Keith Schaefer’s “Freak of Nature” Resource Play

Looking into a teaser from OIl and Gas Investments Bulletin about "The Natural Gas Play More Profitable than Oil"

By Travis Johnson, Stock Gumshoe, November 14, 2012

Keith Schaefer has this week been teasing us with his favorite idea — a natural gas stock.

And yes, we know that we’re supposed to hate natural gas stocks, since the “shale revolution” has clobbered the natural gas price and brought down quite a few natural gas companies … or at least brought down their profits.

But Schaefer’s shtick is that the lower price of natural gas is not only a problem that will cure itself (and it already has to some degree, with prices recovering smartly off the lows earlier this year), but also an opportunity for his favorite stock because it has a strong position in producing condensate from its natural gas wells … and condensate, a natural gas liquid, is in very high demand and trades at a similar price to crude oil.

The downside? Well, we don’t get a lot of clues in this particular teaser ad, so I’ll probably have to end up guessing (I hate that). So that’s your intro — Keith is trying to get us to subscribe to his Oil and Gas Investments Bulletin, and in return he’ll tell you about his “bulletproof” trade that “could become the single most profitable gas stock of 2013.”

So let’s get a sample of what he’s pitching, shall we?

“I never thought I would say this.

“The stock I am certain will give me the easiest win…

“The stock I am convinced the market will reward…

“The stock that has the surest path to growth and capital gains for me, and my readers…

“Is a junior natural gas producer.

“I’m so confident in this company, I recently bought $160,000 worth of stock at well over $1/share.

“The reason I made that kind of investment is that I realized – after researching this company for so long – it’s as ‘bulletproof’ a trade as I’ll ever find in natural gas.”

And then we get into some real “clues” — but as I said, they’re pretty thin on the ground, we’ll scrape up what we can find along the way.

“… the commodity price could again sink that low [$2], and this junior company still makes big money.

“You see, management was able to quietly assemble an amazing land package – not just a high-potential resource play that could pay off, sometime down the road… But in a ‘golden area’ – that’s paying off now. This area has the richest natural gas I have ever seen in my career.”

That “golden area” is the Montney Shale and environs, a deep shale gas are in Western Canada.

Schaefer then goes on to say that this is a condensate-rich company, giving a longish spiel about how condensate is imported into Canada from Texas now because it’s so critical as an additive for the heavy “tar sands” oil (helping to “lighten” it up enough to flow through pipelines), and lately trades at a higher price than crude oil … and we’re told it’s the only natural gas liquidi that has held up in price despite the huge production increases (every natural gas producer is trying to produce more NGLs, because even cheaper ones like butane and propane bring better prices than “dry” gas).

So that’s the picture — Schaefer is recommending a junior natural gas producer with a big position in the Montney and good “liquids” prospects. That’s not enough to even guess, so do we have a few more clues?

“This junior company has an incredible 10-year drilling inventory of the most valuable natural gas condensate product in North America – bar none.

“It’s a ‘freak of nature’ condensate play…

“… there are other companies in this play – from juniors to intermediates, on up to the big producers.

“But what I discovered – is that of the few in the condensate-rich sweet spot, my # 1 junior has the most leverage.

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“Not only could they could drill there for the next 10 years… I think they will hit on every well—because it’s in a proven area.

“As I said, they bought all this land… completely out of sight of the big producers already there in the play.”

And we get a little taste of that story — how the company built its land position for that “10 year inventory” …

“You see, competition for condensate has become wildly intense—because it’s so profitable.

“So it made perfect sense for the company to slowly, quietly acquire land packages, in small amounts.

“And that’s what they did – They acquired a little here, a little there – all under different ‘company’ names, so it didn’t draw industry attention.

“Management’s secret buying continued for awhile, until there was no more land left to buy.

“What they ended up with was an incredible, enviable land position – ‘the one that got away’ from Calgary’s oil & gas tycoons.

“Now, to their credit, these big players did concede victory, in a way.

“That is, they actually bought a big chunk of my #1 natural gas junior.”

And a few more tidbits for you … still nothing definitive that sets the Thinkolator’s lights to blinking, but we’re getting closer to a guess.

“And there’s even more upside to this story: They also added a nearby second property – over 100 square miles, at a purchase price of only $6 million.
I think shareholders got an immediate $30 million win on that valuation. If drilling proves it up, it should be closer to $100 million.”

“It also has tens of millions in net cash. The market gives that a premium valuation.

“It has one simple land package that gives it a decade-plus drilling inventory. The market gives that a premium valuation, too.

“It has a management team that has built and sold other juniors.”

OK, so that’s about all the clues we can wring out of Keith Schaefer for this one — and no, it’s not enough for the Thinkolator to jump up and give the usual quick, clear answer with 99% certainty, so we’re going to have to be human and, well, guess.

I think it’s a pretty good guess, but I can’t promise I’m right … so don’t go making decisions based on my guess (not that you should ever make decisions for what to do with your money based just on what I think anyway, of course). I think Schaefer is teasing Donnycreek Energy (DCK in Canada, DONYF on the pink sheets).

And be very, very careful if you happen to be interested in this one — it’s teensy and volatile, with a market cap of just about $30-40 million. That means, frankly, that I probably shouldn’t even be writing about it because tossing this ticker out to a few thousand of my closest friends could easily influence the share price — but I know that you’re adults, you can make your own portfolio choices, and you won’t go running up a stock prices just because I guessed it’s being teased by Keith Schaefer. Right?

So why do I think this is a match?

Well, a few things — first of all, it’s in the right price range. It’s at around $1.70 per share right now, so that’s reasonable as a “well over a dollar” description.

And they did just make a deal to buy a bigger land package — 73,968 net acres of Montney Land, as per this press release. And while it was about half cash/half stock, the overall cost of the land acquisition was about $6 million. Incidentally, that was a “non arms length” deal, so it’s probably some of the founders or directors selling the land to Donnycreek. The deal coincided with raising almost $30 million, so part of that will go toward the land purchase but most of it goes onto Donnycreek’s books to fund their drilling program, which is expensive (these are deep, multi-stage horizontal, fracked wells).

Given the size of the company and the size of the offering, that’s obviously a very dilutive fundraising — but investors seem to be pretty pleased with it anyway, the stock has risen through this and a couple other equity raises so far in its short life. I suppose that’s probably because the success of Donnycreek’s initial well has increased the value of their land, and folks are hoping that the new acquisition will have some similarly lucrative production prospects. Their big win so far is the Kakwa area in the Montney, with two wells tested so far and three more planned for the first half of next year (they say this one becomes “self sustaining” with the fifth well), and the acquisition area, which is far larger, nearby, and is indeed “simple” as far as I can tell (it’s fairly contiguous, in one area, and subject to two different working interest calculations by block), is called Wapiti. They also have a smaller neighboring land position called Chicken.

And yes, the management team does have a history of “value creation” in junior energy companies — they run through this in slide six or seven of their recent presentation, if you want to give it a look. That presentation is actually a good place to start if you’re sniffing around, by the way — not that they’re going to give you the negatives, but they provide some good baseline information, along with a few geological charts and a wee bit of the technical stuff that I don’t understand at all.

Oh, and I don’t know what kind of industry buy-in there’s been in Donnycreek shares in general, but I can verify that at least one Calgary “bigwig”, billionaire Clay Riddell, has bought a substantial holding. He has made some big purchases lately, maybe to maintain his large (was more than 10%, don’t know if it still is) holding in Donnycreek. That’s substantial for Donnycreek, by the way, not necessarily substantial for Riddell — he has similarly sized positions and larger investments in a bunch of other companies in his portfolio, and is on the board of many of them (he’s not on the board at Donnycreek).

This is far from being my area of expertise, in case you haven’t guessed it, but I’ll throw out this guess that Donnycreek is Keith Schaefer’s new pick … and it is indeed a producing junior gas company in a prolific NGL-heavy area, with good liquids production and a management team that has a history of creating some good returns from their investments in past junior energy companies. Whether or not it turns out to be “bulletproof” or they hit on every well as Schaefer expects, well … beats me. I’m sure we have some readers out there in Gumshoeland who know far more than I do about the economics of the Montney shale, the investment Donnycreek is making, and whether or not this company is a buy in this range — if you’ve got an opinion on any of that, I do hope you’ll shout it out with a comment below.


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