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.