These 3 Energy Companies Deserve To Be In Your Short-Term Radar

by: Value Digger


Energy companies offer a lot of excitement especially those which are explorers and drill uncharted land. As I noted in one of my recent articles, the explorers carry increased risk which pays off sometimes although the failures are also part of the game. After scanning my list, I found that the following energy companies will release some significant news soon which could impact positively the share price. For instance, the successful drilling results from high impact wells are always a very important catalyst for any energy company. So I recommend any investor to put these players in his radar. If he is not a risk averse type of guy, he could also nibble some shares and sit and wait.

The companies

1) Canacol Energy (CAAEF.PK): This is one of my favorite oil producers. After the recent acquisition of Shona Energy, it boosted its Proven and Probable Reserves (2P) up to 32MMboe and it is also one of the biggest land owners in Colombia holding 3.3 million net acres currently in three different basins, the Magdalena, the Llanos and the Putumayo Basin. It also holds light oil producing assets in the neighboring Ecuador. These are the near-term catalysts that could trigger a significant rise at the stock price:

a) Canacol has made a farm out deal with Exxon Mobil (NYSE:XOM) and Shell (NYSE:RDS.A) for two of its blocks (VMM2 and VMM3 respectively) in Middle Magdalena. Shell completed the farm out deal for VMM3 in 2011 paying $320/acre and Exxon Mobil paid more than double ($701/acre) just two months later to buy its VMM2 stake in the same area.

Shell had also bought VMM28 Block at the same area in early 2011 for only $129/acre. So we have a 7-fold increase in acreage value in one year.

Shell and Exxon Mobil did not pay this money accidentally. It is estimated that this area hosts 3.2M barrels (VMM2) and 2.4M barrels of oil as Middle Magdalena hosts La Luna and Rosablanca formations which are Colombia's analogue to the Eagle Ford shale formation. The first results from VMM2 Block are very encouraging as Exxon Mobil (the operator) encountered 85 ft of potential net oil pay at the shallow reservoir. The final results will be released soon once the rig ends its way down to 12,500 ft.

b) Canacol also got just few days ago very good drilling news from its Agueda-1 well (80% WI) in Llanos 23 Block. The Agueda-1 well encountered 70 ft of oil pay within the C7, Lower Gacheta, and Ubaque reservoirs, all of which are productive to the south in the Rancho Hermoso field. A production test of the Lower Gacheta reservoir yielded 1,832 barrels of gross oil per day (1,466 barrels of net oil per day for Canacol) of 28 degree API light oil. This discovery is one of 6 prospects that the company has identified on the LLA23 Block on the basis of recently acquired 3D seismic and the company plans to aggressively drill this Block during the next weeks to grow its production base in Colombia.

c) Canacol also is currently drilling the Guarango 1 well (100% WI) at the Putumayo Basin targeting potential heavy oil-bearing reservoirs in the Mirador sandstones, the main producing sandstones in the company's producing Capella heavy oil field and the same porous sandstones encountered in the Achote-1 well. The Guarango-1 well will be followed immediately by the drilling of a second well, the Cedrillo-1 well.

d) According to the Q3 2012 report, the company is working to sell part or all of its working interests in the Caño Los Totumos, LLA 10, Morochito and Entrerrios contracts which are considered immaterial to its Colombian portfolio. The company owns LLA 10 E&P contract (39% WI), Caño Los Totumos E&P contract (51% WI), Morichito E&P contract (15% WI) and Entrerrios production contract (operator, 60% WI).

e) Again according to the Q3 2012 report, the company is working to farm-out its land in Brazil (operator, 100% WI) and in Guyana (operator, 70% WI) as Brazil and Guyana are considered non-core. Canacol is in advanced negotiations with a potential partner to farm-out 50% of its 100% operated working interest in the REC-T-170 Block (Brazil) and all or part of its working interest in the Takutu PPL Block (Guyana) in 2012. It is currently reviewing bids from interested parties.

The company will start trading on a reverse split basis during the next days and it will get rid of the penny stock status although its current market cap is not small at all and it is higher than $200M.

2) Callon Petroleum (NYSE:CPE): This producer is engaged in the acquisition, development, exploration and operation of oil and gas properties in the Permian Basin in West Texas and in the Haynesville Shale in northern Louisiana. It has also producing assets in the Gulf of Mexico.

During Q3 2012, it initiated completion operations on the Vickie Newton 3801 #1H, a horizontal well targeting the Cline shale and drilling of the Shirly Newton 2301 #1H, a horizontal well targeting the Mississippian lime.

According to the company: "The horizontal drilling program has a major positive impact on the corporate production and Callon is in the process of evaluating two additional horizontal oil plays targeting the Cline shale and Mississippian lime in the northern portion of the Permian basin. These two emerging plays represent a potential catalyst for acceleration of Callon's drilling activity in the Permian beyond the existing Wolfcamp opportunities."

The average daily production rate from the company's Wolfcamp shale program is 576 Boe per well on a 30-day basis. The production guidance for 2012 is 4,500 boepd.

So it is clear that if the two wells targeting the Cline shale and Mississippian lime prove to be as oil rich as the current Wolfcamp shale program, the impact on the total production will be significant. The results are expected in early 2013.

3) GMX Resources (GMXR): This natural gas weighted producer holds assets in Texas and the Williston Basin of North Dakota. As I noted in my previous article about GMX, the company had to deal with its high debt.

Fortunately, GSO Capital Partners showed up recently and helped the company refinance its debt obligations. GSO also became the beneficial owner of 7% of the common stock of GMXR. So now the company can focus on its drilling efforts, and it has spud two wells lately, the Lange 44-31-2H (89% WI) and the Heiser 11-2-1H (40-60% WI). Both wells are located in McKenzie County, North Dakota where the successful Akovenko 24-34-2H well (92% WI) produced an initial peak flow of 3,029 bopd.

If Lange and Heiser wells prove to be as productive as Akovenko, the oil and liquids production of GMXR will rise significantly as the company holds significant stakes in both wells. GMXR's oil and liquids production was only 800 bbl/d as of Q3 2012. We will know the results from both wells by the end of Jan 2013.

The company will also complete a reverse split during the next couple of weeks to bring its stock price again above $1 where it was in May 2012.


Buying explorers with upside potential is a way for an investor to boost the return of his portfolio. However, an investor must always bear in mind that the exploration companies, especially those with negligible or zero production, also carry the inherent risk of big disappointments if the land proves to be a goat pasture.

Disclosure: I am long CAAEF.PK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Some of the aforementioned stocks fall currently into the penny stock category although it is very temporary and it will not last more than a few days or a couple of weeks maximum as both Canacol and GMXR have already approved and will complete a reverse split very soon according to the provided links. However investors should not rely solely on the information presented. Rather, investors should use the information provided as a starting point for doing additional independent research in order to form their own independent opinion.