Badiali: “The Oil Sands Story 60 Minutes Missed!”

By Travis Johnson, Stock Gumshoe, March 6, 2008

OK, here’s one that’s causing a massive wave of Gumshoe email — I guess the Stansberry & Associates email servers are heating up again now that oil looks to be solidly above $100.

This one is for an oil sands play, as you might imagine, but (if you read through the pages and pages of teaser copy) you’ll note that this is a Saskatchewan oil sands play, not an Alberta play. That’s what they mean by the “story 60 minutes missed” — 60 minutes did a show about oil sands, but focused on Alberta. Can’t blame them, really, since Alberta is the world center of oil sands extraction and technology (or maybe Venezuela is, if you want to expand your definition a little bit).

So the S & A Oil report will run you $99 for the first year. This oil sands play will cost you naught but time and the energy it requires to scan your eyeballs back and forth across this screen for the next few moments.

But the teaser goes into detail on the fact, which should probably be obvious to us, that the border between Alberta and Saskatchewan doesn’t extend underground — the bitumen that’s being mined in parts of Alberta also exists under parts of Saskatchewan. And with companies urgently pouring money into the oil sands with OPEC holding the line and production and oil staying near $100, clearly that money is going to go to where the oil is, so Saskatchewan has some potential to enjoy a boom.

Most of the teaser info is tiptoing around this point: That we’re just looking at another province from whence, with enough investment in infrastructure and a large enough critical mass of producers drilling holes, the next big oil sands output might come.

But a fair amount of it also consists of some clues — mmmm, clues! — about the company that holds some significant Saskatchewan rights — and the fact that investing in them will add quadrillions in cash to your bank account.

In Badiali’s words, this one “gives you chance to make 575% over [the] next 12 months.”

The big catalyst that’s very wordily described in the ad is the decision by Saskatchewan (after greedily watching their neighbors in Alberta experience a gold rush-like boom) to start seriously considering and allowing oil sands extraction on their side of the border.

Of course, Saskatchewan is already a pretty big oil producing region and has been for years — their oil sands business is still pretty nascent, but they did pass some new regulations last year and start selling oil sands parcels. Badiali quotes a Canadian oil & gas industry publication as saying that “The Government of Saskatchewan Industry and Resources… has introduced new fiscal and regulatory changes to support development [of its oil sands]” — you can read the whole article here, which is a bit more useful than that little quote (I don’t know anything about the source, but it’s an interesting read).

For some of you who’ve followed the story of this company as they’ve peaked and troughed over the past year, that might be enough — but for the rest, let’s look at a few of those clues:

We get the usual crop of newspaper articles, which serve to make it all seem that much more real and above board:

“The Regina Leader-Post writes, ‘[This secret province] is at the epicentre of a “new world oil order,” thanks to its vast reserves of oil sands, heavy oil and other unconventional resources.'”
The Saskatoon StarPhoenix reports, ‘This is a world-class discovery. This is as big as they get.’
The Edmonton Journal reports, ‘[This region] appears to be on the verge of following Alberta’s lead and seeing significant oilsands projects started in the northern boreal forest.'”

And some specific clues:

The shares trade for less than $4 per share (it’s gone up 5-10% since then, it’s now slightly over $4).

Some specifics on their activities:

“Already, phase one test drills have been completed…
Twenty-four holes were drilled into Saskatchewan’s thick oil-rich sand…
Nineteen came back with a pay grade RICHER than Alberta’s.”

And right now, “this small firm is finishing a second, much bigger test drill. This is the biggest oil sands test in Saskatchewan to date… a complete assessment of the land.”

And the copywriters went so far as to squeeze in some past quotes from company officials (insiders also own a bit less than 20% of the stock):

“‘We haven’t found any edge [to where the oil stops]. We’re in the middle of something and it’s extending in every direction. North. South. East. West. It doesn’t matter. On average it’s running 20 metres thick. That’s a good Alberta pay thickness.’
–Company Geologist
‘You know, last year at this time, we were saying that our [Saskatchewan] discovery could be the start of something big… Well, this year, we’re saying that it truly is the start of something-the birth of an oil sands industry for Saskatchewan.’
–Company’s CEO
‘I am convinced that we are dealing with a world-scale oil sands resource. Everyone involved in our program has a sense that we’re making history for the province of Saskatchewan and for Western Canada’s oil sands industry.’
–Company Engineer

So … there’s more, of course (there’s always more), but my eyes are sleepy and my fingers are stiffening up. The mighty Thinkolator churns briefly and discloses that this company is …

Oilsands Quest (BQI)

Those quotes really are from the various company officials, and they do have a big tract of land for potential oil sands extraction in Saskatchewan (you can download their pdf map of their holdings here).

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And, even if you do accept the somewhat odd contention that 6o Minutes “missed” the Saskatchewan story, you’ll have to give them a break — their piece on the Alberta Oil Sands first aired in January of 2006, unless I’ve missed something more recent. And it did actually give a nice boost to all the oil sands companies back then, since public awareness of oil sands was fairly low at the time. You can watch part of it here and read the story if you’re interested, but it’s really just a basic overview of the Alberta Oil Sands.

Oh, and not to harp on Badiali — but as far as I know he wasn’t urging folks to look at Saskatchewan back in 2006, either, at the time he wrote about that 60 Minutes story. He was a pretty big cheerleader for the Alberta oil sands … which turned out to be smart, of course, with the potential for those companies back then there wasn’t any particular reason why you’d want to take a bigger chance on Saskatchewan (or even the smaller Alberta producers and explorers — Suncor, the big daddy of the oil sands, was a perfectly excellent choice at the time, and maybe it remains so).

I do own a small, speculative call option on Oilsands Quest — not because I’m absolutely convinced that this story will really play out, but because I agree it has a chance to do so.

The positives are probably pretty obvious — with oil above $100, almost any oil sands project can make pretty good money, even if they’re competing for very high priced talent and resources with their neighbors in the Wild West of Fort McMurray. Maybe they’ll start importing disgruntled Venezuelans like their colleagues in Alberta have, I don’t know (Venezuela’s heavy oil is in some ways similar to the oil sands).

And a fair amount of drilling and exploration has been done on both sides of the Alberta/Saskatchewan border, so there is evidence that the bitumen exists under the surface for BQI to extract — and in some ways, it may be easier than some of the current projects on deeper reserves in Alberta.

The negatives? Alberta’s got a 20 year+ head start on this, with companies like Suncor struggling away in the oil sands and developing infrastructure and projects way back when oil was below $30 and the projects were unprofitable. So while Saskatchewan’s government is pushing regulations for responsible extraction of the oil sands, there’s no guarantee that we’ll see fast development of all the roads, pipelines, refineries and such that they’ll need. I’m not an expert on this, so it might be that the existing infrastructure elsewhere in Saskatchewan (from conventional production) and across the border in Alberta can be leveraged and they won’t be building everything from scratch. Commercial production is being pushed for 2010 or 2011, according to the company (starting with their Axe Lake project), so there’s plenty that could happen between now and then.

It will certainly be very, very expensive to start up their extraction operations. They might have to raise a lot more debt, dilute shareholders further, or take on a partner.

And of course, if oil drops to $40 a barrel in the next five years, these guys and nearly all of the oil sands operators will be sunk — the projects will get dropped just as many of them (and the oil shale projects in Colorado, for example) were abandoned after the 1970s push following that decade’s oil crisis led into the cheap oil 1980s and 1990s. I have no idea where oil is going, but with demand continuing to grow globally I’d certainly be more inclined to beton $80 oil than $40 oil. Past estimates for “breakeven” oil prices for the oil sands have gone as low as $35 a barrel, but that was five years ago when costs were much lower in Alberta and I assume they’re significantly higher now. Certainly, any precipitous drop in prices is going to bring the producers down with it, even if the prices remain significantly above break even.

Finally, they’re not making any money. None. So there’s no cushion here from revenue yet, this is entirely a bet on the future — and it’s a “penny stock”, if you want to call it that because it’s priced under $5 a share, but it’s not a microcap. This bet on the future is riding on a company that’s approaching a billion dollar market cap. Certainly a small company, but not a teensy or undiscovered one, and they do trade on a major exchange in the U.S., albeit the “junior” one (AMEX), with decent volume and a not-inconsequential short position of around 6%.

So … an interesting company, probably not new to that many of you. It was a pretty hot story last year when it went from $2 to $6 (and a frustrating one before that, I’m sure, when it went from $9 to $2), and now it’s right about in the middle of that range at $4. We’ve looked at several other oil sands stories during the past year, including Connacher (which also seemed interesting to me back then — almost a year ago) and, more recently, Petrobank. In my opinion oil sands haven’t gotten nearly as much excitement and hype in the last few months as they did when oil was first making the big move from $60 to $80, but perhaps the investment thesis remains. Lots of risks remain, too, but maybe you’ll be interested in taking another look at this company … feel free to share your opinion here.

Oh, and — also thanks to $100 oil — it looks like they’re trotting out the American Oil Pension (A.O.P.) teaser again. I haven’t looked at these companies for many months, but here’s the Gumshoe take on them from last year.

full disclosure: as noted, I do own call options on BQI. I do not own any other company mentioned here and will not trade in any of them (including selling my aforementioned options) for at least three days.

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