Speculative Stock Investment: Alberta Oilsands

Aug. 4.13 | About: Alberta Oilsands (AOSDF)

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

Alberta Oilsands Inc. (OTCPK:AOSDF) is currently trading at $0.1440 over-the-counter. What makes this stock so interesting is the potential it has for growth of the company and increased valuation of the stock price. Highlights from the 2012 financial statement include annual revenue of $592k, cash-on-hand $5.5 million, book value per share $0.36, the number of outstanding shares 211,480,000, and the 52 week stock price (low-high) $0.02 - 0.17. Later in the article, I will expand on the Province of Alberta forcing a buyout of one of the projects that will provide about $50 million in cash to the company. The second additional source of income from a contract is from the $2 million cash payment coming from Crescendo Resources Ltd. for the farm-in on the Algar leases. The company has no long or short-term debt and will have an estimated $57 million of net cash. This will provide the company lots of flexibility to plan its future.

The company has strengths and weaknesses, and a limited track record. The potential for success is good and the challenges of competition are strong in the oil drilling, extraction, and shipping of crude to refineries in the Alberta oil sands area. This is a truly speculative stock and our concerns are the near-term operations creating a loss of income and the ability to sign partners to conduct the actual work and create a return that is profitable for the investors.

As the Alberta Oilsands Inc. name indicates, the company has a presence in the Athabasca Oil Sands, Peace River and Cold Lake Oil Sands areas of Alberta. The term 'oil-sand or bitumen' has acquired a bad name as less desirable oil product due to the heavy oil mixed with sand, gravel, mud and sulfur as a very difficult crude to extract from the ground and ship to refineries. The company had four main Canadian projects until July 25, 2013 when the Province of Alberta announced that it is allocating 55,000 acres of Crown lands to the Regional Municipality of Wood Buffalo (Fort McMurray) under its Urban Development Sub-Region initiative (UDSR). As a result of the UDSR initiative, the Clearwater Project by Alberta Oilsands was cancelled. The 3 active projects remaining are: the Grand Rapids Oilsands Prospect, the Algar Lake Oilsands Prospect, and the Mackay Oilsands. The company has expanded to several African projects that include: Zambia Project, the Namibia Project and the Democratic Republic of Congo Project.

Recent Event driving interest in AOS

On July 26 2013, Alberta Oilsands Inc. announced that on July 25, 2013, the Province of Alberta announced that it is allocating 55,000 acres of Crown lands to the Regional Municipality of Wood Buffalo (Fort McMurray) under its Urban Development Sub-Region initiative (UDSR). As a result of the UDSR initiative, the company's Oilsands leases at Clearwater will be cancelled. As a lessee to these affected leases, the company will be compensated in accordance with existing legislation. The Mineral Rights Compensation Regulation (Alta. Reg. 317/2003) (Compensation Regulation) establishes the compensation payable by the Crown for cancelled agreements. Compensation includes at least the following: 1. cost of acquiring the lease including annual license fees and application fees. 2. Wasted exploration and development expenditures. 3. Reclamation costs. 4. Interest of approximately 5% (calculated as Alberta Treasury Branch prime + 1%). In the near future, the company expects to receive an official notice of cancellation from the Province of Alberta setting out details of the cancellation. The initial assessed compensation is $50 million.

The Oil

Alberta's oil sands hold 1.8 trillion barrels of bitumen. Only about nine per cent, or 169 billion barrels, are recoverable using existing technologies. Current development and testing of new methodologies are being developed to be more ecologically friendly and less expensive.

Canada has the third-largest oil reserves in the world, after Saudi Arabia and Venezuela. Of Canada's 173 billion barrels of oil reserves, 170 billion barrels are located in Alberta, and about 168 billion barrels are recoverable from bitumen. Canada does not have light sweet crude and is focused on the drilling, extraction, refining and transportation of crude and products from bitumen oil.

Total oil sands reserves in place are estimated at 1.8 trillion barrels. There are three major bitumen deposits in Alberta. The largest is the Athabasca deposit, which is located in the province's northeast in the Regional Municipality of Wood Buffalo. The main population centre of the Athabasca deposit is Fort McMurray. The second-largest oil sands deposit is referred to as Cold Lake, just south of Athabasca, with the main population centre the City of Cold Lake. The smallest oil sands deposit is known as Peace River, which is located in northwest-central Alberta.

Transporting crude and products by Rail

Canada has an extensive rail network already developed that can move large amounts of crude and is developing an additional 200-kilometer pipeline, which will connect the Edmonton area to facilities at Hardisty, Alta., and could carry 900,000 barrels per day of crude oil. The terminal will provide storage capacity for up to 1.9 million barrels of crude in the Athabasca Industrial Heartland region north of Edmonton.

A statement from the US Department of State discussing oil transportation into the U.S. stated, "Rail transport could more than meet the growing demand from oil sands producers for U.S. market access even in the absence of the proposed Keystone XL Pipeline."

Ready Product from Bitumen Crude

Bitumen that has not been processed, or "upgraded," can be used directly as asphalt. It must be diluted to travel by pipeline. This product is used extensively in Canada, however has not found extensive markets elsewhere due to transportation costs.

The processing of bitumen adds value to the product into synthetic crude oil, which is a refinery feedstock that can be transformed into transportation fuels and other products.

Current recoverable natural gas reserves are estimated at 33 trillion cubic feet.

Description of Projects

The Clearwater Project was the most developed with an estimated 373 million barrels of oil. With the cancellation of the project, the company will refocus on the other 3 projects. Alberta Oilsands had invested a large sum of money and effort into the project and is estimated to recover $50 million in cash to the company.

Grand Rapids Oilsands Prospect

The Grand Rapids project is located about 20 miles west of Fort McMurray and has an estimated 119 million barrels of contingent resource which could produce as much as 30,000 barrels per day for 40 years. The company has limited development on Grand Rapids and with Clearwater being stopped, the Grand Rapids may become the lead project for the company. The Grand Rapids property sits on 18 sections of land where a small handful of core holes have been drilled delineating the deposit. The property would also be developed using Steam Assisted Gravity Drainage (OTCPK:SAGD) process. The company has 100% of the working interest in the property, and has the ability to subcontract as needed to be the most profitable.

Algar Lake Oilsands Prospect

Algar Lake is a large area of land with 51 sections (32,640 acres) that AOS acquired in 2007. Alberta Oilsands has signed a contract with Crescendo Resources Ltd. for 51% that specializes in Oilsands exploration. Crescendo has agreed to drill at least 3 wells. To earn an additional 24% interest in Algar Lake, the Operator has agreed to fully fund and drill an additional two (2) wells. The Operator has up to two years to earn its interest in Algar Lake. Crescendo Resources Ltd brings a great deal of experience and expertise to the project. Crescendo has previously made two separate billion barrel plus discoveries in Alberta and Saskatchewan and sold them to major companies. The advantage of Algar Lake may be the crude is suitable for cold flow production, which would reduce costs by 25% of SAGD. If cold flow is successful, the Algar Lake could offer very profitable production. Although this could be exciting news, it is important to know that there is still very little data available on the property. While there are projects underway on both sides of Algar Lake, no seismic work has been done and only a handful of wells were drilled years ago.

AOS expects farm-in partner Crescendo to start drilling its wells in the winter of 2013-14 which will answer a lot of questions. If those wells show that cold flow production works on this large 50 section land base, then the value of this property is going to increase dramatically for the company and stockholders. If SAGD is required, the company will still increase income and generate moderate profits for stockholders.

Mackay Oilsands

MacKay River is a third property that was acquired in 2007 and consists of 5 sections (3,200 acres) at 100 percent working interest.

The lands are prospective for McMurray formation bitumen at average depths of approximately 200 meters. There is little information available from previous drilling, and detailed exploration must occur to collect substantial data before any developmental plans can be designed.

International Operations/Assets

Within the last year, a stockholder shake up of the Board of Directors, the company now has 3 projects in 3 African countries. The intent of the expansion is supported by the new Board and is focused on exploration and little cash output to gain the rights to near existing known oil reserves allowing for the high probability of success. The company defined its international strategy to identify and acquire a majority position in assets which meet the following criteria, with a primary focus on the continent of Africa:

1. Geologically prospective exploration licenses in existing petroleum producing basins, or discovery basins, surrounded by current and expected exploration and drilling activity.

2. Geologically prospective exploration licenses in basins recognized favorably by the Canadian capital markets, and for which a premium is currently being awarded for those companies who are able to secure a critical mass presence.

3. Government granted or privately negotiated acquisitions of assets with minimal work commitments over the next 12 - 18 months, in order to provide both maximum flexibility, and options.

The basic strategy in Africa for AOS is not to start drilling themselves (initially) but rather wait for neighboring companies with deep pockets to drill up adjacent blocks. Successful exploration wells next to AOS properties will make bringing in partners much easier and terms much more favorable. This would allow the value of the AOS African properties to increase significantly without AOS actually doing anything in the near term.

For the next 18 to 24 months, AOS doesn't have much for work commitments on its African blocks. The only real spending will be done on annual licensing fees and small G&A expenses.

Zambia Project

Alberta Oilsands Inc. owns an 80% interest in petroleum exploration licenses covering 3 rift basins in the Republic of Zambia. The company's net interest in the licenses is 80%, with the remaining 20% owned by local partners. The licenses are situated in three rift basins, including Lake Tanganyika, Luangwa Rift and the Cabora Bassa (Lake Kariba)/Mid-Zambezi Trough. The licenses cover an area of approximately 18 million acres.

There are a number of companies operating in Zambia and AOS has focused on two lakes and two dry rifts that are promising.

The number one focus point for AOS is Lake Tanganyika. Lake Tanganyika has multiple oil slicks and natural oil seeps including one that AOS believes to be the largest natural oil seep in the world.

There are currently several significant seismic programs on Lake Tanganyika with the most notable being completed recently by $1.75 billion Australian company Beach Energy.

The Beach Energy property is right beside AOS, so success by that company could have good knock-on effects for AOS.

Namibia Project

Alberta Oilsands Inc. owns an 85% interest in petroleum exploration blocks 2712A and 2812A, located in the Orange Basin, offshore Namibia. The remaining 15% is owned to the benefit of Namibian economic empowerment and local groups.

Blocks 2712A and 2812A are situated in the Orange basin off of the southern coast of Namibia and are adjacent to blocks owned by HRT Participacoes em Petroleo SA, who have announced their plans to commence drilling activities in the Orange Basin in 2013.

The Chariot/Petrobras/BP joint venture has also announced that subject to further evaluation, it may potentially drill a well on its Orange Basin acreage, to the east of AOS, in 2013. The Namibia Licenses cover an area of approximately 2.7 million acres and are also situated directly west of the Kudu Gas Field.

The intriguing opportunity about Namibia for AOS and other operators in the area is that it is a potentially direct analogue to offshore Brazil.

Offshore Namibia also has the identical age and rock type as the discoveries in offshore Angola to the north that has had major oil discoveries. Combined, Angola and Brazil have nearly 30 billion barrels in discovered reserves.

Namibia is quite underexplored with only 16 wells drilled in 20 years, the majority of which were shallow shelf wells. BP (NYSE:BP), Petrobras (NYSE:PBR), Repsol and others are out in the deepwater around AOS hunting elephants.

One well that could have big implications is the one that HRT will be drilling in August 2013 on its PEL-24 block which borders the AOS blocks 2712A and 2812A. This HRT well is a billion barrel plus prospect from which well results should be known early this fall.

In total, there should be at least five more wells drilled and $500 million to $1 billion being spent offshore Namibia over the next 12-18 months. This fits well with the AOS intention of being in an active basin where larger companies are spending big dollars around them trying to prove up major discoveries.

International Asset 3 - Democratic Republic of Congo Project

Alberta Oilsands Inc. ("AOS") and Pan African Oil Ltd. ("PAO") are jointly pursuing a production sharing agreement in Democratic Republic of the Congo with respect to two blocks, the Kalembe Block (Block 5) and the Fatuma Block (Block 6) (the "DRCBlocks"), in which the AOS may earn a 43.75% interest in the DRC Blocks. PAO will be the operator of the DRC Blocks.

The DRC Blocks comprise over one million acres (gross) covering the Kalemie sub-basin on Lake Tanganyika, in the Democratic Republic of the Congo - and in the heart of the East African Rift System. Blocks 5 and 6 are adjacent to acreage held by Total S.A.

Company Statement

Alberta Oilsands Inc. is engaged in the exploration and development of drill-defined domestic assets, and an expanding portfolio of international projects. AOS holds 106 bitumen leases in the Athabasca oil sands region of northeast Alberta, primarily its flagship Clearwater and Grand Rapids projects.

In addition, the company's new Africa initiative is focused on active and known onshore and offshore basins on the East Africa Rift System and the offshore in pursuit of additional Cretaceous and Miocene aged critical mass opportunities. The company's head office is located in Calgary, Alberta, Canada and Alberta Oilsands' common shares are traded on the TSX Venture Exchange under the trading symbol AOS

Assessment for Investors

This is a small company with only 2 employees, a Board of Directors and shareholders of 211 million shares. The company does not have a solid income with only $592 thousand of income during 2012 which does not make the company profitable. They do not have the assets to drill, extract, nor transport oil to the refinery or marketplace. However, they have right to some very rich tracks of land with retrievable oil within a growing infrastructure in the region. This is a truly speculative stock as if the investor believes the company can find partners and construct profitable working relationships, the company can be successful. In Canada, over the next several decades the oil industry will likely develop new techniques to extract more oil from these oil fields making them more profitable over their lifetime of 40 to 80 years. In Africa, the company plans to find partners in the known oil regions and again, sign contracts for others to conduct the work and share the profits. The company may be successful if it has the ability to wait for the right partners to sign.

Investing in this stock is risky due to the hope of signing the right partners. The company has no history of success in business, but will have access to $57 million to wait and find the right partners. There is no evidence the company will increase income and turn a profit in 2013, or the next several years. But the company has rights to access very valuable stores of oil waiting to be extracted. I would only encourage speculators to buy this stock as a long-term investment. It may pay off well in the future, but as of today, there are many other investments more worthy of your time and resources.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information collected for this article is from the company website, various media reports and trade bulletins covering the Alberta Canada area. It is strongly encouraged to conduct additional research before investing in this speculative investment.