Something's Brewing at Oilsands Quest Inc.

Recent Happenings

Last week, there was some unusual trading activity in Oilsands Quest Inc. (BQI) and BQI call options, which leads me to believe that something is brewing at BQI. First, on Thursday, the volume and open interest on the BQI Oct $7.50 calls increased significantly, as referenced in the Seeking Alpha article titled "Thursday Options Outlook: XLF, LEH, BUD, CMI, TXN, CHK, KEY, FTO, BQI". Currently, the open interest on those options stands at 10,169 contracts, up significantly from less than 2,000 contracts only a few days ago.

And on Friday, BQI traded up by 13.9%, or $0.66 to $5.40 on trading volume which was significantly higher that normal. Specifically, volume for the day totaled 7.3 million shares, 2.8x the average daily volume of 2.6 million shares.

The Backstory on BQI

A few years ago, the bear case on the stock was that the company's acreage didn't contain meaningful amounts of bitumen and, if it did, the company wouldn't be able to produce it. Since then, the company has drilled 264 wells which have proven that its Axe Lake acreage has 1.3 billion barrels of bitumen. Moreover, the company has drilled 85 other wells and has shot 1,847 km of seismic data, which has led the company to believe that it has a total over 10 billion barrels on its acreage.

The current bear case on BQI is hinged on the assumption that the company cannot produce meaningful amounts of its bitumen, given the geologic characteristics of its acreage. This seems to be the only real concern remaining. However, that concern may soon be eliminated. BQI is currently constructing the 1st phase of its reservoir test program at its Axe Lake project. First steam injection is expected to take place by late summer, the results of which should de-risk the BQI story and eliminate the overhang on the stock.

The short interest in BQI currently stands at 13.1 million shares, which equates to 7.3% of the float and a short interest ratio of 5.4 days. I would expect that, as the test data is released, the short case on BQI could fall apart and that Shorts on the stock will start to cover in a hurry. Perhaps more significant, BQI will likely garner more support from institutional investors, who have been gradually warming up to BQI's story.

Over the last month, institutional ownership has increased to an all-time high of 47%. That figure will likely increase in light of the heavy volume exhibited on Friday and the further de-risking of the BQI story over the remainder of the year. Over the next 6 months, the company is expected by many to secure a joint venture with a Big Oil company. That should provide the company with the capital it requires to continue and/or accelerate development of its acreage.

Perhaps more important, that should make transparent the value which a Big Oil company is willing to ascribe to BQI. With oil prices hovering near record highs, the attractiveness of resource-rich companies like BQI should increase. And it shouldn't be long before it becomes apparent what's brewing at BQI.

Disclosure: Long

Comments

[aviator409]

SEC is re-writing rules on counting oil reserves from oil sands. The value will then be able to be placed on BQI books. Should be a good ride.

Aviator409

[Breadnight]

I've got a few problems with the long term outlook for this company. First and foremost, has the in-situ revocery processes been proven to be economical?? And, if so then what is the price per barrel of oil that makes this process economical??

If you're looking for a pure momentum trade, best of luck. But, if you're looking for a good investment in an oil sands play, pick a company an hour west of this one -that is already mining bitumen at a 1:1 strip ratio.

If someone has some insight to my first 2 questions, please provide... I have been wondering this for some time.

[rughetta]

DDyer,

The price of in-situ recovery of bitumen vary with the price of natural gas (which is used to fire the boilers), the availability of a continual source of water (river rather than lake), royalty taxes (provincial government controlled) and any environmental fees for use of water (various government controlled). I remember a number a few years ago of somewhere between $40 to $50 per barrel but that was before a lot of changes occured in natural gas prices and government regulations. I would guestimate that it may be up about 50% since then but that is just a guess. It is a profitable way to recover bitument (Suncor has been doing it for years) and can be more ecconomical than mining because the environmental fees and provincial taxes are lower for in-situ recovery. I have read that the recent renegotiation of Alberta's royalty taxes retains favorable tax treatment for the in-situ recovery operations.

Sorry I didn't have more specific numbers but I hope this helps a bit.

CAVU,

Rughetta

[Mic510]

The tar sands oil production cost per barrel is estimated at $70/bbl., which is the most expensive barrel of oil that can be produced that meets global demand. Crude oil is around $50/bbl. With oil prices around $140 (and rising?), can you see the acceleration in bringing this to market?

[interested]

maybe a jv with IVANHOE energy will help make it more cost effective,and increase quality of earnings.the process greatly reduces the need to purchase nat. gas.
www.ivanhoe-energy.com...
www.ivanhoe-energy.com...

[toomuchgas]

I estimate the cost per barrel of oil sands is about $50/barrel. In-situ is more expensive than mining. Cost for existing mining operations like Canadian Oil Sands Trust is about $28/barrel.

[Breadnight]

Without doing much research on the issue, I believe the bitumen recovery for the in-situ mehtod is approximately 20-25%.

I know that the in-situ recovery method is in use today, but I don't think it is a major precentage of any oil sands operation. Instead, it is viewed as a new technology that will eventually be needed, but not for some time. Therefore, it is in use only for research and development purposes.

If anyone has some numbers and links to an oil sands operation that is actually using this method -for profit, please provide. If any productivity data is available, that would be great too.

[mcunningham615]

Connacher oil and gas is using the in-situ recovery method of producing their reserves in the Fort McMurry area of Edmonton, Canada. So far they have been VERY successful. In just a little over a years time they have gone from about 10 boe to about 10,000 boe a day. Their first site is up and running and their second project is (the Algar project) being constructed as I type this. Connacher is planning on ramping up production in Canada to 50,000 bbls a day over the next few years. Oil Sands Quest has MUCH LARGER reserves and should be a good candidate for SAGD type production. Teaming up with Ivenhoe Energy could very well be a win win situation for all involved.

[lurkingturkey]

As a petroleum reservoir engineer with experience in bitumen recovery, I would caution investors into reading too much into "bitumen in place" figures. Recovery efficiency is not "the only real concern remaining", it is the major concern for any bitumen deposit from day 1.

The world has enormous deposits of bitumen that are not currently economic to develop. The difference between the uneconomic deposits and the economic deposits depends on the interaction of many variables, including, but not limited to bitumen concentration, oil viscosity, reservoir thickness, continuity and mineralogy, and reservoir depth. A well-designed in-situ pilot in stable operation for at least a year or two is absolutely necessary before investing significant capital. You cannot use rules-of-thumb except to estimate maximum possible recovery (where the minimum is zero).

Without wishing to single out BQI (about which I know nothing), all small-cap oil stocks are potential targets for manipulation. Heavy oil and bitumen stocks are especially susceptible, because it is so easy to release positive-sounding in-place numbers, without demonstrated having any real economic potential. Maybe this is like a biotech company with good results in Phase I trials.

Maybe in a year or so, the initial pilot results will "de-risk the BQI story and eliminate the overhang on the stock". Or maybe they will be a complete bust. Anyone who decides to go long BQI had better be sure of top-quality access to confidential information, because the insiders will be in (or out) before you know what happened.

Good luck, guys.

[Breadnight]

Yeah, I failed to mention that I am a consulting geologist in the mining industry, and I soundly ditto 'lurking turkey's' comment.

I will look into Connacher O&G, I have never heard of them. I just have my doubts in the in-situ recovery method. I have never seen production data that indicates it to be economical.

Additionally, investors should ALWAYS be suspicious of junior mining/mineral companies not listed on the Toronto Stock Exchange -due to the additional resource/reserve reporting requirements.

[lurkingturkey]

P.S. to DDyer

I wouldn't take a TSE listing as any guarantee of authenticity either. Oil and Gas reserve reports are sometimes a reasonable guess, and sometimes much worse. I have seen falsified reserves at a major TSE-listed oil and gas company, and deliberate misrepresentation (misbooking) of reserves by a major oil and gas reserves evaluator. But I don't want to spend the rest of my life in court defending libel allegations, so I will leave it at that.

By the way, I think Imperial made money at Cold Lake, when all costs are included and discounted. But their deposit is very high quality, and Cold Lake bitumen gets a good price because it makes excellent asphalt, compared to other bitumens on the market. I am sure there are other in-situ projects that have been economic, or would be at today's prices. But because of the risk and economies of scale (= big capital requirements), my opinion is that it is a game for the big players only.

[MauiTrader]

This is a beautiful chart!!

[SpyderCat]

What do they mean when they talk about "spring breakup conditions"
Can you not drill unless the soil is frozen?
Can you only do exploratory drilling in the winter?
Will someone please explain what can/must be done in the winter and what can be done in the summer?

[User 211330]

Hello SpyderCat: Spring Break-up is in reference to road conditions.. In forestry as well as mining, hard ground is required to bring in heavy equipment. Spring thaw brings "muudy conditions" which would create a problem for trucks, drilling equipment, etc


On Jun 18 10:23 AM SpyderCat wrote:

> What do they mean when they talk about "spring breakup conditions"
>
> Can you not drill unless the soil is frozen?
> Can you only do exploratory drilling in the winter?
> Will someone please explain what can/must be done in the winter and
> what can be done in the summer?

[Tracy]

Either you believe in BQI's top quality, experienced management or you don't. I BELIEVE they have the goods and an economical way to extract it! Winter drilling results out SOON. It is finally getting the attention that it deserves!

[chexxer42]

In-situ is going to be a requirement for reducing the enviromental impact and for some geological situations.

If you think it's to risky, only use a small portion of your available funds.

It's just had a late run Friday evening with some after hours trading that put it up over 10% for the day. I think it's now at it's highest ever, so if you bought it a few months ago you should have a reasonable profit in sight even if it drops a dollar.

Most of the companies an hour west of this one don't have the same future potential, also Sunoco is down over 50% of it's high, It's been downhill all this year. Most of the big companies are off there highs, it appears the smaller companies are heading in the right direction.

I'm already up 50% BQI and 90% SGY . If this one works out it has the possibilities of being a 10 bagger.

And the experts? look like they need to do a bit of research on the company and the latest in-situ recovery techniques available.

[bowman711]

Apparently some of the above commenters are unaware that BQI is in the process of being listed on the TSE. It is already on the American Stock Exchange, and was also included in the Russell 2,000 maybe a year or so back.

Also, a couple of months ago, two institutions made huge purchases of new issues of stock. If I recall right it was at $4.20/share One was $4.5-million dollars and the other was for $50-million! So, about two months ago, some institution gave a $50-million vote of confidence in the stock. Does anybody think any institutional investor would be stupid enough to put that kind of money into a loser?

[chexxer42]

Now Jim Cramers on to it, and said the land is worth over 8 dollars a share. Volume reached just under 9 million today today. And now I'm over 60% up.

[Digr5]

Well, the overall view here has been on stock potential.Bottom line.
For me i see less merits in this land grab by one company. There has been a few years in which any of the majors could have scooped up value creating land and did not. The infastructure to move the oil to market would have to be shared by several by critical players to be cost effective, I mean we are talking serveral hundred miles of large pipeline with diluent return through harsh conditions.
Second, how do we get to oil that is only 185 meters deep in a hz/SAGD application. The shallowness tells me that the lateral reach in wells would be short played, thus more wells are needed. CNRL Primrose play can reach out to 2000 meters in a depth of 700 meters TVD (true verticle depth) and with the Steam throttle joints on the liners at strategic placement where they are heating reservoir areas accordingly to reservoir engineering.
Thirdly, a CNRL SAGD was a total wash at Wolf Lake Primrose area. Case being the combined mineralization of injected steam and quality of sands created cement like hardening of silt and clay around producing well bores. A $100 million dollar bungle? My contract was cancelled and almost broke me.
As was said earlier, there are factors that are scary and just because a junior says they can do it leaves me to shudder when no press releases indicate the engineering mountain ahead of them.
Characteristically, there are potentail projects stopping an hour west of there with better parameters when cost capturing is unaccountable, hence the for sale sign. (looking for big oil capital)
Big oil has deep pockets for mistakes, engineering baselines for cost analysis (inhouse).
Being contracted to Imperial at Cold Lake,
I see the most intellegent approach by any oil producer. There has been a learning curve there for 50 years and still, major hurdles abound. Shifting reservoirs sheering up to 24 well pads completely. You cant walk away from those until EUB says you spent enough time and money. Their plays are upwards to 120 meter thick payzones.
10 years ago the cost to produce a bbl of Cold Lake Imp was $12.
Then again they play the sharp pencil with contracts.
The best I can see for this shallow play is a huff puff which in a short zone tends to play out early with small amounts of oil recoverable.
Additionally the EUB prefers SAG/D as it refers to cyclical steaming as fracturing of formation caps and nightmares for the parties involved. Small lakes of tar appearing overnight on the surface.
Good Luck CanWest ....errrr Quest(ionable) Oilsands.
Still waiting on my CGX to hit the elephant.
Still smarting from the institutionally backed Bre-ex.

quote: "I think Imperial made money at Cold Lake, when all costs are included and discounted. But their deposit is very high quality, and Cold Lake bitumen gets a good price because it makes excellent asphalt, compared to other bitumens on the market."
17% ashphaltines and they make their own market.

This is only an opinion and has no legal bearing or qualified insight as to what the value of this stock is or is not.

[Digr5]

Jun 21, 2008 thru Jun 27, 2008
Breaker Energy Ltd. Fireweed, Up to 16 Horizontal Wells, Planned X-000-X-094-A-13 Fireweed Dec, 2009
Crucible Resources Corp. Rapdan, Up to 5 Wells, Planned 00-00-004-20W3 Rapdan Dec, 2008
Terra Energy Corp. Sunrise, 7 Wells, Planned 00-00-079-17W6 Sunrise Dec, 2008
MGM Energy Corp. Mackenzie Delta, 3 - 4 Wells, Planned Mackenzie Delta Oct, 2008 Mar, 2009
Oilsands Quest Inc. Axe Lake In-situ Project, Engineering Work Started For Initial 30,000 bbl/d Commercial Project, Pending Drilling Success, Financing, Board & Regulatory Approvals 00-00-092-25W3 Saskatchewan Dec, 2013
Rock Energy Inc. Kaybob, 2 - 3 Wells, Planned 00-00-064-19W5 Kaybob Dec, 2008
Rock Energy Inc. Lloydminster, 14 Wells, Planned 00-00-050-01W4 Lloydminster Dec, 2008
Avalon Exploration Ltd. Pikes Peak, Up to 3 Wells, Planned 00-00-050-23W3 Pikes Peak Dec, 2008
Twin Butte Energy Ltd. Bulwark, 5 Additional Wells, Planned 00-00-038-12W4 Bulwark Dec, 2008
Nuloch Resources Inc. Southeast Saskatchewan (Tableland), Up to 13 Additional Wells, Pending Initial Success, Proposed SE SK Dec, 2008

[BJK]

Try doing some research on Petro-Canada MacKay River SAGD facility where I have been employed for over 2 years. We are located approx. 70 kms north west of Fort Mac.


On Jun 17 12:54 PM DDyer wrote:

> Without doing much research on the issue, I believe the bitumen recovery
> for the in-situ mehtod is approximately 20-25%.
>
> I know that the in-situ recovery method is in use today, but I don't
> think it is a major precentage of any oil sands operation. Instead,
> it is viewed as a new technology that will eventually be needed,
> but not for some time. Therefore, it is in use only for research
> and development purposes.
>
> If anyone has some numbers and links to an oil sands operation that
> is actually using this method -for profit, please provide. If any
> productivity data is available, that would be great too.
>

[BJK]

Try doing some research on Petro-Canada MacKay River SAGD facility where I have been employed for over 2 years. We are located approx. 70 kms north west of Fort Mac.