Macro Tsimmis

intelligently hedged investment

BUY Oilsands Quest (BQI)—A Quintessential Spec Stock

Posted by intelledgement on Fri, 13 Jul 07

Oilsands Quest (BQI) is a development stage E&P company with the largest holding of contiguous oilsands property in Canada…some 500M+ acres covering much of NW Saskatchewan and spilingl across the border into Alberta. The quality of the samples the company has drilled in the last three years or so are outstanding, and if the economics of oilsands processing hold going forward, this company and their properties are hugely discounted here.

BQI’s CEO is Chris Hopkins, a geologist who was instrumental in Synenco’s (SYEYF.PK) properties selections in Alberta. (Synenco has initiated an oilsands processing operation largely financed with Chinese money; a Sinopec subsidiary has a 40% interest in the operation…Hopkins was a VP and founding shareholder.) He believed that the oilsands-rich formation that blessed Alberta extended into Saskatchewan, and sought out investors willing to roll the dice on that proposition. By 2005, CanWest Petroleum (as the company was then known) had assembled the rights to exploratory drilling on some 1.4MM acres (they eventually had to “give some back” having the option to retain rights to the pick of the litter), where management were guesstimating there were some 300MM bbls equivalent of original bitumen in place (OBIP). In the winter drilling season of 2005-06, they began initial drilling with a single rig. The stock had already appreciated sharply—from the 40-cent range to north of $3—following the acquisition by Total E&P Canada of a small Alberta-based oilsands developer, Deer Creek Energy, for $1.11B announced 2 Aug 05 (and increased a month later to $1.38B to close the deal). Deer Creek was considerably further along developmentally than CanWest/BQI, but the latter had potentially much more bitumen.

On Friday, 13 Jan 06, the company released the first of several encouraging reports on the results of the drilling and panic buying ensued, running the stock price from the high $2s all they way up to $8.30 in early May 2006, before backing off into the $4-to-$6 range. Management’s estimate of the recoverable OBIP was up to 400MM bbls equivalent.

In the 2006-07 winter drilling season, the company deployed eight rigs and eventually drilled 150 holes, fewer than planned but many more than the previous year. Preliminary results were consistently positive, but in February the company announced a prospective private placement of 5MM new shares of stock to raise $30MM and The Street did not take the potential dilution kindly. Even a new management estimate of 600-to-750MM bbls equivalent of OBIP plus word that BQI had acquired rights to additional acreage in Alberta contiguous to their Saskatchewan Axe Lake holdings did not prevent the share price from eroding into the mid-$2s by the end of June.

Which brings us to yesterday, when prior to the market opening, management released a new estimate of the OBIP for their properties in Saskatchewan (5.1 to 5.7 billion barrels) and Alberta (4.5 billion barrels) for a total estimate of 9.6 to 10.2 billion barrels. Let’s just call it ten billion even. So what is BQI worth now?

First some assumptions:

  • 50% of management’s estimate will prove economically recoverable
  • the price of oil will not go below $70/bbls in constant dollars
  • the cost of mining/refinining will not go above $50/bbls in constant dollars, including G&A
  • it will be another eight years before any oil is produced
  • to finance the work, the stock will be diluted 300% from here
  • it will take 50 years to extract all the oil
  • the historical P/E ratio of mature refining operations will in the long run remain around 10

The stock closed sharply higher yesterday at $3.40. With the price of oil now up to $70/bbls, and the costs—based on the most recent PCZ estimate—up to $50/bbls, we forsee a gross profit of $100B (!), which comes to $161.81/share, or $3.24/share/year over 50 years (starting eight years from now when the first oil is produced). So at a P/E of 10, we would expect BQI stock to be valued at $32.36/share in eight years…and the CAGR on an eight-year move from $3.40 to $32.36 is 32.5%.

In other words, the stock is a screaming buy here.

Of course, nothing is foolproof. Any macro-level development that has the effect of increasing energy supplies or dampening demand over the next eight years could render this project diseconomic. Or management—who have been spot on to date—could screw things up horribly. Or by some incredible bad luck, the data collected thus far could turn out to be way too optimistic.

But here you have a stock that has moved from 45 cents to $8+ and back to the mid-$3s attached to a company that has no revenues (let alone earnings) but spectacular potential. If you do the math concerning the respective shares outstanding and OBIP estimates, the oilsands here are essentially the same price they were when the stock was at 45 cents in 2005…but some of the risk is reduced, in that we are more confident that the estimates are real, and the economics of oilsands processing are stronger at these price levels. (Of course, the price levels eight years out are what really matter. If you think oil will be cheaper then, or banned by the UN because using it produces too much CO2, pass this one by.) BQI is, in short, a nearly perfect stock for a spec port.

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