Macro Tsimmis

intelligently hedged investment

Oilsands Quest (BQI) update #9

Posted by intelledgement on Mon, 12 May 08

Another day, another dilutive stock offering from Oilsands Quest (BQI), our under-capitalized oilsands play.

This time it is 12MM shares offered at $4.20/share; the stock closed today at $4.31. The company needs money to fund their field testing program—to determine the optimal process for converting bitumen to oil—and continued exploration of the huge block of land in Alberta and (mostly) Saskatchewan which they have mineral rights for. They have no current revenue, nor any realistic prospect of revenue in the near term. Thus they sold shares three times in 2007 and now once so far in 2008. We expect continued fund raising sales of equity over the next several years and project the number of shares outstanding will rise from some 220MM now to over 600MM by 2015. (Here is our latest valuation model.)

We currently have a GTC open order to get buy more shares of BQI at $3.03, but the chances of that executing are looking less and less strong and we will probably be canceling it soon to pursue another opportunity with those funds. If we didn’t already have a position with a basis of $3.35, we would not hesitate to open one here at $4.31. There are 10B barrels of oil equivalent (BOE) estimated to be present under the acreage which BQI have the mineral rights to. Assuming that half of that is recoverable at a cost of two-thirds the market price for oil or less, BQI could be on the way to being a $20B company within the next decade…if they don’t get bought out first. Even with over 600MM shares outstanding by then, buying here at $4.31 affords you a compounded annual growth rate of 30% or better between now and then. (This, of course, also assumes that demand for oil does not dissipate between now and 2015 for whatever reason, as discussed in our original BUY rec.)

And if you do buy in, don’t sweat the dilutive sales of stock to raise operating funds. This management team owns lots of stock, too, and they know that if we can bring this project off ourselves—even though we have to give up some ownership—in the long run it will be better financially for us than totally selling out to a big company along the way would be.

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