“This New International Shale Play Could Be the NEXT BAKKEN” (Schaefer’s Kerogen Tease)

Sniffing out Keith Schaefer's teased international shale play for Oil & Gas Investments Bulletin

By Travis Johnson, Stock Gumshoe, October 25, 2012

“My top international junior pick has just updated their reserves and resources numbers.

“Those numbers have nearly DOUBLED.

“They’re drilling right now; production is growing. And I’m expecting a big jump in production by year-end.

“But that’s not even the best part.

“This good news is merely the precursor – a set-up – for their BIG PLAY.

“Their Big Play comes from an incredibly profitable energy breakthrough which – if it’s as successful as I think it will be – could transform this company into the # 1 junior in the world.”

So … we see plenty of teases around these parts, but that’s a Tease. The #1 junior in the world? In a sector like junior oil stocks, where the boom and bust dynamics mean there are always a few 1,000% gainers floating around to justify all the hope we throw at the 99% losers, well, “#1” sounds unusually good.

The tease, by the way, is from Keith Schaefer, who is very much a story-driven oil guy — his Oil & Gas Investments Bulletin newsletter, which is still fairly young, seems to look at least as much at growing investor interest, big land holdings, and up-and-coming areas as it does at financial statements and reserve replenishment … at least, that’s the feeling I get from his ads.

And he’s been blanketing the e-waves lately with a pitch for his new favorite international oil stock, a company that has more than a million acres of land in what he refers to as maybe the “next Bakken”, a breakthrough oil area that will make us rich.

So, well, we want to know what it is. Right?

Let’s see how he hints and teases, and get some answers. Here’s a bit more from the intro:

“I’ve followed this company non-stop for 16 months. I’ve seen it go through its learning curve.

“And now I believe the Market is about to figure out what I’ve discovered…

“A huge resource play with the very real potential to become a world-class energy play… with an experienced management team that is aggressively (yet cautiously) taking all the right steps to create a major success for everyone involved….

“I’m expecting more news inside the next 2 weeks… information that could dramatically change things for this company.”

OK — so huge potential, something happening soon, doubling reserves, drilling, producing … what’s not to like? Well, let’s not get ahead of ourselves just yet — here are some more clues about our mysterious “#1 junior”:

“The Great Energy Breakthrough that ‘Saved’ America… Is Now Going Global

“Early Investors Are About To Profit From Its First Big Overseas Success….

“… this company – one of my big portfolio trades – has acquired a full 1 million acres of kerogen-rich lands.

“That’s a million acres – that are completely untapped.

“It is already one of the most profitable junior companies – in terms of profit per barrel – on any stock exchange.

“And it has become one of the most compelling ground-floor opportunities I have ever come across in my career.

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“It operates in an area of the world few oil and gas companies have ever explored – until now.”

Huh? OK, here’s more from the ad on that kerogen bit:

“Kerogen, like conventional oil and natural gas, is formed undergroundby decomposing organic matter under heat and pressure.

“But it’s not a liquid or gas. It’s a waxy solid, similar in consistency to candle wax….

“When kerogen gets heated – and the deeper in the ground it’s buried – the hotter it gets. It’s then converted to oil and natural gas.

“Of course kerogen rarely exists in free form that you can just scoop out of the ground.

“Most of the world’s kerogen is bound up in what is most commonly known as shale oil.

“This isn’t society’s first go-round with shale, though…

“Pioneers learned how to cook shale in ovens they called retorts. This produced a black oil that was used to lubricate machinery and firearms.

“Settlers in Colorado found the same strange stone, and they also built retorts to manufacture the valuable oil.

“Today, the ability to extract large volumes of oil and gas from shale makes it…

“The Biggest Game Changer in Oil Production… In the Last 150 Years”

Yeah, we don’t hear much about kerogen in these parts — at least, not since the failed oil shale efforts in the Rocky Mountains and the Green River area got a fair amount of attention in the years after the OPEC oil embargo (and again in 2006-2007, when oil was on a wild ramp ride). Kerogen is, for our purposes, oil that’s embedded in a type of immature rock and that can be released only by heating the rock, which is what Shell and other folks tried to do with some of the US’s huge oil shale resources. But it’s not worth it if you have to dig up the Rocky Mountains and put the rocks in a microwave, as experiment after experiment has found.

Now, what has been a “game changer” and is worth it — at least economically — is shale oil. Unfortunately, the two terms are often used interchangeably and probably neither one is really accurate. The “good” shale oil is what they’re extracting from the Bakken in and around North Dakota, oil that’s light and sweet but is trapped in rock layers, and that can be released by horizontal drilling and hydraulic fracturing. That shale oil is fueling a massive surge in US oil production and increases in oil reserves, and may bring down oil prices in the future the same way that natural gas prices have been destroyed by the huge reserves of similarly trapped shale gas found in the Marcellus, Fayetteville and other shale formations.

So it seems to me that Schaefer, with this kerogen bit, is mixing the two up — which doesn’t inspire confidence, but hopefully it’s just a storytelling ploy and he’s really talking about a shale oil/horizontal drilling/fracking play overseas, not a pig-in-the-poke kerogen play that could require the kind of intensive and expensive processing (mining and heating the rock) that makes the Canadian oil sands look efficient and environmentally friendly.

But that said, we’ll move on — just note, in our parlance “oil shale” usually means the kerogen stuff that can’t really be efficiently turned into oil, “shale oil” means the good stuff that made North Dakota ranchers into millionaires.

Schaefer’s presentation seems to mix the two together, but he does at least note that the Bakken, Barnett, Marcellus, Cline, Eagle Ford etc. are the real “breakthrough” shale regions — and they have nothing to do with heating kerogen, those are all horizontal drilling/fracking plays. And he tells us, of course, that he’s found the next one. Here’s some more of the tease:

“Now a Major Shale Oil Deposit — One So Large, It Could Revolutionize the Energy Industry — Has Been Discovered Outside North America

“Most people don’t know anything about this country. It isn’t one of the top 10 oil-producing nations.

“Yet it is a politically stable nation – an ideal place for oil companies to do business and prosper.

“And I have the one company I think will prosper there the most – and be the next big yielder in my portfolio.

“As I said, this tiny energy company owns over 1 million acres of prime shale oil formations in this red-hot new play.

“For the moment, the company flies under Wall Street’s radar.

“Even better for investors, it’s a small cap company that I think is a great buy at today’s share price – in light of its leverage and growing production.”

OK, now that sounds pretty good — any guesses on the country? No? It’s OK, we’ll get there with a few more clues. We’ve seen shale pitches for “bringing Bakken technology to Country X” several times in the past, from Poland to China to Argentina, and I’m not aware of any companies actually making that breakthrough leap to be the next Continental Resources (CLR) just yet (CLR is a massive producer in the Bakken after placing a big early bet there) … but that doesn’t mean it won’t happen eventually.

So how can we identify this country and company that he’s teasing? Why, we root around in the clues for a while, of course … here’s some more:

“The company’s 1 million acres have gone largely unexplored. That’s despite great geology and numerous oil and gas seeps (springs that ooze oil and gas instead of water).

“The seeps have been traced to 2 stacked shale formations recognized as the source rocks for many of the oil and gas seeps.

“When you think of huge shale plays, keep in mind that the world’s largest, the Bakken, is only 12 to 20 meters thick.

“By comparison, just one of this company’s 2 stacked shale plays is a whopping 600 meters thick!”

I don’t know if those thickness comparisons have any point when it comes to production potential or not, but at least it’s a clue. Some more?

“It’s a unique, ground-floor opportunity to develop world-class shale oil production… in a democratic, politically stable region.

“And while this acreage is almost completely unexplored, geologists are convinced it has vast potential to produce oil and gas.

“Technical work on only 15% of the property suggests a total of 22.3 billion barrels of oil in place….

“… you normally produce 7% – 15% of the oil in a shale play.

“At just 2% (an ultra-conservative estimate) that’s 478 million barrels.

“That oil is worth at least $20 per barrel in the ground once it’s been discovered.

“That’s $9.5 billion in take-out value for the stock.

“I’ll confess—I don’t expect the company to be bought out for anything near that. Not even close. However –

“I Am Absolutely Convinced that if this Shale Play Produces Economic Oil — the Event Would Catapult the Stock Price”

OK, so some more clues — though we’ll also note that democracies and politically stable countries have not necessarily been the best oil producers, or the kindest to outside oil companies. Just saying.

And this is, we’re told, also one of those “secret” assets — where the company is fairly valued based on the other stuff that they own, stuff that everyone knows about, and you get the shale oil prospects “for free.” Here’s a bit on that:

“… there are an estimated 126 million barrels more recoverable oil in targets directly above the shale—based on a 9% recovery rate.

“You know what my favourite part of this shale play is, though?

“It’s FREE. That’s right – investors are getting it for free.

“That’s because, at year-end 2012, the company will be producing more than 2,000 barrels a day of very profitable oil.

“Only this oil is coming not from the shale play, but from a different play altogether.

“The company has a second big basin – a bonus to the huge shale play I’ve just told you about.

“This second play – far away from the first – has more than 150,000 net acres of highly profitable oil.

“And, like I said, they should finish the year delivering the market more than 2,000 barrels a day.

“The stock is fully valued just on that. That’s why I say the monster shale play is free.”

And the clues keep piling up, just in case you were getting bored:

“In play # 2, they’re now producing from 4 wells—and on a major growth curve.

“They have barely scratched the surface over here, and they already have more than 30 prospects or leads.

“The company is drilling quickly now to complete a total of 12 exploration wells in this basin this year.

“They plan to drill at least one a month through 2013, to grow production, cash flow, and reserves.

“And — this is a company that has the geology figured out — There are dozens, possibly hundreds, of potential drill locations here.

“The company’s wells initially flowed 600 to 1,100 barrels of oil a day.

“They’re hitting 80% of the time.”

Schaefer must have been paying attention in copywriting class — he almost never writes a two-sentence paragraph that might slow people down, they’re all quick-hits with no adjectives … it’s like reading a John Grisham novel. That’s a lesson I can’t seem to remember, I usually squeeze at least a couple sentences into each, well, sentence.

He then goes into lots of other clues about other picks he likes, which leads me to think that he’s still holding and touting DeeThree Exploration and Poseidon Concepts, both of which have done extremely well (though I don’t know what price he paid) … but for our international shale play that’s pretty much it — though he does add on that management owns 30% of the company, and that they’ve got positive cash flow and no debt, both of which are checkmarks in the “plus” column.

So who is he teasing?

Toss it all into the Mighty, Mighty Thinkolator and we learn that this is … New Zealand Energy (NZ in Canada, NZERF on the OTCQX in the US)

Which kind of spoils the second surprise, that this is a little exploration and production company operating in … New Zealand. They are indeed currently producing oil from several wells in the Taranaki Basin on the West Coast of the North Island, with a goal of getting that production up to 3,000 bopd of very light, sweet crude in the near future. They are also banking a fair amount of their future on their much larger exploration areas on the East Coast of that same island, which is where the shale idea comes into play.

Need to make sure? Well, the numbers match quite perfectly — including the 22.3 billion barrels of original oil in place (OOIP) for those shale territories, though even that 2% extraction number (478 million barrels, also a match) needs a fair amount of exploration before it could potentially becomes “discovered” and the potential becomes anything close to a reality.

And they are producing from four wells and did recently almost double reserves, though that news and the relatively less impressive fourth well haven’t given investors a lot of love for the stock in recent weeks — it’s a decent sized company still, with a market cap around $200 million, but the stock has fallen a good 20% as the last few announcements have come out this month (and is down even more harshly since the early drilling success inspired a huge ramp up in the share price early in the year, when it got over $3.50 a share after tripling in the first quarter). Right now it’s around $1.60.

The East Coast basins where they have almost two million acres (including both the permits they hold and those they’ve applied for) are long-known petroleum areas — oil seeps have kept people looking for oil there for over 100 years. The punchline is, dozens of wells have been drilled in this area (which isn’t that many, considering the vast size), but although some oil and gas have been found no one has ever found a commercial discovery (ie, big enough to invest in). They do compare the characteristics of these shale basins to the Bakken, but I certainly don’t have the expertise to tell you whether or not they’re just blowing smoke — I do know that it’s early days and they’ve done very little exploration or driling so far, and have not done any horizontal drilling or fracturing of the shale so I have no idea whether they’ll be able to produce oil from the East Coast shale areas.

They do seem to be doing well on the Taranaki stuff on the West Coast — they’ve acquired more permits and are drilling more aggressively now that they’ve found oil in four wells (they are producing from three of them, the other one had heavier oil and they had to decide whether to invest in lifting equipment to produce on that well), so they are indeed cash flow positive (in the last quarter, at least) and they could be profitable just on those conventional production permits if they keep finding more oil, as seems likely. Maybe not a good value, that depends on a lot of factors, but profitable is definitively good. And they recently bought a midstream production site and they’ve invested in pipelines, so they are looking at this (still the producing stuff in Taranaki that we’re talking about) as a sustainable project that they’re going to keep expanding. They do not have a huge number for reserves just yet, about 450 thousand barrels in the “proved and probable” category that would keep them going for only about six months at that hoped for 3,000 boe/day production rate if I’ve done my math correctly (I may not have, so do check) … so it’s not the reserves we’d be buying, it’s the anticipation that they will dramatically increase their reserves as they continue drilling these conventional wells — including eight wells being drilled between now and February.

If those wells are encouraging and both production and reserves go up, then the exploration project on the shale/kerogen area can be a bit more of a sideshow, waiting to see if they learn anything exciting next year but not counting on huge returns. I have no idea how the shale exploration might go. You can see how they line it up in their latest investor presentation here, and it certainly looks nice and shiny … but of course, it would. They’ve got a lot of cash on hand, they raised money earlier this year so they should be able to do their drilling and do at least some exploration even if their production doesn’t ramp up as dramatically as they hope.

And yes, New Zealand is a democratic society, with a government that is apparently at least somewhat amenable to oil and gas producers and interested in achieving energy independence — if the shale turns out to be an area that is amenable to fracking like the Bakken (they say they see good indications, but there’s been just very limited testing so far), I have no idea whether more wide-scale hydrofracking will be allowed. Oil companies in New Zealand have been using hydraulic fracturing for something like 30 years in the more established Taranaki region and other areas to boost production and, as in the US, it has picked up in the last decade … but it is apparently a continuing issue of political and environmental debate, particularly when it comes to groundwater contamination and earthquake risk. You can get a small taste of that from this student newspaper article, and by major newspaper opinions for and against fracking, just to get the flavor of the situation, but I have no idea what’s likely to happen in the future.

So there you have it — New Zealand Energy may well have stock price catalysts as their drilling results roll in, including possibly news within a few weeks as Schaefer teases either from the well that’s completing right now or from their seismic data interpretation, and they did just substantially increase their reserves numbers. It looks to me like you do need some more good drilling results and/or something positive to come out of the shale exploration next year to justify the stock climbing substantially from this point, but I might just be overly cautious since I haven’t spent much time exploring their reports. There are massive claims for the potential oil in place in their permit areas, both conventional and unconventional, but as far as I can tell it’s still a gamble as to whether or how that theoretical oil gets turned into reserves and extracted.

I’m sure Keith Schaefer knows far more about the company than I do, and I expect there are also plenty of Gumshoe readers who can better explain their exploration potential (please do, use the friendly little comment box below) … but I can at least tell you that I’m quite sure this is the pick he’s teasing. As to whether it’s a great idea for your portfolio … well, that’s your call. I do not own any of the stocks mentioned above, and won’t trade in any of them for at least three days.