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A New Crown Jewel?

|Includes: Crown Point Energy Inc. (CWVLF)

Now that I've had some time to gather my thoughts...

First off. What a day! FINALLY Crown Point (OTCPK:CWVLF or CWV on the TSX Venture) is not the ugly step-sister of the Vaca Muerta. While America's Petrogas (OTCPK:APEOF or BOE on the TSX Venture) and Madalena Energy (OTCQX:MDLNF or MVN on the TSX Venture) have enjoyed $200-250 million market caps, at least partially based on their VM shale exposure, CVW has historically been given zero value for its VM exposure. I believe that the news and market action today (http://www.crownpointenergy.com/press12022014.php) underscores that the old view has to change. Not only does CWV's VM shale appear to be oil mature, but it's also interbedded with 36 meters of highly fractured volcanic intervals. That's like putting high permeability fluid highways in the very source rock that industry players in the region are so excited to tap. Unlike other Vaca Muerta areas where drilling operations may require horizontal wells with multi-stage fracture completions, CWV's Cerro de los Leones Hoyada-1 has the potential to flow oil with only a vertical well and a standard vertical completion. Because of the natural fracturing, it's very unlikely that fracking it would make any sense.

In any tight reservoir/resource play, interbedding is the key. You want higher permeability silt and or sand interbedded with the shale source rock. The silty and/or sandy layers act as higher permeability "conduits" for the gas/oil to flow through and they provide storage capacity via their inherently higher porosity. In CWV's case, those interbeds are brittle volcanic rocks that have been fractured over time as a result of their thermal and structural history. As with the sands and silts discussed above, those fractured volcanic interbeds should act as high permeability conduits and storage space for reservoir fluid, which, based on the oil shows, appears to have a good chance of being oil.

So, does CWV deserve to get some VM shale value now? I think so. Not only does it bring the EV/acre discussion into play for Crown Point, but it also begs the question, "With so many high profile Vaca Muerta deals (Exxon, Shell, Total, Winterhsall, Dow Chemical to name a few), doesn't this put CWV's 90,000+ acre, 100%-owned Vaca Muerta package in play for a JV?". The answer is maybe. The good news is that the play would likely be cheaper to drill and develop than areas where horizontal drilling and completions are required, but we still need to see a definitive flow test. Given the above discussion regarding the nature of the reservoir, the signs are encouraging -- I would say at least as encouraging as players like Madalena (MVN CN), America's Petrogas (BOE CN), and Andes Energia (AEN LN).

I have seen references to potential valuations as high as $12,000 per acre (article linked here), though I would be far more conservative. The next cheapest direct comparable is Madalena. Madalena's (MVN CN) Vaca Muerta acreage is arguably valued at around $1200/acre (using $100 million for the Canadian Ostracod assets and assigning the remaining $120 million of market cap for MVN's ~100,000 net VM acres + production). If you were to apply $1200/acre to Crown Point's 90,000 net acres which are modeled as being in the oil window (I've assumed each company's producing assets are equal and just rolled them up into the EV/acre calculation), you would get around $110 million, which is about $1.05/share. It will be interesting to see if 100%-owned land with proven offsetting oil production will attract a suitor or JV partner... especially when you see stories like this around (http://www.bloomberg.com/news/2013-04-29/billionaire-plots-to-beat-chevron-to-largest-latin-shale-energy.html).

Test results will take 6-8 weeks as the company analyzes the data gathered from the well and formulates a completion and testing program. In the meantime the market will sharpen its collective pencil and price CWV accordingly based on the comparatives and the data from the well. A fully funded 10-well development and exploration program is expected to begin in Tierra del Fuego in March or April where historical success rates are around 90%, IRRs are >100%, and all fields are open to expansion via drilling based on full 3D seismic coverage of the area. One of the exploration wells, PQX-3, is targeting a previously undrilled 50 square kilometer fault block with production on 3 sides and high seismic amplitude, often suggestive of gas charge.

In any case, it should be an interesting 2014 for Crown Point and its investors.

Disclosure: I am long CWVLF.