Seeking Alpha
A few months back, there was an article published on Oilsands Quest (BQI) called “9 Good Reasons to Like This Oil Sands Name.” Now, after some extremely positive news from the company, I am adding a 10th reason.

Just some background: last winter BQI drilled 30 holes, 24 of which encountered bitumen. When Norwest (NYSE:NWE), the third party consultant, evaluated BQI’s core samples, it estimated reserves to total 525 million barrels. Thus, about 22 million barrels per hole.

Currently, BQI is undergoing its 2006/07 winter drilling program which could consist of up to 250 holes, 150 exploration and 100 delineation (these are the ones that could add to estimated reserves later this year). For the time being, let’s only pay attention to the 100 potential holes since they are the only ones that could add to estimated reserves.

Assuming that all 80% (a very conservative assumption based on last year’s drilling success rate – you’ll see what I mean below) or 80 of those holes encounter bitumen at the same volume per hole as last year, the company would add 1.76 billion barrels (80 holes x 22 million barrels per hole) to its current reserve estimate of 525 million barrels. Assuming each incremental barrel of reserves is worth $1, obviously, that 1.76 billion in additional reserves would be worth $1.76 billion (even I can do that math!).

Again, assuming that the value of each of its barrels in the ground is $1, the company’s market cap should intuitively be $525 million. That assumes that the company has NO other assets worth anything. However, the company’s market cap is currently $729 million. That implies that the market is valuing all of the company’s “other assets” at $205 million.

Now, for the interesting part! If you take the implied market valuation of $204 million for the company’s other assets (i.e. the land it’s currently drilling) and divide it by the potential value of those assets of $1.76 billion, you get 12%. If I remember the expected value session of my Statistics 101 class correctly, that means that the market is only ascribing the company an 11% chance of increasing reserves by 1.76 billion barrels this drilling season. That seems VERY LOW to me given that the company just came out on Tuesday saying that they’ve already completed drilling 31% of its potential 100 delineation holes for this drilling season with excellent results. Of note, out of the first 31 holes of the 2006/2007 drilling season, 27 have intersected bitumen. That implies an 87% success rate (=27/31). To put that in perspective, 40%+ success rates are considered good in the industry.

If you assume that the company has a 41.5% chance of adding 1.76 barrels (or $1.76 billion in value), you would get an expected incremental reserve value of $729 million, and the stock should be a two-bagger when the results are reported later this year. If you assume that the company has an 80% chance (in line with its 2005/2006 drilling success rate, you would get an expected incremental reserve value of $1.41 billion and the stock should be almost a three-bagger later this year.

With this kind of major upside potential, I would think that this stock will appear on many more radars over the next couple of months and that we’ll see a lot more investor interest in this stock.

Already, since the company reported its preliminary drilling results on Tuesday, the stock is trading about 1.76 million shares per day, or about 79% more than its recent average of about 986,000 shares per day. Barring a major collapse in oil prices, I would think the stock continues to appreciate until the company releases its estimated reserve numbers around October of this year.

Disclosure: Author is long BQI.

Source: A Tenth Good Reason To Like Oilsands Quest