by Travis Johnson, Stock Gumshoe | May 1, 2012 2:19 pm
Keith Schaefer has been burning up the inbox with the pitch for his “#1 junior oil company in North America.”
The tease — and yes, he’s teasing this one, which is what we call it when they hint around about a hot investment but won’t tell you the name or the ticker — is an inducement to subscribe to his Oil & Gas Investments Bulletin, which is a newsletter that he’s been publishing for a couple years that basically follows his investment portfolio in energy stocks.
And the promise is, of course, sounding pretty good — here’s how he gets us interested:
“This ‘exploration play’ has just become a full-fledged ‘production play.’ Keep reading to find out why it should be one of the best organic growth stories of the year….
“This junior company Has It All, and is Getting It Done.
“Not only has it already achieved record production numbers this year, but drilling results on its huge new wells have crushed just about everyone’s expectations.
“That’s why management has increased guidance, and why it is rapidly ramping up exploration and development on its large, 100%-owned land base — in the heart of one of North America’s hottest resource plays.
“And it also helps explain why insiders are loading up and buying more stock….
“Production will continue to boom as the company masters its fracking and completion techniques on this unconventional shale oil play.
“That’s why I believe the share price is on the brink of a big run….”
Interested? Well, he’ll charge you $399 a year to get some answers … but if you’ll be patient for a moment, we’ll sniff through the rest of the clues and see if we can identify the name and ticker. And we won’t charge you four hundred bucks for the pleasure, though I’m sure we also won’t provide as much backup info as Schaefer must in his “Special Report,” so you’ll have to do the researchification on your own.
OK, so here are the rest of the clues from his lenthy promo letter:
“… their new core play has LOTS of running room. I’m talking about 150 different well locations… perhaps even 200 – and drilling that will last years, with high-growth production, fast payback, and low decline rates.
“That means this company – this trade – is no longer an exploration play.
“It is a low-cost, low-risk, high-growth resource play – the best kind of play. It’s what the market pays UP for.
“And it still has a discounted valuation.
“On the whole, the company’s production is growing quickly — having increased more than 50% in the last 3 months. And it will continue to ramp up quickly as at least 12 more of these wells get drilled this year in its new core play alone….
“… they have one of the absolute lowest decline rates I have ever witnessed in North America.
“… payback on their newest well is at the most just 3 months. Keep in mind that most operators in North America are happy with payback at 2 years!”
So that gets us partway there, a few clues to feed into the Thinkolator. Then we get more on this stock’s exposure to the “Alberta Bakken,” which is apparently not reflected in the share price:
“… this junior company has one of the largest land positions – if not THE largest – in the entire Alberta Bakken play.
“More importantly, it has drilled the best reported well in the play, to date.
“Best of all – we’re essentially now getting the Alberta Bakken for FREE. Here’s what I mean by that:
“As I said, management is already expecting a huge 50% per share increase in production and cash flow in 2012. (That’s what the market pays for the MOST… They pay for per share upticks in production and cash flow.)
“And none of that increase is expected from the Alberta Bakken. It’s coming from their new core play.
“So not only is the new growth curve NOT priced into the stock, investors are now getting hundreds of thousands of acres of Alberta Bakken — FOR FREE.”
Some more tidbits? I thought you’d never ask!
“… the play itself is cut off to the north, east, and west.
“Why is that important? Well, the Alberta Bakken is fully staked. So, if anyone wants to play in this sandbox… they now have to buy their way in.
“And that’s great news for my # 1 junior oil company in the play – and its investors… because success makes this company an instant takeover target….
“… its JV partner agreed to pay 100% of the cost to drill 4 wells – at $4 million a pop – just to earn 60% of a small part of the play.
“That ‘small part’ is just a few dozen sections – a fraction of my #1 junior oil pick’s total land position!”
Are you sweating with money-lust yet? Well, if not, here are a few more of the hints to get you going:
The newest well apparently doubled management expectations. And they’ve got 12 more wells to drill in 2012, after completing four. And they have “nearly 200,000 acres” in the “heart of the play” (though it’s not clear on that last bit whether he’s talking about their core area, or the “free” Alberta bakken area.
And Schaefer says that he just added to his personal position, though it’s a stock he’s held for a while.
So is that enough? Can we get a good answer from the Thinkolator? Well, we do get an answer spitting out with a high degree of certitude, but our one mistake in 2011 was also for a Schaefer pick (we aim for at least 99% certainty with our picks, which means, if you “risk” the results like investors do, we’re allowed two mistakes a year from our 200+ teaser solutions — my internal accounting, which is burned into my brain, credits the Thinkolator with three wrong sleuthifications in five years).
So can we get a little more certain?
Yes, thanks to the fact that Schaefer included a stock chart in his latest email pitch, we can check the specifics of that chart against our solution and verify that the Thinkolator has it right this time around: the “#1 junior oil company” from Schaefer is … DeeThree Exploration (DTX in Canada, DTHRF on the pink sheets)
(Which, for full disclosure, was probably the stock he was really teasing when I threw out a wrong guess on a prior teaser of his in 2011.)
And yes, DeeThree is a producing oil and gas company as well as being a junior explorer — with a focus on drilling for oil, as of 2011 (they drilled 15 new oil wells last year and only one gas well, a swap of prior years’ focus). Analysts apparently believe that they will become profitable this year, but they haven’t been in the past (estimate is for 17 cents per share in earnings this year, per Bloomberg, and they lost 22 cents per share in 2011).
And they are growing quickly — they just raised some more money about a month ago to spark their drilling plans, and as a result they raised their guidance for production and cash flow, with an estimate now that they’ll be drilling 19 wells in 2012 and that they will exit the year producing 5,000 barrels of oil equivalent (boe) per day, mostly (70%) oil and natural gas liquids. Which would be about 20% more than they’re producing every day right now.
The company, according to their latest results press release, values its current proved and probably reserves at $175 million (using a 10% discount rate), so if you take that as a valuation for the company’s assets you’re paying about twice that much for the stock right now (market cap of about $300 million, debt in the neighborhood of $50 million). The real value, then, must be in reserves that aren’t yet booked or in their undeveloped land — they have more than 250,000 acres of land to explore, and presumably an investment in more drilling this year will result in booking more reserves (assuming that they drill successfully), since they did increase their reserves by more than 400% over the past year on a much more limited drilling budget.
And yes, DeeThree is indeed in the “Alberta Bakken”, with most of their land in what they refer to as the Lethbridge area of Southern Alberta, where they also own a fair amount of infrastructure (gathering systems and compression for gas). Their drilling will largely be in this area in 2012, targeting oil, and in the Belly River area of west-central Alberta, also searching for light oil. You can see their corporate presentation here, from March, to get more of an idea of their specific plans and their valuation argument.
And that’s all he wrote — sound like your kind of stock? Think they’ll get a takeover bid, or a further ramp-up in reserves that leads investors to keep the share price climbing? Let us know with a comment below.
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