As we continue to favor the nuclear renaissance over many other investment themes out there, we would also like to revisit our favorite non-uranium company: Oilsands Quest (BQI). The stock has been in a strong uptrend over the past few months; in fact the stock has more than doubled off of its lows set in July of this year.
Last week the stock came under pressure as the company released the independent estimate of resources at the Axe Lake Discovery Area. The numbers were quite bullish, however the stock came under selling pressure due to the fact that the numbers were basically identical to what management had previously predicted in their own estimate. What the independent estimate stated was that the Axe Lake area probably possesses between (and this is the worst to best range) 1.117 billion barrels (low estimate) and 1.547 billion barrels (high estimate) with the best estimate being 1.344 billion barrels. This would seem to be extremely good news as the company is being valued at less than $1 per each of these barrels which are classified as "Discovered Resources of Original Bitumen in Place".
Many are out there saying that this stock could go much higher if only Alberta would get its act together on the issue of royalties as they pertain to oil sands, however on this project BQI only has two blocks in Alberta and the rest, an overwhelming majority we might add, is located in the province next door, Saskatchewan. Yes it is important to note that Oilsands Quest does have Eagles Nest which is located in Alberta, however at this time it is not a focus of the company's drilling efforts so we find it hard to understand the discount BQI is trading at.
With any kind of exploration company there are a few key points we like to investigate before an investment is made, as well as remain up-to-date while invested in the stock which has proven very profitable for us. First we always like to look at what is next door, and the neighborhood is a very good one in BQI's case as Suncor (NYSE:SU) is located just west in Alberta with its Firebag Project. As a side note, it is hard to imagine why everyone thought that the bitumen stopped at the Alberta-Saskatchewan border only a few years ago; it seems that they missed out big not only on the discovery but also on the cheap land!
The management team is probably the most important factor when working from the ground up on a project such as this, and as the results prove this team is top-notch. Chris Hopkins has been here and done it before and if we are correct in our assumptions he will do it once again. The flow of news is also very important for us as we like to keep up on operations and the success or failure of ongoing exploration programs. BQI has been the most successful exploration company that we have seen on a percentage basis. They have consistently sported a 70%+ success rate on holes drilled hitting bitumen, and this was in an area where everyone (including Suncor) had written off as being sub-par for further exploration.
This company has been transformed in a little under 3 years. Above you will find a chart showing you the past two years - very impressive we must admit. If the company begins drilling new areas in Saskatchewan, or for some reason decides to monetize a portion of its Alberta Project known as Eagles Nest, the stock could test its old highs set early last year.
To date it seems that BQI has done no wrong and it would be very difficult for them to do wrong in the future, however prices are rising for construction and equipment which would be necessary for future production. Building the infrastructure is going to be expensive, but BQI still possesses 100% of these exploration lands and most likely could structure a deal (maybe with the Chinese?) where they could keep a carried interest (possibly in the 30% neighborhood) and have its partner provide the financing and build the infrastructure in the area. This would allow BQI to continue with what it is good at, finding bitumen. Last year the company reported that they were discovering a barrel at a cost between $.02-$.03. That is amazingly cheap and one of the reasons the company has delayed bringing on a partner at this point. The company is waiting for a big payday, either in cash or guarantees in construction. I am betting that the company is talking to the Chinese, one of the Integrated Companies, possibly Suncor, and less likely but also a possibility is a deal with India.
No matter the partner, we expect Management to make the best deal for shareholders and continue to supply us with great news from the exploration front. In the next few months the news flow should pick up providing further upwards pressure on the stock. We continue to believe in Oilsands Quest and shall continue doing "more of that which is working, and less of that which is not."
Disclosure: Author has a long position in BQI