Sector: Oil Sands / Oil & Gas Exploration and Production
Key Asset: Over 500,000 acres of land in Saskatchewan potentially holding approximately 60 billion barrels of oil.
Why Own It?
The company has top notch management with a track record of building an oil sands company (CEO, Chris Hopkins founded Synenco [SYN]). On a macro level, it’s a play on the increasing importance of the Canadian oil sands. Specifically, worldwide, demand is continuing to grow, driven by incremental demand from China and India. Meanwhile, non-OPEC supply growth is not keeping pace. As such, the world is on a trajectory to increase its reliance on Middle East oil. For the U.S., that is a major security issue. The solution? Increase access to “friendly” sources of oil such as the Canadian oil sands. It’s one of the best ways to play the increasing M&A in the oil sands space. On Friday, April 27th, Statoil (STO) acquired privately held North American Oil Sands Company for $0.91 per barrel, or $1.97b U.S. for 2 billion barrels of recoverable reserves. M&A activity in the Canadian oil sands space is expected to increase as oil companies struggle to replace reserves and increase production. The stock has significant valuation support. Statoil’s April 27th acquisition should provide of floor to the valuation of BQI. If you apply the $0.91 per barrel valuation to BQI’s 1.5 billion of estimated resource (assuming 50% is recoverable), you get a valuation of $683 million, or $3.46 per basic share, or about $2.90 per fully-diluted share. It’s important to note that the 1.5 billion estimate is probably conservative and will likely evolve into a 2.0+ billion number in July, when management comes out with its official OBIP estimate. That would turn the $3.46 and $2.90 per share valuations into $4.60 and $3.86 per share, respectively. If you also assume that BQI can employ newer oil sands technology to increase recovery, such as Petrobank’s THAI technology, which is said to be able to produce recovery rates of 80%, the $4.60 and $3.86 figures turn into $7.36 and $6.18. The above valuation discussion only applies to 2.0 billion of estimated resource. Management believes that the company’s property could potentially hold up to 60 billion barrels. So essentially, investors who buy at the current price get a free option on 58 billion+ of the company’s resource potential. If the company’s property actually holds 60 billion barrels of resource, the stock’s valuation would, theoretically be 30x the figures noted above if you assume the company’s land is homogenous and its characteristics/oil content is consistent throughout. Clearly, this would be the upper bound of the valuation. Recent options activity indicates that investors are discovering the BQI story (heavy call option volume for July 5 strikes and October 5 strikes). The volume on calls outweighs comparable put volume by a significant margin. Clearly, some investors are betting big on BQI’s prospects. There are numerous near-term catalysts could boost the stock Updates on summer drilling program over the next couple months
1. Update of Axe Lake project potential based on core data in July (could be upgraded from the 1.25 to 1.5 billion barrels estimate released in early April)
2. Toronto Stock Exchange listing should provide more demand for the shares later this year
3. Finalization of Saskatchewan government’s oil sands royalty framework
4. 3rd party data estimating its potential resource on its first project, Axe Lake, is due out in October (this will significantly lower risk associated with company’s resource estimate and open the door to negotiations for a joint venture). That number will likely be in excess of 2.0 billion barrels.
5. The company could enter into a joint venture as between fall 2007 and 1Q08.
Institutional investors have been buying over the last couple quarters. Major shareholders include Fidelity and Wellington. The stock has limited analyst coverage, which would likely change one more data is released on its potential resource and the company’s risk profile improves. Despite the company’s favorable operational/drilling updates over the past 4 months, which have significantly lowered the company’s risk profile, the stock is currently trading at $3.00 per share (near its recent low). The weakness in the stock price in recent months is attributed to a combination of its recent $30 million private placement as well as a recent lock-up expiration that has resulted in selling by early-stage investors, who purchased shares at much lower prices.
BQI 1-yr chart