No Bakken, But Junior E&P, Second Wave Petroleum May Have Good Upside

| About: Second Wave (SCSZF)
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Second Wave Petroleum (OTC:SCSZF) engages in the acquisition, exploration, development, and production of crude oil, NGLs, and natural gas in Canada. Its core development areas are in the Judy Creek area in Alberta, and in Battle Creek and Tableland in Saskatchewan. Its two main areas of current development are both in Judy Creek -- Beaverhill Lake (30,000 net acres) and Pekisko (91,000 net acres). Second Wave Petroleum is a small cap stock with a market cap of only 271.28M and an enterprise value of $316.81M. However, for a small cap E&P company it has a very respectable Price/Book of 2.48, and this stands to decrease (improve) considerably with further development. Now may be a good time to buy it (with a 2+ year outlook) as it currently trades at $3.27 per share with only 83.01M shares outstanding. This means most funds cannot own it yet. It means you may get substantial upside when some funds start to buy it after it moves above $5 per share.

Why am I optimistic about Second Wave Petroleum moving above $5 per share in the near future. For me the chat of Second Wave's production tells the story.

Second Wave has an $85 million capital budget for 2012. It plans to focus most of its attention on the Judy Creek Beaverhill Lake play. It plans to complete 39 (16.8 net) horizontal wells there. It plans to initiate its first water flood there in 2H 2012. It is planning some oil pipeline and infield emulsion treating facilities. The pipeline and the associated truck terminal will be constructed by a third party for Q4 2012. This should all yield 3,850 boe.d of production from this field by 2012E with an expected liquid weighting of 80%. The total expected production at 2012E for Second Wave Petroleum is 5000 boe/d. This number includes oil from other Second Wave plays. In Beaverhill Lake Second Wave Petroleum has 10,000 net acres with a 100% working interest. Plus it has a JV with 50,000 acres with a 40% W.I.

How real is the Beaverhill Lake play? You can judge for yourselves from some of the IP30 data.

  • 15-36 tested at rates of 1,080 bbl.d.
  • 01-28 tested at rates of 444 bbl/d.
  • 16-13 tested at rates of 400 bbl/d.
  • 02/01-015 tested at rates of 650 bbl/d.
  • 04-06 tested at rates of 990 bbl/d.
  • 12-16 tested at rates of 350 bbl/d.
  • 13-16 tested at rates of 210 bbl/d.
  • 13-25 tested at rates of 1,800 bbl/d.

There are many other wells which have been completed, but I do not have 30 day IP data for them. Therefore I have omitted them. Still most of them look promising. A couple are:

  • 06-13 tested at rates of 1,800 bbl/d IP13.
  • 03-36 tested at rates of 1,800 bbl/d IP15.

I have even less data for the others, so the comparisons are not as apt. However, they do look promising. Even more drilling is planned for 2013 and 2014 in Beaverhill Lake. Plus Second Wave plans to drill 34 wells in Pekisko in 2013. It believes it has 1.1 billion barrels in place in the Pekisko resource. With 91,000 undeveloped net acres, the undeveloped well inventory at Pekisko exceeds 675 wells. It already has 54 square miles of 3D seismic and 150 miles of 2D seismic delineating the Pekisko play. To date it has drilled 23 horizontal wells there. However, the oil is medium grade here versus light grade at Beaverhill Lake. Plus the Beaverhill Lake wells are on average more productive so far. All of the Pekisko facilities and lands are owned at 100% working interest. In sum there is more than sufficient evidence to indicate that Second Wave Petroleum will eventually be a highly successful company. As it increases its daily production total, it should become an ever more attractive buyout candidate as well. When the price of the stock goes above $5, many funds will likely start buying it. This should give the price of the stock a considerable lift. It could well get to $10 per share within two years. It has a fantastic five year average EPS growth forecast of 45.00%. It is early on, but there seems to be sufficient evidence to believe Second Wave Petroleum will be a success.

The two year chart of Second Wave Petroleum gives some technical direction for a trade.

The slow stochastic sub chart shows that Second Wave Petroleum is near over sold levels. The main chart shows that it has been in a strong uptrend since Dec. of 2011 (or perhaps even Oct. of 2011). It has taken a minor leg down on recent market and oil weakness. However, it is still far above its 200-day SMA. It is above its 50-day SMA as well. The uptrend is still intact. I would be worried about a possible downturn in the overall market as one seems over due. This would likely take Second Wave Petroleum down further. However, the overall fundamentals and the techincals indicate that an investor can start legging in now.

It is important to realize that small cap stocks can get beaten up badly in a strongly down trending market, which could possibly happen if the world and the US economies turn markedly more sour. You should plan for what you will do should this possibility turn into a reality. However, an investor has to work with the conditions at hand. Second Wave Petroleum looks like a good opportunity for good profits if you are thinking longer term (2+ years). Not only I, but the brokerage analysts find it attractive. It carries an average analysts' recommendation of 2.1 (a buy). It did just post a wider than expected Q4 2011 loss (-$0.11 versus -$0.02 estimated) on increasing operating costs. However, Petroleum and natural gas sales rose 131 percent to C$15.4 million. Plus you should remember that Nymex natural gas prices fell dramatically in Q4. This will likely be a problem for most if not all of 2012. Still I do not think it changes the overall picture for Second Wave Petroleum.

Second Wave Petroleum may be bought out. It may try to sell itself. However, if neither of these things happen, it should longer term be a good investment. It did just increase its proved plus probable reserves by 87% year over year to 10,950,000 boe (approximately 72% oil and NGLs). The estimated present value of P+P reserves increased by 112% year over year to $192.9 million. If it is able to duplicate this increase in 2012, that would put its present value of reserves at approximately $400 million. This is far higher than its market cap. In two years this figure should be even higher. A greedy investor might try to snap this stock up at the nadir of the EU recession. Of course, it may be hard to time the movement in this stock that closely.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTC:SCSZF over the next 72 hours.