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Mike Perinotti
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Former hedge fund trader with +10 years experience as a professional trader. Recipient of the "Trader of the Year Award" in 2008. Acted as junior Portfolio Manager for a fund with an estimated $450 million under management. I enjoy writing articles, it's the best way to organize my... More
  • NWTR Going International With 9 Acquisitions In 5 Years 1 comment
    Jan 15, 2014 7:29 PM | about stocks: NWTR

    Over the past year I have published several articles suggesting oil and gas companies of all sizes that investors should consider when trying to capitalize on the U.S. oil boom. As many of you already know, the United States is on pace to become the largest producer of oil in the world by 2015. Every single one of my oil and gas recommendations from 2013 are up nicely with two having gained as much as 40% and 50%. With that being said, I want to provide an in-depth look into perhaps the most unknown oil and gas company that I've mentioned that has the potential for a big year.

    New Western Energy (OTCBB: OTCQB:NWTR) has projects in Kansas, Oklahoma, Texas and Pennsylvania totaling 195 wells holding potential reserves over 20 million BOE. A method of valuing oil and gas companies is the ratio of market capitalization to proven reserves. In a report conducted by Zacks Investment Research, they chose to value New Western Energy at the median value $6.0 per barrel of oil equivalent when comparing similar small oil companies' valuation ratios and figures. Given an estimated reserve of 20.2 million barrels of oil, this implies a market capitalization of $125 million, nearly nine times greater than currently listed. In concluding their research report, Zacks Investment Research determined that a fair equity value for New Western Energy based on this ratio would be about 809% higher than its current share price and has an Outperform rating on the stock.

    (click to enlarge)

    (click to enlarge)

    Too few investors are familiar with the name New Western Energy . You would think that a company with 8 successful acquisitions since 2009 that continues to increase production revenue and expand their lease portfolio would be getting more attention. Perhaps the company is undiscovered because there has been a history of losses that negatively impacted the ability to achieve business objectives. New Western needed additional funding to expand its drilling program which it received through a positive private placement in November, 2013. Without such additional capital the company will not be able to meet its objectives on a sustainable positive net free cash flow. However, things are quickly changing as the company continues to push forward expanding its portfolio. In fact, New Western Energy just announced a Letter of Intent to acquire Legend Oil and Gas Ltd. for what would be their 9th acquisition in the past five years. The acquisition would immediately add about 135 BOE/d or about $1.06 million per quarter with the potential to play in on about 110-150 BOE/d from shut properties with proven reserves. A deal would also expand New Western's lease portfolio into the exploding oil and gas area of Alberta, Canada as well as British Columbia. The northern Alberta reserve is the 3rd largest deposit in the world.

    According to Javan Khazali, President of New Western Energy, "The strategic acquisition of Legend Oil not only increases our holdings in Kansas but also allows us to diversify our geographic portfolio outside of the U.S. and into the diverse energy region of Western Canada. From an operating strategy point of view, we will immediately accelerate revenue growth through our combined production rate while having opportunities to aggressively develop oil & gas properties in historically proven zones in the near term. We are extremely excited to join forces with the Legend Oil management team that has shown in-depth technical expertise and tremendous exploration and operation capabilities. We expect this value creation to reflect on our strong post -- transaction balance sheet with substantial increase in pro forma liquidity that will further enable us to continue organic growth and fund future acquisitions."

    "The acquisition of Legend Oil by New Western creates a combined entity which substantially benefits the shareholders of both companies. The significant access to capital by New Western led by its President and CEO; Javan Khazali and the production assets and technical strengths of the Legend management team will create a larger production and revenue base as well as enhancing the management of the combined entities. We are excited about the potential for growth this business combination will afford in 2014 and beyond," said Marshall Diamond-Goldberg President/CEO of Legend Oil and Gas Ltd.

    Completion of the acquisition will be subject to the negotiation and execution of a binding agreement and the satisfaction of a number of conditions, including, but not limited to each of New Western Energy and Legend Oil being satisfied with the results of their respective due diligence investigations.

    This deal makes perfect sense for New Western Energy as risk is low with a potential high reward. Not only does it increase the company's lease holdings in Kansas, their core lease area, but it expands their portfolio into the oil and gas-rich lands of Canada. Legend Oil's 100% interest in the Piqua Project in Kansas will add 1,040 acres with 44 wells currently producing 18 BOPD to New Western's already 3,050 acre Kansas holdings. In 2011, an engineering evaluation of the Piqua Project determined there to be 97,461 barrels of proven reserves for a $2.6 million value when using a 10% discount for price volatility. Legend's maintained a 100% drill success rate here while managing a $25/barrel operating expense.

    (click to enlarge)

    Still, the most attractive part of this deal for New Western is establishing a footprint in Canada. Legend's 100% interest in the Berwyn/Grimshaw Project produces about 17 BOE/d while varying interests in locations of the 3,046 acre Medicine River Project yield about 45 BOE/d currently for the company. Legend Oil and Gas also owns a horizontal well completed in the Pekisko formation that, although has been shut, could still potentially produce 20-30 BOE/d once reactivated. Additional percent interests are also owned in the Leduc formation gas well. The well tested at 3.0 MMCF/d (million cubic feet per day) with 30-40 BOE/d per 1 MMCF for total potential of 90-120 BOE/d.

    Berwyn/Grimshaw:

    Medicine River:

    Legend also owns anywhere from 9%-25% interest depending on the block on the 5,500 acre Clarke Lake property. This is a prolific gas producing property with gas wells with reserves ranging from 80+ BCF of gas. Suncor, a $52 billion energy company, has four producing wells on this very same property. In addition, Legend owns a small percent interest in the Wildmere property producing 24 BOE/d.

    Clarke Lake:

    Wildmere:

    Along with its joint venture partner, Legend Oil and Gas owns a 40% interest in the 6,400 acre Joarcam property. This area has produced 55 million barrels of light oil to date and would enable New Western Energy to make its mark in eastern Alberta, Canada. This property currently produces about 1,000 BOE/d. Legend Oil and Gas also produces approximately 50 BOE/d of mainly oil from four minor properties in Alberta and B.C. Some are small interest properties, such as Fort St. John and Boundary Lake. Others, such as Inga B.C., are high interest properties with development potential. Inga carries a 90% working interest in ¾ section of land currently developed with one well producing over 11 BOPD.

    Joarcam:

    Inga:

    I am impressed with New Western management's ability to evaluate risk and identify acquisitions greatly beneficial to the company's production operation. Their strong due diligence practice can be seen through the quality of deals they have conducted in the past five years. They have been able to keep costs low while maximizing existing wells and going after proven reserves. Management's mindset reminds me of Occidental Petroleum, a $75 billion giant, that has been known to say is in the "oil recovery" business not the "oil discovery" business. This helps keep costs low and implement an effective risk management system.

    This strategy has worked brilliantly thus far for New Western Energy as they have successfully completed 8 acquisitions in the past five years. As long as the company is able to secure the necessary capital, there is no reason to believe management will slow down. The Legend Oil and Gas deal would not only be their 9th successful acquisition but will also enable New Western to make its mark in Canada. I may be getting slightly ahead of myself, but if management keeps this pace, they could develop a portfolio and asset base that would qualify for an up-listing.

    Although I am very optimistic about the future of New Western Energy, it is a micro-cap and investing in micro-cap companies can be risky. If the history of losses continue it will have a negative impact on the company's ability to achieve business objectives. Additional funding would be needed to expand its drilling program. However, according to Zack's Investment Research, New Western Energy should be in the clear and is expected to produce positive numbers for shareholders down the road. It appears this small company has made it over a crucial hump thanks to a talented management team and can now begin to pick up speed.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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  • Vital Media
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    Nice article, I think it's safe to say that NWTR is extremely undervalued considering their success vs. other companies in their sector and even OTC markets in general.
    16 Jan, 01:25 PM Reply Like
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