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Is the sun rising on Daybreak Oil and Gas?

|Includes: Daybreak Oil & Gas, Inc. (DBRM)

No one disputes the fact that there is a need for increased emphasis on alternative energy sources for transportation. Much has been written about plug-in hybrids, CNG-powered cars and electric cars such as the Chevy Volt and Nissan Leaf.

Most also agree the U.S. needs a comprehensive energy policy that addresses the long-term energy requirements of the nation.However, you will find very few who believe that these changes will have a substantial impact on our need for oil for many years to come. Given that our crude oil demand will at best remain relatively stable in the near-term, and also given that the geo-political uncertainly we have seen will probably continue, I decided to investigate opportunities in domestic Junior oil producers. As we know from the Bakken oil plays and renewed interest in areas such as Texas and Kansas, there are large reserves of oil within our borders that do not require environmentally risky deep-sea drilling. While I am all for deep-sea exploration, it should be supplemented with increased on-shore exploration and drilling. With the recent increase in the price of crude, it also becomes economically feasible to re-open closed wells and drill additional wells in fields that were abandoned years ago during our period of relatively cheap oil.I believe there is significant potential for small producers to benefit from these factors.

One such company is Daybreak Oil and Gas - DBRM. Daybreak owns several large leases in the historically-productive areas in Kern County, California. I have been following the company’s growth for over two years and feel they are well positioned for both immediate and long-term growth.

Daybreak has;

A well thought out business plan that has allowed them to increase production and revenues while reducing production costs.

Production and revenue has increased every quarter since production began in 2009.

Revenue for Q4 of FY2011 exceeded operating expenses.

Excellent track record of drilling successful development wells after evaluating seismic data.

Over 20,000 acres currently under lease with a seismic option on an additional 14,000 acres.

Experience in maximizing production in the low-API fields found in Kern County.

Nine producing wells with FY 2011 4Q production of 3800 Bbls.

Very low cost of production of approximately $10/Bbl.

Current total proved reserves of 237K Bbls.

Estimated reserves of 9M Bbls with a 41% revenue interest in these fields.

Refurbished production facilities that allow them to be a low-cost producer.

Estimated net reserves in Bull Run development area of 750,000 barrels.

They are the operating partner of all leases they have a working interest in.

Company is fully reporting in compliance with all SEC reporting requirements.

While they do have a large amount debt on the books of approximately $25M, their estimated reserves just in the Bull Run area amount to revenue of $56M even using a low crude price estimate of $75 per barrel. Their low production costs should allow repayment of this debt within a reasonable timeframe.

Last week the company announced a loan agreement for $3.5M which will allow them to aggressively drill their identified targets with a goal of becoming cash-flow positive before end of FY12. Drilling will begin in July with the first well to be drilled in the Bull Run prospect. This will be an exploration well to determine the size of the reserves. There are currently no production facilities at Bull Run. Additional development wells will then be drilled at current prospects including Dyer Creek and Ball.

As with any junior oil producer, you must do your own DD and there are certainly plenty of risks and no guarantees. But as I stated in my opening, we will be using oil for many years to come and there should be plenty of upside potential for junior producers like Daybreak.

For more company information visit their website a video presentation given by the CEO at last summer’s Southern California Investor Association “Hot Summer Nights” conference.

– Author has a substantial long position in DBRM.

Disclosure: I am long OTCPK:DBRM.