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Edge Resources sees plenty of reserve potential in Alberta’s Edmonton Sands

Apr. 21, 2011 11:40 AM ETEDGXF
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Edge Resources is an oil and gas exploration company that does things a little differently. It is a small Edmonton Sands natural gas focused play in the process of accumulating land during this period of suppressed gas prices. Technological and managerial expertise has allowed the company to generate significant revenue and reach positive cash flow while holding back the majority of its production potential.

Canada is known to be rich in both petroleum and natural gas; it is the world’s third largest producer of natural gas, with proven reserves of 58.2 trillion cubic feet. In this resource rich country, natural gas can be found beneath much of the land, though often tied up in shale and sand formations. According to the company, the Alberta government estimates there are 44 trillion cubic feet (TCF) of non-producing, shallow natural gas in Alberta alone.

The Edmonton Sands formation pursued by Edge Resources consists of such shallow deposits. The company’s ability to efficiently extract gas from the shallow sand formations forms the heart of its competitive advantage and forms the base of their story.

Many oil and gas resevoirs would remain non-producing without the intervention of hydraulic fracturing. This is a process whereby liquids at high pressure are pumped into the well to “fracture” and generate cracks in the rock, speeding the flow of contained oil or gas. After the cracks have been formed, they are typically held open with sand or other material called proppants pumped along with the hydraulic fluid. This so-called hydraulic stimulation is in frequent use today, improving the economics of oil and gas recovery.

Several different fluids are typically used in fracing operations. The most commonly used is a water-based solution with additives to aid in the transport of proppants. Cheap as it is to operate, this form of stimulation often leaves a troublesome mess in its aftermath, especially in low pressure formations, lowering the economic potential of the find. Other methods including a nitrogen gas/water foam mix and nitrogen gas alone are also used.

A highly effective method, and one deployed by Edge Resources, is the carbon dioxide/sand fracturing approach. Generally speaking, liquid CO2 combined with sand serves as the hydraulic fluid and is pumped into the resevoir. The liquid CO2 creates the fractures and transports the proppant (sand), then quickly turns to gas, leaving a well-preserved resevoir. Unlike nitrogen gas, it has the ability to carry a proppant, and unlike nitrogen foam, there is no water left behind. It is a costly method, estimated to be up to double that of nitrogen gas, at the same time significantly improving recovery. This technique, developed in Canada, is now being taken up by American developers.     

Edge Resources’ refined fracing technology together with specialized mapping and drilling procedures has proven a highly potent combination; the company has boasts a 100% success rate, low development costs, and high well performance. It is able to be profitable at a natural gas price of less than $2.00/mcf.

Continuing to do things a bit differently, Edge is implementing its “counter-cyclical” strategy, working to acquire new sections of land during this trough in the natural gas cycle at favorable costs, while limiting its own production and natural gas sales into the down market.

This endeavor has been partially abetted by the Alberta government- its “Shallow Rights Reversion” law has forced mineral holders to either prove, drill, farm-out, or lose their mineral rights. Under this scenario, Edge has been adding most of its land through farm-in agreements. It typically drills a single well per section, leaving up to three additional wells for future development when natural gas prices regain their strength. It has earned or acquired 23 sections of Edmonton Sands property and has agreements in place to prospect on an additional 27. The company continues to identify high quality targets for addition to its land base.

The mostly contiguous nature of Edge’s acquired lands allows the company greater control over its production. It has 100% ownership in its shallow-gas infrastructure plus a pipeline and compression facility. This greater control translates into additional cost benefits, hence better profits.

Edge Resources has a very persuasive story; it acquires assets for bargain prices, developing them at the lowest cost with state-of-the-art technology, and keeps the assets in the ground until prices improve. The risk of course is prices do not improve. But in the case of Edge, we know it can survive and even profit on low natural gas prices. That’s the benefit of a company with operating costs of under $1.10/mcf.

Edge is still a small company with a market cap just over $20 million. On April 12, the company received $2.1 million from a public offering of its shares, providing additional cash for continued exploration and development activities. As of March 2010, the company showed proved reserves of 3.1 MMcf with a NPV of $1 million per well. It had 20 drilled locations as of March 2011, eight producing. Continued activity has the potential to deliver significant growth to the company and its shareholders.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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