After my last article was published on July 25th, Oilsands Quest (BQI) shares appreciated by 36% to its 52-week high of $5.13 before declining by 16% back to the current price of $4.32. Interestingly enough, the stock has given back some of its gains ahead of a plethora of catalysts that should emerge over the next 12 to 18 months (including 3 that will likely materialize over the next 12 weeks or so). Importantly, there is one catalyst, the company's Norwest update, that should give rise to a number of other catalysts, all of which, combined, could move BQI shares materially in the upcoming months. So here they are:
Sidebar: For those of you who aren't familiar with Oilsands Quest, it is an oilsands exploration company with over 707,000 acres of oilsands land (mostly in Saskatchewan) and the largest contiguous oilsands acreage position. It is essentially the only oilsands play in Saskatchewan. The geographic characteristics of its first oilsands project are equally or more attractive than Encana's Borealis, Christina Lake and Foster Creek projects as well as Suncor's Firebag project. It is headed up by Chris Hopkins, who has a demonstrated track record of successfully establishing another oilsands company (Synenco).
The Near Term Catalyst
Norwest Estimate (timing – late-Oct / early-Nov): This catalyst, due out in the late-October / early-November timeframe, is one of the most eagerly awaited catalysts to the BQI story over the past couple years. Importantly, this is the catalyst could give rise to a number of other catalysts that could move BQI shares higher. Essentially, Norwest (a third party assessor of oilsands assets) is expected to issue its opinion on BQI's first (of potentially several) oilsands project, Axe Lake. To date, management has estimated that Axe Lake contains approximately 2.5 billion barrels of resource. However, it appears that the market has doubted the validity of that estimate. Should Norwest's estimate confirm or come in higher than management's estimate, I think we could see the stock price trade materially higher as investors gain further confidence in management's estimates of its reserves. Of note, Strata Oil & Gas [SOIGF] recently received Norwest's estimate of its reserves. On the announcement on September 27th, the stock rose by 169% to $1.67 before settling at its current price of $1.33. Now, I don't believe BQI shares will have a move of that magnitude; nevertheless, I think the upward move will be significant. The significance of the Norwest estimate is not really in the estimate itself. Instead, it is in its implications. BQI management is estimating that it currently has 10 billion barrels of resource on its acreage. A positive report from Norwest will give investors much more confidence that the 10 billion number is accurate.
1. Closure to the Alberta Royalty Situation (timing – sometime in October): On September 18, 2007, the Alberta Royalty Panel issued its official suggestions for modifications to the current royalty structure for energy companies in the province. Effectively, the panel suggestions, if implemented in their entirety would increase the government's take of oilsands projects by 20% per year to about $2 billion. This has put a dark cloud over the Canadian oilsands space and has caused stock prices of many producers such as Encana and Suncor to stall. However, by the end of October, the government of Alberta will respond to the panel's suggestions. Importantly, industry participants have highlighted the flaws in the panel's report including, underestimating capital costs among others. Perhaps more salient, Encana one of Canada's energy heavyweights announced on September 28th, that it would cut capital expenditures in Alberta by 33-40% if all the panel's suggestions are implemented. As such, it appears as if the royalty suggestions may not be passed in their original form and entirety. Interestingly, whether the Alberta Royalty situation gets implemented in its entirety or in part, BQI should benefit. Should the proposed royalty hikes get pared down, BQI would benefit in that about 4.5 billion (45%) of the company's estimated 10 billion barrels are in Alberta and would benefit from lower royalties longer term. If the royalty suggestions are implemented in their entirety, BQI would also benefit. This is how. It seems the consensus thinking is that Canadian oilsands is the only viable alternative for increasing non-OPEC supply materially. If Alberta's royalties are hiked significantly, investors will immediately look for oilsands prospects outside of Alberta, which would eventually lead them to Saskatchewan. That in turn should lead to the discovery of BQI by numerous new investors.
2. Short Squeeze (could begin anytime): As of mid-September, BQI's short interest is still near its high at 11.5 million shares (4.4 days-to-cover and 6% of the float). Undoubtedly, some of these shares are associated with investors who believe don't believe management is credible. Should the Norwest update confirm or improve upon management's estimate in late-October /early-November, I think there could a significant short squeeze. Prior to the Norwest update, I think we may see some short covering from investors who don't want to be short BQI ahead of the long list of catalysts to come.
3. TSX Listing (timing – 4Q07 / 1Q08): BQI has been pursuing a TSX listing. Currently, the stock only trades on the AMEX in the U.S. I believe that there is pent-up demand from Canadian institutional investors who would like to invest in BQI, but cannot due to fund mandates which prohibit those funds from investing on exchanges outside of Canada. This to me makes intuitive sense. Most of us are very familiar with what's going on in our "backyards" and have a sense of confidence investing in something that is close to us, geographically. This investor base could add significant demand for BQI shares over the near-term (and of course, the longer-term as well). Management has stated that a TSX listing in contingent upon Norwest resource estimates. So, if the Norwest numbers come out, I believe we will be BQI begin to trade on the TSX shortly thereafter.
4. Incremental Canadian Analyst Coverage (timing - 4Q07): Currently, BQI is only covered by two analysts: one at Blackmont and the other at Genuity. I would think that other Canadian brokers would be anxious to cover BQI after its TSX listing, given those brokers will be anxious to make a market in BQI shares or take part in future equity offerings.
5. Joint Venture Announcement (timing – after Norwest announcement and probably before year-end 2008): This catalyst will likely take place in late-2008 as it will hinge on the Norwest resource estimate as well. BQI management has stated that it will begin JV discussions after the Norwest estimate is released. That should open the door to serious negotiations with big oil companies that continue to struggle to replace reserves and grow production. Keep in mind that many big oil companies are only replacing about 85% of their reserves. In other words, they are running out of oil to sell in the future. This is a tremendous problem over the longer term, especially since demand for oil continues to increase and incremental supply will have to come from OPEC countries. That would threaten the national security of the U.S., which we all know is of paramount concern to the government. Any JV would probably cause BQI shares to mark-to-market instantly, as the economics provide a floor valuation to BQI shares.
6. SEC Inclusion of Oilsands in Oil Company Reserves (timing – uncertain, but could be next 12-months): Because the rules were established long ago, the SEC does not have a provision for oil companies to include their oilsands resources in their reserve figures. As such, oil companies are dis-incentivized to acquire more oilsands assets or form oilsands joint ventures. However, the SEC has been discussing the issue and many believe that, over the near-term, oilsands reserves will be allowed into the calculation of reserves. That will likely increase interest in oilsands companies and assets and spur M&A activity in the space.
7. Increasing M&A Activity After Reserve Replacement Figures are Published in Early 2008 (timing – 2008): Industry-wide reserve replacement in the last year has approximated 85% and has been getting worse. With oil service costs and day rates exploding, big oil companies are in dire need of big prospects (so they can get more reserves with fewer wells/less spending). Earlier this year, the nationalization of many oil and gas operations in Venezuela took one of the larger potential sources of oil out of the equation. Essentially, now that Venezuela is out of the question for most large international oil companies, Canadian oilsands is becoming more and more of a focal point for increasing non-OPEC reserves and supply.
8. Oil Prices Above $100 Per Barrel (timing – near the end of 2008 / early 2009): Clearly, oil prices north of $100 will be a significant factor in accelerating JV's, M&A, and exploration and development of Canadian oilsands. Not only is $100 a psychological panic point, but it is also a price point at which many more oilsands projects become economical. Should 2007 bring a cold winter, oil prices could see $100 per barrel earlier than expected (right now some people say that oil will be $95+ by year-end 2008). Also, geopolitical issues such as the Iran nuclear debacle could prompt a military strike by the U.S. or Israel that could send oil prices skyrocketing.
So what is BQI worth? For that, I turned to two Seeking Alpha articles, "Oilsands Quest Inc.: Undervalued Canadian Oilsands Play" and "Three More Compelling Reasons To Like Oilsands Quest". Taking the average of the two target prices in those articles ($18 and $26 per share), I arrive at a valuation of $22 per share, or over 400% higher than the current price of $4.32 per share.
Following the Norwest estimate catalyst, I believe that, BQI's stock will move upwards towards $22 per share as investors speculate on the potential economics of a joint venture with a big oil company. Helping the stock get to $22 per share will be all or some of the catalysts listed above.