Thursday, July 24, 2008

A situation similar to CQM.H , but not a given........

As we wait for the Forest Oil and Junex drilling results over the next few weeks that will provide the next leg up for the Utica plays, I've identified a situation that is similar in several respects to the Canadian Quantum (CQM.H) situation I uncovered in May. The one difference, and it is a big difference, is that this 10 bagger potential is not guaranteed like the CQM situation at $.30 was. The company is Lariat Energy (LE.V), a company that had no properties, no debt, and minimum working capital at the time I identified CQM on May 31st. Like CQM.H, their outstanding shares are microscopic, with the currently free trading shares standing at a tiny 3.3 million. They did a PP in early June that closed last week and are doing a 15 million PP now to get the approximately $10-$15 million needed for their share of the well costs. They have put themselves in a position to earn 25% of a potential 585 million recoverable barrels of oil in the North Sea.

The thing that really jumped out at me was that the other 25% of the farm-in is with BFW Capital Management, a private company headed by former Talisman CEO Dr. James Buckee. This brings instant credibility to the play and is what has led me to puchase 20,000 shares in the last week in the $1.20 range. The operator with 50% interest is Bridge Resources. A report by Blackmont in June put the risked (not the unrisked mind you) value of Bridge's 50% share at $220 million. Using their metrics, they would value Lariat at approximately $110 million risked value, or nearly $4/share after taking into account the recent PP financings. On an unrisked basis (meaning if this well is successful), the value could be over $15. Unlike CQM, success is not guaranteed so a 10 bagger is not "in the bag". However, a $4 price target is reasonable in the next few weeks considering the well will spud next week (around August 1st) and it will only take 20 days to drill the target.

ENG with only a 10% interest and less recoverable barrels reached a $160 million value pre-drilling results with over 30 million free trading shares. With LE having only 3.3 million free trading shares until the middle of November, the spike on a successful test will be extraordinary. Even before results are announced, an ENG pre-drill valuation would give Lariat a $5 share price.

The current market will probably not reward LE the same value ENG received pre-drill results but a $4 price is certainly within reach. Again, I own 20,000 shares so I have a vested interest in this play. A warning.....the microscopic 3.3 million outstanding shares through the middle of November will make it difficult to accumulate a large number of shares without moving the share price up appreciably. Investors with a speculative bent may want to dip their toes in this play as the risk-reward appears extremely favorable and the pay-off will be known in less than a month.

For those who want more information, including those geo's out there, a presentation can be viewed here.

Note: right click the link to open it in a separate window.

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