With all the talk about oil sands in recent years, most people (including me) thought the oil sands boat had set sail long ago. Nevertheless, I've become familiar with a very interesting oil sands name, one which I haven't heard discussed much before, and I currently own. So today, I present to you CanWest Petroleum (BQI).
1. Upside-downside very attractive. Based on its current stock price of $3.82 per share and its current estimated reserves of 525 million barrels, the stock is trading at an EV/BOE of about $1.59. Although that might sound like a fair valuation when considering the valuations of Synenco and UTS, which trade at about $1.00 and $1.50 EV/BOE, respectively, there’s more to BQI. Specifically, the company is in the process of drilling 100 delineation wells and 150 exploratory wells, which could bring that reserve estimate up to as much as 1.5 to 2.0 billion barrels.
Assuming the market continues to value BQI shares at the same EV/BOE of $1.59, the value of the shares could rise to $10.31 to $13.75 between July and September 2007, when the company plans to release the data from its current drilling program. That equates to 170% to 260% potential return. On the flip side, assuming a conservative $1.00 EV/BOE on the company’s estimated 525 million barrels (and no additions to reserve estimates next year), you get a stock price of $2.27 per share.
If you like to look at things from a upside-downside point of view, you get a ratio ranging from 4.2x to 6.4x depending on whether you use $10.31 or $13.75 for the upside. That’s over the next year. It’s important to note that that company to date has only drilled less than 2% of its land. Management believes that its land holds 4 to 6 additional projects of equal magnitude to its current project. Although the timing of those additional projects is unclear, the potential of those projects could be enormous.
2. Holy acreage Batman! When most of us think of oil sands, we immediately think of the Alberta province of Canada. Can you say Saskatchewan? CanWest currently controls an enormous amount of land in Saskatchewan, which turns out to be the largest contiguous oil sands acreage position in Canada. Specifically, the company holds permits to 850,000 acres in the Saskatchewan province of Canada. However, the company has to relinquish 342,000 acres back to the Saskatchewan government in the future. Even after the required give-back, the company will have control of 508,000 acres. To put that in perspective 508,000 acres equates to 70% of the combined acreage of Shell, Suncor, Syncrude, Synenco/Sinopec, UTS/Petro Canada/Teck and Total S.A./Enerplus. All told, those companies control 700,000 acres of oil sands property.
3. Experienced management with track record of success. The company is headed by Chris Hopkins, an industry veteran of more than 30 years. This isn’t Hopkins’ first dealing with oil sands; he helped found Synenco and pioneered its drilling program, which has proved 2.4 billion barrels of bitumen and is expected to produce 100,000 barrels per day of synthetic crude by 2010. Importantly, management has been on time with meeting its stated goals over the past year, which should give you comfort that future milestones will be met on time as well.
4. Third party data so you don’t have to believe what management says. If you are one of those people who tends to take company estimates with a chunk of salt, this might make you feel better. Independent drilling data was released on August 29, 2006 by Norwest, the same company who assessed reserves for Synenco as well at a number of bellweather oil sands companies. According to the management, the individual who did the assessment for BQI was the same person who did the evaluation of Synenco’s core samples. Norwest’s reserve estimate was 525 million barrels. Making that estimate more impressive is the fact that CanWest only spent $10 million to find that 525 million barrels. That equates to a finding cost of only $0.02 per barrel.
5. Under-followed stock with no institutional sponsorship. Currently, BQI is not covered by any investment banks or brokers and only a couple of selectively-disseminated newsletters. That is because up until August 24, 2006, the stock has been listed on the bulletin board. However, with the Amex listing, the stock will undoubtedly get put onto institutional investor radars, especially as management gets the BQI story out.
6. Weak oil and gas investor sentiment has brought the boat back to shore. Despite releasing 3rd party reserve estimates and getting its shares listed on Amex, BQI shares are hovering at $3.82 per share, or 57% below its 52-week high reached on May 10, 2006. Importantly, back then, the company had not been listed on Amex yet and hadn’t released its estimates on potential reserves. The culprit leading to the decline in BQI’s share price is undoubtedly the weakness in oil prices, which have recently seemed to settle at the $60 per barrel area about a week ago. The weak oil prices effectively brought the BQI boat back to shore for all investors who hadn’t heard of CanWest until recently. “Better listing + more reliable reserve estimates = lower stock price?” Not in this math class. It’s more like “better listing + more reliable reserve estimates + lower stock price = buying opportunity.”
7. Invest in BQI and you’ll be in good company. Resolute Funds, Fidelity, and Wellington are listed among BQI’s top shareholders, owning 4.9%, 4.3%, and 3.5% of outstanding shares, respectively. If my analysis is faulty, at least I know I’m as dumb as some of the smartest guys on the street.
8. Management now has a new, more-polished investor presentation and is becoming more active on the road show front. After seeing BQI’s management investor presentation several weeks ago, and again just recently, I have to say I am pleasantly impressed with the movement up the learning curve. The first presentation I attended was lengthy, detailed, and contained some good information, but definitely lacked the zip needed to get me excited about the BQI story.
Just the other day, I saw management present again. This time, the presentation was much more concise and contained only data and information critical to an investment decision. Kudos to management for giving the Street the information it needs, in a way that can get it excited about the BQI story. Recently, the company has been through Boston and New York, among other places, visiting potential institutional and retail investors.
9. Perfect story for the sell side. Based on my knowledge of what sell side guys look for in new coverage ideas, I believe the BQI story is perfectly ripe for an initiation. The company story is unique, straight forward, and, for the most part, unknown. Moreover, the stock has a fully-diluted market cap of about $820 million and has traded about 2 million shares per day over the last 6 months, which makes it relatively liquid (granted, the volume has been lighter in recent weeks). With the potential for significant upside over the next year, driven by specific events, I’d have to think that more than one sell side analyst is just waiting to pull the trigger on his/her initiation.
Note: I garnered a large portion of the information for this article from The Berry Report available to everyone CanWest’s IR company website.
Disclosure: Author is long BQI.