Sssooo much to talk about…(it’s reporting season)

First, the portfolio purchases.  I have purchased token positions in two small juniors who are involved in the Canadian side of the Alberta Bakken play – 15,000 shares of Bowood Energy (BWD-TSXv) at 43 cents and 2000 shares of DeeThree (DTX-TSXv) at $3.70.  I will now start to do research on these companies.  I don’t know much about them, but in this very bullish and frothy market I sometimes shoot first and ask questions later.  Primary will remain my largest position by far in this play – I just find I pay more attention to these stocks if I own them. All 3 of these stocks will be mentioned in Friday’s public blog story on the Alberta Bakken.

I also bought another 10,000 shares of Torquay (TOC.A-TSXv) on this $1.30 financing announced today.  Management has been slow to tell the market what’s going on at Alma Lake, which tells me–not much.   They are chasing the Bakken formation there. Most of their production is coming from their 1 section of Viewfield, the core area of the Canadian Bakken, which the two new gentlemen from Petrobakken sold them. But that is the most prudent way to build this company–build up production in an area that’s a “gimme”and then branch out into the more risky, but large upside area – Alma Lake, where they have about 53 net sections.

Truthfully, the reason I’m buying this financing is because Pat Ward’s Painted Pony (PPY.A-TSX), another OGIB portfolio stock, announced its first well at Flat Lake which is in the same area as Torquay’s Alma Lake down at the North Dakota border.  The well tested 208 bopd for the 24 hours of Day 6 of a flow rate test.  So that border area is prospective, productive, and I have the confidence in the new Petrobakken guys at at Torquay to figure out the completion puzzle.  This means the oil is there in economic quantity, and they just need to figure out the best way to frack it to get it out.  My suspicion is that this will remain a patient, illiquid story for several more months. But I see it as a quick take out by someone like nearby Enerplus if Alma Lake works out.

BTW, Painted Pony is one of my favourite NATURAL GAS stocks because of its Montney land position and the Buckinghorse Shale.

Energy service stocks are on fire – two reported great Q3 numbers yesterday, including OGIB portfolio stock Canadian Energy Services (CEU-TSX; $24.10 today). CEU’s primary business is selling technologically advanced drilling mud (please read the initial write up at the Members Centre; Bulletin #20 dated April 28 2010 – because this company is still a great investment IMHO). Revenue was up to $78 million vs 19.2 million in Q3 last year – a 308% increase! That was due to the two accretive acquisitions in the US this year and the fact that industry drilling has increased dramatically over 2009.

I try to keep my thinking on my investments very simple.  This company is clearly growing quickly, and as long as gross margin is still there in the business, I’m happy.  It was 29% this Q3 vs last year’s 32% – I’m not nervous until it’s under 25%.  The US acquisitions were accretive to begin with, and management has indicated they have been able to leverage their product line across all these new customers.  US market share jumped from under 2% to over 5%.

They increased their dividend for the second time since I originally bought the stock, and it’s now 10 cents a month vs 6 cents a month when I purchased it – a 66.66% increase in dividend!

GasFrac (GFS-TSX) reports its next set of financials at the market close today, with a conference call tomorrow morning.  Unless I see something that I think will move the stock price, then I will wait until the call is over before issuing any of my thoughts.  The stock has told me that management has grown the business very well, and is likely meeting their milestones.

As a side note, when I talk to management at the producing oil companies, they all say how tight the services sector is; lead times for a frac is now 4-6 months, and prices are moving up.  So as much as these stocks have already run, they are going to keep running – especially those with a technological edge like the two I have.

Xcite Energy (XEL-TSXv) had a spike to $4 a share last week, and I sold 10,000 shares at $3.92 on Friday while I was at the Montreal Investment Conference.  The good news behind the Friday share spike came out yesterday, Monday (ahem), as Xcite announced they had encountered the oil formation 18 feet higher than expected, which makes for a larger oil column, and they successfully directed the well along the top of the formation.  The market has supported this team and stock beyond my wildest hopes.  The fact the stock is today still holding the gains from its gap up tells me the stock could still go higher…but we will need a couple more days to confirm this.  While none of this changes the timeline for production, it does mean that, potentially, the amount of oil that could be included in a P1 and P2 reserves could be more than anticipated.

This is where an independent reservoir engineering company goes in and says ok, given the characteristics of what I see from the well, and seismic, then our best guess as to how much oil is there (P1=90% likelihood; 2P=50%) is this many barrels of oil.  And a very rough general rule of thumb is a $12-$18 valuation per barrel – or higher.  I always have in the back of my mind that this junior exploration company now has a market cap of over $600 million with no production for a year possibly and we are now in a very juiced junior oil market courtesy of QE2, the American quantitative easing program. 

Petrobakken (PBN-TSX) announced its Q3 results, with production of 40,000 bopd below street expectations and they also announced their first Cardium results – which were not bad–they were horrible – just over 100 bopd IP (Initial Production) for many of their Cardium wells.  Yet the stock has not dropped off dramatically, which tells me management had guided the street’s expectations for these results. 

Also dragging on the stock is the parent company’s (Petrobank; PBG-TSX) decision to sell off its position in Petrominerales (PMG-TSX, and a big win for OGIB subscribers – I bought at $11 and sold out the final half of my position at the very top, $33/share).  They will likely do this with PBN now as well, so I see the stock staying low until there is some clarity from management on this issue.

Peyto Exploration (PEY.UN-TSX) also announced their Q3 numbers. Production per share up 41% year over year (YoY). Year end 2010 production (the ëxit rate”) guidance was raised to 30,000 boe/d.  Lower royalties in Alberta allowed them to beat the street’s cash flow numbers at 48 cents a share for the quarter.  The company lowered costs from $6.35 a boe (barrel of oil equivalent) to $5.90 and they still have the highest netback (profit per barrel) of any gas weighted producer I can find in Canada.  The stock has been on a tear recently as natural gas prices have moved up.  As the lowest cost intermediate producer on the TSX, I think it is the BEST call on rising natural gas prices.

On a final note, it’s easy to be a disciplined investor in a down or lacklustre market.  You are just naturally attuned to looking for the best deal. In a market like this, where I get two emails a day asking me to participate in a new junior oil financing, it’s harder.  You’re making money, every story sounds good…but this is where being diligent is key. 

Subscribers, thank you for your support and keep the feedback coming!

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Hello, this is Keith Schaefer, editor and publisher of The Oil & Gas Investments Bulletin.  I started my subscription service in mid-2009 because I could see there was no place where retail investors could go to easily find which oil and gas companies were creating huge shareholder wealth by using exciting new technologies, such as horizontal drilling, fracing and 3D seismic.

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