For all the chatter surrounding wind, solar, biomass and other “green” energy sources, the world still runs on old-fashioned fossil fuel — and will to an even greater degree into the distant future. The U.S. Energy Information Administration presages daily world petroleum consumption will grow to 97 million barrels in 2015 to 118 million barrels in 2030, from 83 million barrels today.
Growing demand for petroleum and its distillates is as old as the industry itself. In recent years, the demand has quickened a step or two; hence, the five-fold increase in per-barrel prices over the past decade.
No one likes to pay higher prices, but higher prices spur entrepreneurs to bring new oil supplies to market. One notable entrepreneur actively seeking new supplies is Oilsands Quest Inc. (AMEX: BQI), a Calgary-based energy exploration and development company whose business is extracting oil from oil sands.
And there's potentially a lot of oil for Oilsands to extract. Canada's oil sand reserves lie under an expanse of real estate larger than Florida, putting it on par with Saudi Arabia's reserves. But unlike the Saudi's reserves, which flow relatively freely, Canada's oil from sand often requires high-pressure steam — produced by burning vast amounts of natural gas — that's injected into the ground to separate the viscous bitumen from the sand to which it adheres.
Oil at $30 a barrel provides little incentive to pressure-wash sand for oil. Oil at $100 a barrel is another matter. Today's prices have inspired oil sands projects valued at $100 billion, further cementing Canada's position as the number one crude-oil supplier to the United States.
Oilsands is working to assure that the United States's petroleum thirst remains well slaked. The company owns a 100% interest in the Saskatchewan Oil Shale exploration, as well as lesser projects in the Alberta oil sands, giving it the largest contiguous lease on oil sands in Canada, if not the world. The company has forged ahead with an ambitious winter drilling program to prove reserves ahead of a 10,000-barrel-per-day pilot project scheduled to start up in 2009, with a subsequent target of 100,000 barrels per day. The company has four rigs turning in Alberta and Saskatchewan to delineate an estimated 1.5 billion barrels of contingent reserves.
But in today's incarnation, Oilsands is more exploration than development, which means it is expending, not generating, cash flow. At this juncture its income statement is relatively useless for extrapolative purposes, but here are the numbers anyway: in the six-month period ended Oct. 31, 2007, revenue was nil, resulting in a net loss of $26.6 million. In the same six-month period in 2006, revenue was also nil, but the net loss was larger — $35.6 million. Looking at 2008, revenue will be equally barren and losses equally pronounced.
At this stage the balance sheet is more revealing than the income statement. As of Oct. 31, 2007, Oilsands was sitting on $49.6 million in cash and no long-term debt, compared with $32.4 million in cash and no long-term debt at the end of Oct. 31, 2006, which means the company is sufficiently capitalized to fund its working capital and exploration and production needs.
Oilsands's value lies in its potential. The Alberta Energy Utilities Board estimates that oil extracted from oil sands is expected to grow to 4.6 million barrels a day in 2015 and then to 4.9 million barrels a day by 2020. Saskatchewan is Canada’s second largest oil producer (after Alberta) and produces about 17% of Canada’s total oil production. No one knows for sure how big Saskatchewan's oil sands are, but early estimates put reserves at one-fifth of the 300-billion barrels of known bitumen reserves.
In short, Oilsands's potential is tall, and the analysts who follow the company generally concur. Desjardins Securities analyst Adam Zive recently reiterated his $7.50 per share price target based on the company's oil discovery at its Axe Lake property in Saskatchewan. Blackmont Capital analyst Menno Hulshof has a target price of $7.25 per share, noting "Oilsands Quest has the single largest, contiguous oil sands acreage position in the industry, and its shares continue to trade at a sharp discount to net asset value, making it the least expensive company in its peer group.”
TD Newcrest analyst Mark Friesen is more circumspect. He recently initiated coverage with a “speculative buy” and a 12-month price target of $5.75 per share. Friesen states that “while this success cannot be extrapolated over the remaining unexplored land position, it seems reasonable that much more remains to be discovered on the company’s leases.”
Here's our distillation of Oilsands's value: the company has 241 million shares issued and outstanding, which gives a book value of $2.06 share. The closing price on Monday was $3.88. All the known potential — the Axe Lake reserves in Saskatchewan and projected annual production — is priced into the shares, with a discount for the probability of various failure scenarios.
That said, one can convincingly argue that insufficient premium is given to the difficulties — thanks largely to the environmentalists — of replacing reserves, which gives the drilling rights alone the potential to drive share-price higher. What's more, the probability of share appreciation increases as stated goals are met and as oil prices move higher. Should both events continue along recent trends, Oilsands' (BQI) shareholders will get closer to their quest for a higher share price.