DeeThree Exploration: Are Investors Missing the Forest for a Tree?

Every single stock with exposure to the Alberta Bakken was on fire in the beginning of 2011 as the play was touted to be similar or very close to North Dakota’s Bakken. Investors were expecting to hit it big with IP rates of 500+ bopd but the dream of gushing oil never materialized. The first set of results was below expectations; coupled with market volatility it formed a deadly cocktail which turned euphoria upside down triggering a stampede out of the pure players. These impatient investors were bidding stock prices like crazy taking DeeThree DTX.TO 7.935 [+0.125] above $5 a share which allowed the CEO Martin Cheyenne to plant a forest when the market was focusing on 1 tree.

At the height of their premium valuation, DTX acquired producing assets in the Peace River Arch and in the Brazeau areas by raising $130M (The flow through shares were issued at a price of $5.15 per share). The expectations for the Alberta Bakken were never realistic because right from the start it was a pure exploration play with almost no wells drilled compared to North Dakota’s thousands. You got to give it to the CEO who in hindsight did the right move at the right time. Even though DeeThree was one of the first companies to release results of its initial Alberta Bakken wells, it was no longer a pure Alberta Bakken player following its acquisitions. The company joint ventured 30% of its Alberta Bakken land limiting risk capital and turned its focus on its low risk resource plays which offer significant upside potential.


DeeThrees Land Base

At Brazeau, the company acquired a light oil resource play with production from the Belly River formation over 42 net sections of contiguous land base with associated facilities and infrastructure ownership. With 48 MMbbls/section of Original Oil in Place (42o API), this asset is expected to ultimately yield an inventory of 100-150 horizontal drilling locations. Each well costs around $2.5M (NPV10 of $5M) with an expected IP30 of 240 boepd with up to 85% in liquids. As recovery factors improve, reserve bookings are going to get more interesting. The CEO describes this acquisition as ‘The best asset I ever bought in my life!’

Back in September, the company increased its capex by $15 million with $0 earmarked to the Alberta Bakken on the back of successful drilling results targeting Belly River oil at Brazeau and Sunburst oil at Lethbridge. I believe this will set the tone for the 2012 capex program as I expect the company to direct 80% or more of its capex to its 2 oil plays at Brazeau and Lethbridge. Financially, the company is in good shape as it is only using around $13M from its $40M line of credit which is expected to be bumped higher by at least $10M.

The Alberta Bakken should not be written off just yet since exploration is still in its early stages. Well completion techniques will be crucial to increasing IP rates and sweet spots are bound to appear (how will pressure variation in the fairway affect results?). DTX exited Q3 with 2,850 boepd and I am sure they comfortably exceeded the 3,000 boepd level exiting Q4. I expect the company to guide towards a 50% in production growth for 2012 and higher liquids weighting (>60%) which provides the share price with room to grow.

The Company is set to release an operational update and its 2012 guidance in the next 2 weeks. Last year, the Market was impatient with DTX mainly because of its Alberta Bakken label but this year I believe it will be paying attention to the 2012 guidance and revalue the stock according to the forest and not a tree!

Whats your take on DeeThree Exploration?