The shares of junior energy exploration company Alberta OilSands Inc. AOS.V 0.12 [+0.005] more than tripled this week to 15 cents—after announcing its main asset was essentially being bought out by the government—for 25 cents a share cash. They already had 3 cents a share cash.
That would imply the stock has more room to run.
Normally, investors buy junior energy stocks so they get bought out by a major or intermediate sized oil company. I have never before heard of a junior energy company being bought out by a Canadian government.
Alberta OilSands’ flagship property is the 27 section Clearwater property which has 373 million barrels in contingent resources with a PV10 of $490 million – that’s about $2.30 a share. And it sits right beside the Fort McMurray airport.
AOS was evicted by the government when it cancelled all oil sands leases on 55,000 acres surrounding Fort McMurray. The town which lies in the heart of the oil sands industry in Alberta needs more housing and infrastructure in order to grow. Its population is expected to double over the next 2 decades because of the oil sands industry.
Affected companies will be compensated for all the money spent on the acquisition & development of their oil sands leases to date. For AOS, that’s more than $51 million plus interest of approximately 5% for a total of at least $53.5 million – that’s about $0.25 per share.
At first glance, the outcome is disappointing; Clearwater had the potential to produce 4,350 bopd in phase 1 and up to 40,000 bopd in phase 2. However, just phase 1 would have required approximately $150 million in capex.
As of its last news release, the company had $6.75 million in cash. There’s just no way AOS can come up with $150 million in THIS market. Furthermore, AOS was not being given any value for the assets by the market.
So in my opinion, the lease cancellation is a blessing to investors based on cash per share. If I add the cash on hand to the expected compensation I get around $60 million or $0.28 per share.
That’s almost 100% upside from here – and that’s just for the cash.
Just a couple of weeks ago, the stock was trading at cash value at $0.03 to $0.04 per share. There’s a good chance the stock will trade at $0.28 per share but only once the money from the government shows up in their account.
That would not be the only upside here as the company has multiple assets investors can get for free.
At Grand Rapids, AOS has a 100% WI in 18 sections of oil sands leases with 120 million barrels of contingent resources. Then there’s a smaller 5 section (100% WI) property at Mackay next to Southern Pacific Resource and 51 sections (100% WI) of land at Algar Lake which I find most interesting.
The Algar Lake property has seen 3 drills (1958, 1958, 1960) so it’s largely unexplored. While all three wells indicate in-situ bitumen volumes, the game changer here is the potential for “cold-flow” heavy oil. Contrary to SAGD where the oil has to be heated in order to flow, the heavy oil would flow on its own from conventional vertical or horizontal wells just like in the greater Lloydminster area.
The beauty of “cold-flow” heavy oil is that you can put a well on production for less than $1 million. The company would not need extensive capital or complex facilities to produce the oil.
Algar Lake is AOS’s biggest property in Alberta. In this area, there’s no problem finding oil since the McMurray formation holds the traditional oil sands. The cold-flow potential lies in the Wabiskaw sandy formation believed to hold movable heavy oil.
Even though this property is surrounded by 3 developed projects including the Pelican Lake Field with cold-flow production 40 km south west of AOS, this property remains an exploration project that requires some work to confirm the Wabiskaw potential.
On this front, AOS executed a letter of intent to farm-out its interest with a private entity – Crescendo. They come with a track record of discovery, 2 billion barrels in the past decade. The farmee will be spending all the money to drill 5 wells at Algar starting this winter. The first 3 wells would earn the farmee 51% WI with the option to drill 2 additional test holes bringing its WI up to 75%.
So on top of trading below cash value, there’s a free call on Algar Lake since someone else will be paying for the wells. If moveable heavy oil proves to be a reality, this property could easily turn AOS into a junior heavy oil producer with positive cash flow such as Palliser Oil & Gas or Rock Energy.
The timing would be perfect now that heavy oil differentials narrowed back to average about 20% to WTI. Western Canadian Select, the heavy oil benchmark, has been strong trading above $80 per barrel. That’s a long way from trading below $50 earlier this year!
The market seems to believe that the transportation bottleneck for Canadian oil is solved, at least in the medium term. The WTI/Brent spread narrowed substantially this year supported with an extra 1.4 million barrels in additional takeaway capacity coming up in 2014 thanks to pipeline expansions (Seaway) or new pipelines (Keystone XL south.)
The US Midwest refining complex is also an important variable as it is increasing heavy oil demand by 140,000 barrels this year and 180,000 barrels next year. Throw rail and other pipeline projects into the mix and all of a sudden Keystone XL no longer seems that important, that is until 2015 at least according to Raymond James.
Besides the call option on Algar Lake, AOS also provides exposure to 2 offshore blocks of oil exploration in Namibia and 18 million acres of oil leases in Zambia. The strategy here is to rely on the neighbors for drilling and exploration on adjacent blocks. The international leases have minimal work commitments for the next 18 to 24 months so it’s a wait and see game.
The African portfolio comes for free at this price but anyone of these assets could become a game changer at any point of time in the future. Any neighboring discoveries could unlock value quickly for shareholders as potential partners with deep pockets emerge.
Finally, the most important catalyst for AOS is receiving the compensation money from the government. Algar Lake would be the next catalyst to watch going into the winter of 2014. I personally view the African portfolio as free lottery tickets that may or may not payoff in the future.
What’s your opinion on AOS?
Disclaimer: I hold a small position in AOS. This is not an invitation to buy or sell AOS shares, please do your own due diligence before taking an investment decision.