“Tiny Driller Set to Become One of the Big Players in ‘The New Bakken'”

Snuffling around a Diggers & Drillers tease for a Niobrara explorer

Never let it be said that we don’t love our Aussie readers here at Stock Gumshoe — the newsletter folks have been active teasing their wares in that market for many years now, and we’ve even seen the big publishers either start up new letters to focus on Australian shares (like Roger Conrad’s Australian Edge) or start up Aussie affiliates Down Under (like Motley Fool Australia, or Agora’s Port Philip Publishing), so it hasn’t escaped anyone’s attention that the “Lucky Country” is home to a lot of folks who want stock tips and research.

And in order to sell info to those investors, Dr. Alex Cowie and the folks at Diggers & Drillers (that’s one of the older letters, from Port Philip) are teasing just like the US letters tease — but don’t despair, US readers, they’re actually teasing a stock that trades mostly in Australia but has all of its operations in the United States and does trade at least a little bit on the pink sheets … just in case you fall in love with the idea.

Not that you should. Fall in love, I mean. Save that for your family, friends and pets. But sometimes a wee bit of stock lust is OK, as long as you don’t overdo it.

So is this pick deserving of your money? Let’s find out what it is so you can make that decision. Here’s a bit of the hinterriffic teasing:

“Tiny ASX-listed Driller Set to Become One of the Big Players in ‘The New Bakken’

“Drilling begins this July… commercial oil could be flowing within months.

“The time to invest is now… BEFORE the pumps are fired up….

“Investors in successful Bakken explorers made a fortune as the full potential of this oil rich site was realised over a relatively short period of time.

“That’s old news. But it’s the kind of news that gets commodity investors hot under the collar…wondering when a ground floor opportunity will fall into their lap.

“Well, the story I have to tell you today could be it.

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“You see, right now there’s a new region under scrutiny nearby that could undergo a similar transformation in the next five years…

“The Niobrara formation is one of the most exciting new energy regions in America. Big Oil companies are moving in quickly and leasing land.

“As a result major investment dollars are pouring into these fields.”

So we’ve got an Australian company that’s drilling in the Niobrara formation … we’ve written about some Niobrara stuff in recent years, I think, and folks are always drooling about the “next Bakken” (and, frankly, there’s still plenty of excitement about the actual Bakken), so let’s see if they give a few specific hints that can send us along the yellow brick road to our answer:

“I’ve found a small Australian-listed firm that’s secured exclusive drilling rights to a 60,000 acre region in this new oil formation dubbed “The New Bakken.”

“This company has already proved that oil exists underground.

“And thanks to a new “fracturing” technique, the extraction of this oil is now possible.

“Drilling starts in July this year – in a matter of weeks from now.

“If everything goes to plan, I believe they’ll be pumping commercial oil within months.

“And the best news for you?

“Right now this story is getting very little press coverage. Very few Australian investors even know about it. And that means the market hasn’t priced in the potential upside yet…

“Bottom line: this is a little known bargain that could turn into the buy of the decade.

“If you’re an investor looking to get in right at the start of what could be one the biggest energy growth stories of 2012 and 2013…”

OK, so 60,000 acres, about to start drilling. Some more clues?

“The company drilled three wells last year to get a better understanding of the geology of their prospective acreage.

“Oil flowed at the pace of 10 barrels of oil a day.

“That may sound like nothing…but the rate of production at this stage doesn’t matter.

“The company hasn’t started “fracture stimulation” of the shale yet – this is the process that opens up the shale formation where the oil is trapped….

“Just 25 miles south of where this Aussie stock’s operations are, Shell and Quicksilver have recently fractured a number of holes in the region.

“The results are good, with between 100-500 barrels of oil already being produced per day.

“This bodes very well for the company I’m targeting.

“And at 13ยข per share…I think this could be the investment of the decade (correct 14 May 2012).

“Of course, just because its neighbours have had success, there’s no guarantee these guys will. But if it is successful, and this company sees oil flowing at a good rate…its stock price could see a major uplift.”

There we go, then — that’s plenty for us to toss into the ol’ Thinkolator. Throw in a little marmite and rinse the hopper with a splash of XXXX, and we’re ready for our answer to come out upside down on the other side: this is Entek Energy (ETE in Australia, ETKEF on the pink sheets).

And it is tiny. Tiny tiny tiny. So be careful.

Entek is indeed focused on the Niobrara, though it’s more like 50,000 acres than 60,000, from what I can tell — though the gross acreage is much larger, about 110,000 acres (they bought some acreage recently, and the net number is lower than the gross because they have farm-in partners on much of the land). They also own some assets in the Gulf of Mexico, some non-operated joint ventures (meaning they’re investors, not operators in those wells) and a few royalty interests — they’ve sold off some of those interests and are hoping to sell more, the plan seems to be to generate cash for their Niobrara exploration by selling their Gulf of Mexico interests, but to keep at least some royalty interests in those relatively low-risk wells in the Gulf.

And yes, they did drill three wells last year, and their work program this year will start in July. The three wells drilled are offering some very limited production, but the intention is to fracture and stimulate them and see if they can get up to the 100 barrels/day level or thereabouts (those are numbers that are being generated by similar projects a bit to the South, the ones teased above from Shell and Quicksilver and a couple other larger companies). Interestingly, these are mostly vertical fractured and stimulated wells, nto the horizontal drilling that has really opened up the Bakken — they are holding out the potential for maybe doing some horizontal drilling as well, but so far it’s the cheaper vertical work that’s generating pretty decent production from what they hope are comparable assets nearby.

And yes, the shares are changing hands for about 13 cents — and they were trading for 12-13 cents on May 14, as teased. The Aussie dollar is trading at about US0.97 right now, so the Australian close of 13 cents would mean that it should trade for roughly 12.6 cents per share on the pink sheets, which is roughly where the last trade was (it’s always hard to trade these kinds of low-volume stocks on the pink sheets — the Australian and US markets are never open during the same hours, unlike, say, London or Brazil which can provide some “real time” check on pricing, so usually if you want to buy a foreign stock on the pink sheets you have to be pretty confident that you want to be a long-time holder because you’re probably going to have to overpay to buy shares and under-ask to sell them).

Now is the time when one should expect some catalysts for the stock, as they start their work program for the year in the Niobrara (they’ve got enough cash to do quite a bit of work, thanks to some recent sales of Gulf stuff, though they also seem to want to do more farm-ins and partnership deals) … though of course, it’s worth noting that “catalyst” means “something that causes change” … it doesn’t mean “stock goes up.” There’s that other direction, too, just in case the catalytic event is a less-than-positive announcement about, say, a few wells that are abandoned because fracturing doesn’t cause substantial production increases. Not that I have any knowledge about how this year’s work program will go, just throwing a little layer of caution on the pile.

You can see the latest investor presentation from Entek here — their basic argument for investors is that they should see their valuation increase on a per-acre basis as they prove up the value of their assets, they have a current “enterprise value per acre” of about $1,000 and they see that going to somewhere between $5,000-$25,000 per acre over the coming years as they develop. That’s a projection that’s probably a bit ahead of its time, of course, since they haven’t yet gotten to that “proof of concept” or proven the production/depletion curve or the reserves level that they’re hoping for, but if they’re right about the range that would mean the company reaches a value of between $250 million and $1.25 billion. So that’s their ambition.

Think it’ll work out for them? I haven’t done much more than read a few of their filings and check out the presentation to confirm their plans and make sure that they’re the right solution to Cowie’s teaser, but you can see that there is at least a decent-sized land position in an area that several oil companies think will become big (though “next Bakken” may be overstating it). That said, it’s probably wise to sniff around and see how other Niobrara-focused fields are valued — it would be a good start if they get a few wells up to 100 barrels of oil/day this year, but it’s also worth noting that their last acquisition of acreage, a deal they made late last year and finalized a few months ago, was for 18,644 net acres and cost them $2.5 million … which, if you do the math, means someone was willing to sell them these leases for about $140 per acre, a far cry from $1,000 or $5,000. Not every acre in a package carries the same value, of course, but that low price (relative to their existing enterprise value per acre) jumped out at me.

Their partner in most of this Niobrara exploration, by the way, is an even teensier Australian company called Emerald Oil & Gas (EMR in Australia, EOGSF on the pink sheets), they appear to be passive investors in projects in the Niobrara with Entek (they own 45% of the joint venture in the Green River Basin, which is where the Niobrara assets are) as well as with other partners in the Williston Basin (North Dakota oil) and Appalachia (Kentucky gas). I have no idea how they’re set up, but they are certainly carrying a much smaller “per acre” valuation than the operating partner if you go by just the equity valuation of the company … though they probably carry some debt, too — they’ve had some of their “buy in” funded by outside investors, and they have a huge amount in options/warrants outstanding — but I didn’t have the heart to dig very deep into what is a sub-$20 million company — so that’s on you if you want to burrow in.

I leave the rest in your capable hands — I’m not particularly interested in adding another oil explorer to my portfolio at the moment, but there is some potential here even if the insect-sized market cap means it will likely be a bumpy ride, feel free to shout out your opinion below if you’ve had a look at Entek and think it’s appealing (or appalling).


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Bob Norikane
Irregular
June 5, 2012 3:43 pm

There have been several very successful Australian juniors operating in the US. The ones I have been holding are Sundance, SEA.ax/SDCJF.pk, Red Fork Energy, RFE.ax/RDFEY.pk and Austex AOK.ax/ATXDF.pk. Sundance does have acreage in the Niobrara and has sold some acreage to big players Noble and EOG, who are just beginning their drill programs. Sundance is also drilling their own Niobrara wells. Recent success in the Wattenberg fields drilling vertical wells for oil are very promising. Sundance is a very good prospect because they have land in three excellent areas, Bakken, Niobrara and Mississippian. They used their early acreage buys in prime Bakken land to safely grow the company thru non operator mode. Their big partners are drilling well over 100 wells on Sundance land this year. Low working interest for Sundance but good cashflow and low risk.

The other two companies are strictly focused on the Mississippian oil play in Oklahoma and Kansas. Sundance has also identified this as an area of emphasis and is assemblying acreage.

I think the Mississippian is a better prospect for success than the Niobrara. Oklahoma and Kansas are veritable pin cushions, with thousands of previously drilled wells. These old wells provide a nice definition of the Mississippian field. Previously marginally economic, the Mississippian produces great economics with horizontal drilling and hydro fracking. In fact, Sandridge claims this is the most economic resource play in North America. Why?

The Mississippian is shallower and cheaper to complete than Bakken wells. This is not shale so the fracking doesn’t have to be as powerful and costly. The Mississippian does produce water so there is increased water disposal costs but the high oil content and cheaper drilling and completion costs make it competitive and arguably better than Bakken, Eagle Ford, Niobrara.

Red Fork is now drilling several horizontal wells. They have assembled 75,000 acres in the play. They have had good support by institutions but have recently had two big owners start to sell. This has reduced the share price along with most oilers but the value remains in the good acreage position and the pure play exposure to the Mississippian.

Austex is much more speculative. They have 6,000 acres in core Mississippian acreage. They have an additional 30,000 acres in possible Mississippian areas in Kansas. They just drilled a horizontal with a Range Resources sub that was successful.
Austex has lots of shares outstanding at 280million.
http://www.austexoil.com/irm/content/investor_investorfactsheet.html

Sundance is my favorite. They have excellent land positions and are aggressively growing their Mississippian acreage to 25,000 and have stated goals of 80,000 in two years. They are drilling the Mississippian by themselves as their Bakken cashflow is growing.
http://www.sundanceenergy.com.au/2012/5.9.2012%20-%20Calendar%20%20Q1%202012%20Earnings%20Call.pdf

Red Fork Energy is a solid pure play on the Mississippian. Most of their acreage was bought at $400/acre and if it follows the valuation of comparable Eagle Ford shale acreage could be worth $300million or more. Red Fork has 310million shares out and a market cap of A$232million.
http://www.asx.com.au/asxpdf/20120522/pdf/426dk2vlm54x6n.pdf

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John
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John
June 5, 2012 4:11 pm
Reply to  Bob Norikane

I also like the Mississippian with Sandridge and small driller Osage Exploration (OEDV). Osage has had a huge run but has been “consolidating”. They also have some operations in Columbia with Pacific Rubiales (I believe).

Dean
Guest
Dean
June 5, 2012 7:07 pm

G’day Travis, that’s Vegemite by the way, not Marmite.

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Dean
Guest
Dean
June 5, 2012 7:11 pm

Thanks for putting your toe into the shallow end of the pool (refer to Share market size). I have been following your recommendations for some time now and find it refreshing to have you do a cover on Aussie stocks occasionally. Will be doing some more research on these mentioned in this article and hope to invest a little in some. Again thanks for your coverage and keep up the good work.

Kirk
Irregular
June 6, 2012 12:15 am

Niobrara is having test well problems. I’d be careful. I am sticking with actual Bakken companies as almost every well hits oil in ND- not quite that successful in MT. Companies like KOG, NOG, TPLM, OAS, MHR are screaming bargains due to the recent correction. See my articles on MarketWatch. I’ll be in ND soon to review.

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Fletch Thai
Member
Fletch Thai
June 7, 2012 2:59 am
Reply to  Kirk

SSN may also be of interest, given the Australian company / US Bakken theme. It is listed in Australia as well as the US ADRs. The AUD version has also been trading in AUD 7 cents to 14 cents range.

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Moose
Guest
Moose
June 6, 2012 4:21 pm

Another Subject:

Thank you in spades Gum Shoe for a real winner-Africa Oil
For the subscribers who can’t stand too much speculative heat have them try Whiting Petroleum Trust with an 18% return.

Moose

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blackjack
blackjack
June 9, 2012 2:16 am
Reply to  Moose

ya Moose
thats an American Co

Kenneth
Member
Kenneth
June 12, 2012 11:05 pm