time) of potential big news on increasing the reserves for Rex and, therefore, probably forcing investors to revalue the stock, my guess would be that booking any reserves from ASP would happen next year, not this year, and that any Illinois drilling announcements this fall should be for conventional shallow oil plays that are really just helping to keep their oil production steady in a slowly declining field.
If you’d like to catch up on REXX, you can see their latest conference call transcript here (the next earnings release should come around the end of October), and an investor presentation from last week here [pdf file]. The CEO has been pretty active on the conference circuit in general lately, so perhaps there’s something to them trying to get the drumbeat of anticipation going for their Shale and ASP projects.
So what do you think? Ready to jump on Rex Energy as a play on tertiary production in the Illinois Basin and their drilling in the Marcellus Shale? Love it but want to wait for all of Badiali’s readers to calm down a little first, or want to see what the CEO says at today’s conference or in the next earnings release? Or is it all hooey, or something inbetween? Let us know with a comment below. Personally, I’d guess that after this initial enthusiasm dies down (and yes, I’m fueling a little of it with this article as well, probably) we’re likely to see the shares dip slowly over the next couple weeks as the stock returns to equilibrium — absent, of course, that shocker of a “podium” announcement that Badiali teases here. That’s really a standard guess, though, because that’s what happens most of the time with these kinds of promotions … but of course, “most of the time” is not “always,” sometimes the editors really pick great and timely stocks and the shares never stop going up.
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