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  • Stream Oil And Gas: Small Company With Big Upside

    Introduction:

    Stream Oil and Gas (OTC:SOGAF) is a Canadian based small oil and gas production, development and exploration company with 100% working interest (WI) in three producing onshore heavy oil fields, Cakran-Mollaj, Gorisht-Kocul and Ballsh-Hekal, and one onshore liquid-rich natural gas field in Albania. Stream is engaged in the reactivation and redevelopment of these hydrocarbon assets. All of three oil fields are candidates for relatively straight-forward workover and reactivation. Primary work includes installation of modern rod and PC (progressive cavity) pumps. Stream plans to expand current operations through validation of enhanced oil recovery (EOR) methods in the near term.

    Delvina is the largest gas field in SE Europe with 4 existing wells. According to the Company's latest presentation, Delvina holds 615 BCF PIIP (OGIP) of gas with ~100bbl/MMCF condensate (PIIP = petroleum initially in place, OGIP = original gas in place). In late 2011, Stream completed the interventions of the two existing vertical wells with acid fracturing of Delvina 12 and injectivity testing of Delvina 4 for future liquids production. As a result of the workovers, production flow rates for the Delvina 12 well increased substantially producing 100 MMcf in 45 days without decline in productivity during testing. Seismic monitoring indicated a fracture distance that was over four times initial estimates at approximately 3,600 feet, indicating greater contact with the reservoir.

    Operational update:

    As of end-October, 2012, Stream had a production capacity of 2,300 net boed, which included average oil production of 1,600 net boed from the three heavy oil fields at that time, and a 700 net boed production capacity, gas and associated liquids combined, of the Delvina gas field (see Q3-12 MD&A). Most of Stream's oil production is coming from Cakran-Mollaj field. As per FY 2011 MD&A, oil production from this field peaked at approximately 1,200 net bbls/d in 2011, resulting from the installation of nine jet pump units. Additional 6 jet pumps were scheduled to be installed and integrated in the fourth quarter of 2012. Stream's capital expenditure in the first nine months of FY 2012 indicated that all the additional 6 jet pumps had been paid for.

    At the Gorisht-Kocul field, oil production averaged approximately 335 net bbls/d at the end of FY 2011. Stream is currently focused on the workover of prior Albpetrol operated wells with modern rod and PC pumps. In addition, Stream is working on the first phase of the waterflood program at Gorisht-Kocul, data from which will be used to validate the full waterflood project design and for the future EOR (enhanced oil recovery) project.

    At the end of FY 2011, Stream operated less than 20% of the existing wells at the Ballsh-Hekal oilfield, averaging approximately 100 net bbls/d at the end of FY 2011. Stream is planning to take over the remaining wells in that field from Albpetrol soon.

    Delvina 12 gas well is reported to be shut-in as Stream is in the process of securing and installing a gas compressor for reinjecting natural gas into the ground while planning to produce associated liquids. It may be mentioned here that Stream currently doesn't have a reliable and consistent buyer of natural gas. The Company used to sell natural gas from the Delvina field to local refinery, ARMO, but maintenance outages at ARMO refinery affected Stream's ability to sell its gas. Q3-12 MD&A indicated that the Company Management was finalizing plans for long-term gas utilization. The plans included both industrial and power generation consumers and were forecast for implementation in the late 2012 and into early 2013. Until it secures a reliable and consistent market for gas, Stream plans to produce natural gas liquids and reinject associated gas into the ground. The gas compressor is supposed to be installed and tested by early 2013. Net condensate production from this well is estimated to be 250-300 bbls/d. Stream plans to drill the first horizontal gas well within proved structure of the Delvina field in 2013.

    Valuation:

    Stream's share is currently traded at $0.75, or 4 times its trailing EPS. The company has a market cap of $50 MM, which is only 10% of its (proved + probable) 2P NPV10. Below is a comparison of Stream and it much bigger peer with substantial footprint in Albania, Bankers Petroleum (BNK.TO), based on some key production and financial metrics:

     

    Production boe/d

    MV/ BOE

    P/ E

    P/ FFO

    MV /

    2P NPV10

    Netback/Boe

    Stream Oil and Gas

    1,600

    $31,650

    4

    2.80

    10%

    $48.58

    Banker's Petroleum

    16,110

    $48,841

    25

    5.91

    43%

    $40.23

    Funding capex:

    Stream's stock is traded at a huge discount to its inherent value primarily due to delay in execution of its business plan hindered by funding constraint in the past. Finally, Stream secured a US$20 million credit facility from Raiffeisen Bank Sh.A. of Austria in December, 2011. Subject to timely utilization of the debt facility, the Company is able to fund first phase of workover on its oil fields from its current revenue. However, Stream needs funding estimated at $10 MM for drilling of its first well to tap into approximately 60 BCF of gas and associated liquids in Delvina gas field. Stream also needs to find reliable and consistent buyers for its gas.

    Short-term catalysts:

    2013 is the year for Stream to deliver. There are a few short-term catalysts that will have profound impact on its share price and shape the Company's future:

    1. Production update from Cakran-Mollaj field: Additional jet pumps, scheduled to be installed in late 2012, should increase crude production by ~450 bbls/ d, which is likely to add at least 12 cents to current EPS on a yearly basis.

    2. Results from the waterflood pilot project at the Gorisht-Kocul field to justify the viability of future EOR project

    3. Taking over of remaining wells in the Ballsh-Hekal field from Albpetrol

    4. Installation of gas compressor at Delvina 12 well site to allow production of condensate, which will add another 10 cents per share in net earnings shortly.

    5. Short-term and long-term plan for marketing of gas: There are several options in the short-term - Stream can turn on the tap and sell its gas from Delvina 12 to power generators on a small scale, use some of it for its EOR projects or sell it to its neighbor, Bankers Petroleum for EOR (Bankers has so far been unsuccessful in finding gas). However, a lot of work needs to be done to market the gas in the long-term.

    6. Announcement of plan for financing the drilling of first Delvina horizontal well.

    Conclusion:

    If Stream can execute its short-term plan timely, it can almost double its production and boost its earnings significantly by the end of spring this year. Its long-term success, however, depends on successful drilling of the first horizontal well in the Delvina gas field. That's the biggest pie up in the sky, which could turn this slacker of the past into one of the biggest winners of 2013.

    Disclosure: I am long OTC:SOGAF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: SOGAF, long-ideas
    Jan 27 7:23 AM | Link | 4 Comments
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