Tuesday, April 08, 2008 4:18:12 PM
BER Investment Highlights:
A business model capitalizing on exploration and production synergies
UPDA owns controlling interests in six operating subsidiaries involved in oil and gas exploration and production, distribution, storage and trading. The Company's business model focuses on joint-ventures that expand its assets and operations and provide it with the services of skilled energy industry professionals and financing support while reducing operating risk. The Company's operating subsidiaries and joint ventures are UPDA Operators, Inc., Catlin Oil & Gas, Inc., Canyon Creek Oil & Gas, Inc., Aztec Well Services, Inc., Continental Fuels, Inc. and Heartland Oil & Gas Corp.
Aggressive acquisition strategy
During 2007, UPDA acquired 87% interests in two important assets: Continental Fuels (OTCBB: CFUL) and Heartland Oil and Gas Corporation OTCBB: HTOG). Consequently, the Company re-organized it business into two operating segments
Oil and gas trading operations conducted though Continental Fuels' distribution of oil. This segment operates a petroleum storage and terminal facility in the Port of Brownsville, Texas, and provides blending, transportation and distribution services.
Oil and gas exploration operations through Heartland Oil and Gas Corp, Aztec Well Services, Canyon Creek and Catlin Oil & Gas. The Company has an interest in oil and gas leases encompassing approximately one million acres and 216 operating wells
Geer Tank Trucks, Inc. acquisition completes vertical integration of Continental Fuel
On December 17, 2007, Continental Fuels purchased all the outstanding stock of Geer Tank Trucks, Inc., a crude oil purchasing company with five locations in North Texas and nearly $50 million in annual revenues. The Geer Tank Truck acquisition includes four pipeline terminals with connections to major pipelines owned by Colonial, Teppco and Plains and five service yards across North Texas, as well as over 20 large transports, 50 frac tanks and water hauling and disposal facilities which include two commercial salt water disposal wells.
Through this acquisition, UPDA gains all of the equipment necessary to transport and process crude oil and access to major crude oil pipelines that will enable it to efficiently deliver its production to market. Continental Fuels has emerged as a fully-integrated operator with port facilities; contracts for the purchase, storage, sale and delivery of light crude in South Texas; facilities and equipment to transport and deliver crude, and contracts to purchase and sell crude in North Texas.
Significant acreage in prolific Cherokee and Forest City Basins
Through the purchase of majority ownership of Heartland Oil and Gas Corporation UPDA acquired drilling rights to more than one million acres in the gas-prolific Cherokee and Forest City Basins of eastern Kansas. The Petroleum Technology Transfer Council (1999) estimated nearly 10 trillion cubic feet of gas in Eastern Kansas alone (Cherokee Basin), while the Forest City Basin contains an estimated one trillion cubic feet of gas.
Only a small fraction of the acquired acreage has been explored and developed; the Company is currently producing around 500 MCF per day in Kansas. Going forward, UPDA believes it could easily quadruple production volume in 2008 but exploring its remaining land leases in Kansas and sustain triple-digit production growth in 2009 and 2010.
Robust revenue growth
Following a series of completed acquisitions and joint ventures, UPDA has begun generating meaningful revenues, mainly from its energy trading business. Revenues increased to $21 million in the first nine months of 2007 from $0.3 million in the same period last year. Revenue growth reflects contributions from Continental Fuels, Catlin and Heartland Oil & Gas.
The Geer Tank Trucks, Inc. purchase and Heartland's expanded exploration and production activities should enable UPDA to increase pro-forma revenues to $140 million in 2008 and $170-200 million in 2009.
Rising oil and gas demand
World energy demand is supporting premium valuations for companies with significant oil and gas reserves, particularly US reserves. In 2007, global oil demand is expected to increase by 1.3 million barrels per day (bbl/d), mainly due to increased demands from China and the US. According to the Energy Information Administration, world oil demand in this year's fourth quarter is 1.8 million bbl/d more than fourth quarter 2006 levels. In addition, the EIA projects world oil consumption will increase another 1.4 million bbl/d in 2008.
Business Model
The Company's business model focuses on identifying acquiring exploring and developing oil and natural gas projects in proven producing regions. UPDA operates as a holding company, providing funding and support for reserve development. Through this business model, UPDA is able to expand and diversify its assets and operations.
The Company pursues low-risk oil and gas prospects offering high net revenue interests, usually in areas of proven production. Risks are minimized by utilizing advanced technologies for geological interpretation, drilling, geophysics and production engineering such as 3-dimensional seismic and magnetic survey data.
The Company operates through six subsidiaries which are either wholly-owned or operated as joint ventures. These include UPDA Operators, Inc., Catlin Oil & Gas, Inc., Canyon Creek Oil & Gas, Inc., Aztec Well Services, Inc., Continental Fuels, Inc. and Heartland Oil & Gas Corp.
Corporate strategy
The Company plans to increase production from its existing wells by upgrading the well equipment, drilling additional wells and applying enhanced recovery technologies. UPDA aims to establish a well-capitalized growth platform for assets and cash flow. Specific aspects of its strategy include:
Investing in oil and gas projects offering attractive rates of return on capital employed;
Growing its Aztec Well Services business, and
Expanding its Continental Fuels trading business.
UPDA expects to achieve these objectives by:
Exploiting and developing its existing energy properties and pursuing additional property acquisitions;
Contracting with third parties for well maintenance services, and
Increasing condensate trading volume and expanding into the fuel blending and distribution markets.
Continental Fuels, Inc.
Continental Fuels, Inc. (OTCBB: CFUL) was incorporated under the name First Lloyd Funding, Inc. in 1989. On April 23, 2007, the company closed a business combination transaction pursuant to a Stock Purchase Agreement with UPDA, acquiring two petroleum trading and storage companies from UPDA - UPDA Texas Trading, Inc. and US Petroleum Depot, Inc. - for $2.5 Million in cash and convertible preferred stock valued at $5.0 million. As of August 13, 2007, UPDA owned approximately 87% of Continental Fuels' voting capital stock.
Continental Fuels focuses on nationwide distribution and retail gasoline operations, as well as international sourcing, marketing, and distribution of upstream and downstream petroleum products. It serves as the trading arm for UPDA, operating a petroleum storage and terminal facility on the Port of Brownsville, Texas, as well as blending and distribution businesses.
The Brownsville facility originally consisted of four oil storage tanks representing an aggregate capacity of 48,000 barrels. Continental Fuels recently installed two new storage tanks at its Port of Brownsville facility and is in the process of relocating its rail spur to allow transport via large tank cars. Continental Fuels is presently receiving approximately 6,000 barrels of condensate (light crude) per day.
Continental Fuels' contribution was the main reason the Company has reported spectacular revenues growth in the first nine months of 2007. Third quarter 2007 revenues were approximately $11.7 million.
Exhibit 1: Continental Fuels' revenue, $ thousands
Source: SEC Filings
Continental Fuels plans to expand into gas marketing, fuel blending and transport, and trading of refined products, including low sulfur diesel on barges or via pipeline. On the international front, CFUL has developed valuable relationships abroad and plans to open offices outside the US that will facilitate its international trading business.
Continental Fuels' management has reorganized operations, increased condensate trading and developed additional supply contacts with top-tier customers. In addition CFUL is pursuing acquisitions of oil and gas marketing companies and similar businesses consistent with its goals. In August, 2007 Continental Fuels established a wholly-owned subsidiary in Aruba to invest in the general energy sector, the commercialization of hydrocarbon by-products, and the financing of industrial projects and energy infrastructure.
Recent events
On December 17, 2007, Continental Fuels acquired all the outstanding stock of Geer Tank Trucks, Inc. Founded in 1945, Geer has five locations in North Texas and generates nearly $50 million in annual revenues. Continental Fuels has completed a key phase of its business plan by securing a consistent crude oil supply, gathering all of the equipment necessary to transport and process crude and gaining access to major crude oil transportation pipelines.
The Geer Tank Truck acquisition was financed by Sheridan Asset Management, LLC of New York. In addition to financing this purchase, Sheridan has committed a $3 million working capital credit facility to finance Geer Tank Truck's ongoing operations and Continental Fuel's expansion activities at the Port of Brownsville.
Heartland Oil and Gas Corp.
Heartland Oil and Gas Corporation (OTCBB: HTOG), founded in 1998, explores, develops and markets Coal Bed Methane (CBM) gas, which is found in the Cherokee Basin and Forest City Basin in eastern Kansas. In April 2007, UPDA purchased 52% of HTOG capital stock. As of August 13, UPDA owns 87% of the issued and outstanding HTOG common shares.
HTOG holds interests in over one million acres (about 700,000 are still undeveloped) of prospective CBM leases expiring between 2007 and 2012 and in various stages of development. Its holdings include 88 wells, including 43 CBM wells in eight pilots that were dewatering and/or venting gas, 37 CBM wells awaiting stimulation, and eight saltwater disposal wells. HTOG has drilled 20 new wells in Kansas, 10 of which are already producing. Production has increased from about 200 MCF to 500 MCF. The Company has a dominant acreage position in the Cherokee Basin and is negotiating pipeline rights-of-ways across its producing areas.
At year-end 2005 HTOG contracted to sell gas and committed funds to construct a 5.5 mile gas gathering line and processing plant to initiate sales from Lancaster, its largest battery1. Continuous gas sales commenced last February. Gas from three additional batteries is being vented while awaiting pipeline hook-up. Lancaster is currently producing approximately 300 MCF and generating sales of approximately 225 MCF, net of fuel gas, shrinkage, dehydration, and carbon dioxide extraction. After processing, gas delivered to the sales line averages 1006 million British thermal units (BTU) per thousand cubic feet. The system and facilities are sized to support Lancaster production growth, connection to the adjacent batteries currently venting gas, and future development drilling. The adjacent batteries are currently venting approximately 200 MCF.
Exhibit 2: Heartland Oil and Gas revenues, $ thousands
Source: SEC Filings
Recent events
In September 2007, UPDA assigned its Texas oil and gas wells and leases to its Heartland Oil and Gas Corp. subsidiary. In Jack County, Texas, UPDA assigned its 2,700 acre Catlin Oil and Gas Field to Heartland, transferring production valued at approximately $100,000 per month, as well as the related gathering system, extensive pipeline and surface equipment on as many as 65 wells.
UPDA also assigned a large gas field consisting of several leases and more than 10 producing wells in Palo Pinto County, Texas to Heartland. The Palo Pinto County field currently generates revenue in excess of $100,000 per month. With the installation of a new salt water disposal well, production is expected to significantly increase as many presently shut-in wells are re-completed in the Barnett Shale.
Aztec Well Services, Inc.
Aztec Well Services, Inc. is a wholly-owned UPDA subsidiary that provides drilling and well services to UPDA's exploration and production subsidiaries. Aztec is currently drilling wells in the Cherokee Basin CBM field in eastern Kansas owned by Heartland Oil and Gas Corp. Aztec is seeking authorization to provide services in Texas and will soon begin work on the leases and wells owned by Catlin and Canyon Creek.
Canyon Creek Oil & Gas, Inc.
Canyon Creek Oil & Gas Inc. (CCOG) was formed in July 2005 as a joint venture for acquiring currently producing oil and gas properties, low-risk drilling prospects and existing oil and gas wells on properties across Texas. UPDA owns 60% of CCOG capital stock. CCOG holds leases to 63 oil and gas wells located on more than 2,700 acres in Archer, Palo Pinto, Young, Victoria and Coleman counties in Texas. CCOG is upgrading some of its properties, with the goals of improving production and profitability and bringing more wells on line. CCOG owns a 100% working interest in all of the lease wells.
Catlin Oil & Gas Inc.
Catlin Oil & Gas Inc was formed in 2006 to acquire currently producing oil and gas properties, low-risk drilling prospects and existing oil and gas wells in Jack County, Texas. Catlin holds leases on 65 oil and gas wells located on more than 3,000 acres. Catlin is also upgrading its existing properties to improve production and bring new wells on-line and may also expand its operations in North Texas.
UPDA Operators, Inc.
UPDA Operators, Inc. is designated by the Texas Railroad Commission as the operator of all UPDA subsidiaries leases. This subsidiary also provides managerial, legal and administrative services for all of UPDA's drilling properties. UPDA-OI, among other things, provides operational, geological, engineering, legal and land purchasing services and handles the accounting and bookkeeping activities necessary to commercially operate UPDA's assets. By centralizing subsidiary administrative functions at UPDA-OI, the Company capitalizes on economies of scale, increases the productivity of its employees and avoids duplicative costs and activities.
Exhibit 3: Summary of Company's properties
Source: SEC Filings
1 A battery is a well or group of wells and associated production facilities in one general area
Competitive Analysis
UPDA competes for acquisitions, exploration and development projects with other oil and gas exploring companies holding properties in Texas and Kansas. Some of these competitors are described below:
Index Oil and Gas Inc. is an independent oil and gas company. It holds drilling leases on 16,500 gross acres in Kansas, Texas, and Louisiana. Index is the parent company for four group subsidiaries. The company has participated in a number of drilling prospects in Kansas and enjoyed an 80% drilling success rate. It also had success with two wells drilled in Texas. At March 31, 2007, Index`s estimated total proved oil and gas reserves were approximately 114.6 Mboe2, consisting of 24,300 barrels of oil and 541.5 million cubic feet of natural gas.
Tandem Energy Holdings, Inc. focuses on low- risk drilling prospects in Texas, New Mexico, Oklahoma, and Kansas. Tandem has enough offset drilling locations in its lease portfolio to drill 250 low-risk development wells over the next three years. At September 30, 2005, estimated net proved reserves were 8.9 MMboe, of which approximately 64% was crude oil and 36% was natural gas. Preliminary due diligence indicates probable reserves and "behind pipe" opportunities of an additional 16 MMboe.
Baseline Oil & Gas Corp., formerly known as College Oak Investments, Inc. is an independent exploration and production company. Baseline has 20% to 100% interests in three core areas which include: the Texas Gulf Coast, specifically the Blessing Field area, located in Matagorda County, Texas; North Texas, specifically the Blessing Field, located in Stephens County, Texas; and, the New Albany Shale, located in southern Indiana. Since 2004, the operator has drilled and completed 12 wells in the Eliasville Field. Each was a producer, representing a 100% success rate. Baseline's proved reserves in this field are 7.0 MMboe. The proved reserves on 4,600 acres in the Eliasville Field are estimated at 4.3 MMboe.
Noble Energy, Inc. explores for oil and gas in major basins across the US, including Colorado's Wattenberg field, the Mid-Continent region of western Oklahoma and the Texas Panhandle, the San Juan Basin in New Mexico, the Gulf Coast and the Gulf of Mexico. At year-end 2006, the company's reserves totaled 835 million barrels of oil equivalent (55% were located in the US). Western Mid-Continent region proved reserves were estimated at 59 MMboe. In 2006, the company drilled or participated in 116 development wells in the Buffalo Wallow and Billy Rose fields, located in the Texas Panhandle, all of which were successful.
Petrosearch Energy Corporation is an independent oil and natural gas exploration and production company with existing production in North Dakota, Texas and Oklahoma. The Company's three core areas of operation include the Barnett Shale project; the development of 28 locations of the Texas Panhandle water flood project; and the exploitation of the Wilcox trend in the Southwest Garwood Field of South Texas. Petrosearch Energy Corporation has two additional development locations on its Southwest Garwood, Wilcox properties, and has 23 producing locations for development on its Texas Panhandle water flood project. The company's prospects indicate opportunities for 300 new wells drilled over the next three years.
Exhibit 4: UPDA peers
Source: SEC Filings; Analyst estimates.
2 Mboe, defined as thousand of barrels of equivalent oil, is calculated by converting gas volumes to oil volumes at the ratio of 6:1.
Energy Industry Outlook
World oil demand is expected to remain strong for the foreseeable future due to population and economic growth as well as technology improvement. With the United Nations predicting world population growth from 6.4 billion in 2004 to 8.1 billion by 2030, demand for energy will increase substantially over that period. In addition, increasing standards of living in developing countries will trigger strong energy demand, expected to grow 1.6% per year from 2004 to 2030.
World energy consumption is projected to increase 57%3 from 2004 to 2030, reflecting GDP growth over the next 25 years that will be higher than the rate recorded over the last 25 years. Emerging economies will comprise an increasing share of world GDP.
Exhibit 5: GDP growth by selected countries and regions, % per year (based on year 2000 dollars)
Source: www.eia.doe.gov/oiaf/ieo/pdf/0484(2007).pdf
Oil supply and demand
World oil consumption in the fourth quarter of 2007 is expected to rise by 1.7 million barrels per day above fourth quarter 2006 levels. According to EIA, US consumption increased by 0.17 million bbl/d year-over-year in the first half of 2007. Consumption in 2008 is projected to rise by 1.4 million bbl/d.
Exhibit 6: Oil: Demand, m b/d
Source: http://www.eia.doe.gov/emeu/steo/pub/3tab.html
On the supply side, EIA projects declining oil inventories. OPEC crude production in 2008 is expected to average 31.7 million bbl/d, or 1.4 million higher than 2007 levels. Even with increased OPEC output, however, world surplus production capacity will remain fairly low at around 2-3 million bbl/d.
Exhibit 7: Oil: supply, m b/d
Source: http://www.eia.doe.gov/emeu/steo/pub/3tab.html
In 2007, inventories remain well below prior year levels. Data for the US indicate that inventories declined below the 5-year average in November. As inventories continue to draw down and demand rises, crude oil becomes even more valuable.
Exhibit 8: Inventories in three major OECD Markets
Source: http://www.neb.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/nrgytlk/tlkwntr/tlkwntrprsnttn-eng.html
EIA projects OECD commercial inventories will reach a five-year low by year-end 2008.
Steady oil prices
Daily closing spot prices for benchmark West Texas Intermediate (WTI) crude peaked at $99.16 per barrel on November 20 but have since declined to a $94-96 range in anticipation of increased OPEC production. Prices for benchmark WTI are projected to increase from an average of $66.024 per barrel in 2006 to $71.36 per barrel in 2007 and to nearly $80 per barrel in 2008.
Exhibit 9: NYMEX Crude Oil Futures Close (Front Month)
Source: www.wtrg.com/daily/crudeoilprice.html
Natural gas market
Natural gas consumption is expected to rise 4.6% in 2008 because of increased demand from the residential, commercial, and electric power sectors. Total US natural gas production is expected to rise 1.3% in 2007 and 0.9% in 2008. As of November 30, 2007, natural gas in storage was 3.44 trillion cubic feet, or 400 billion cubic feet above the 5-year average.
In November 2007, Henry Hub spot prices for natural gas averaged $7.31 per thousand cubic feet (MCF), which was 5.1%, higher than the average October spot price. Henry Hub spot prices are expected to peak at $8.22 per MCF in January 2008. Natural gas futures are expected to trade between $7.00-8.00 per MCF.
Record high crude oil prices are not pushing natural gas prices significantly higher. Stronger US domestic production and higher liquefied natural gas (LNG) imports have offset reduced Canadian gas production. Overall, the North American natural gas supply is expected to remain fairly flat over the winter and begin building again late in the spring.
Exhibit 10: Natural Gas Spot Henry Hub
Source: www.wtrg.com/daily/clfclose.gif
3 http://www.eia.doe.gov/oiaf/ieo/pdf/0484(2007).pdf
4 www.eia.doe.gov/emeu/steo/pub/contents.html
Financial Analysis
Income statement
Following a series of acquisitions and joint ventures, UPDA has begun generating meaningful revenues from its oil and gas operations.
Exhibit 11: Revenue, $ Thousand
Source: SEC Filings
In the nine months ended September 30, 2007, natural gas revenue rose to $712,000 from $70,000 in the prior year nine-month period. This revenue growth is attributable primarily to production contributions from Catlin and Heartland.
Revenues from oil and condensate sales increased to $19.9 million during the first nine months of 2007 from $274,000 in the prior year. Revenue gains reflect condensate sales by Continental Fuels and from storage tanks in Port of Brownsville facility. In addition, revenues benefited from increased production from producing wells owned by its Canyon Creek and Catlin subsidiaries.
Exhibit 12: Revenue segments, $ thousand
Source: SEC Filings
Going forward, the recent completed Geer Tank Trucks, Inc. acquisition further expands the Company's growth opportunities and adds $50 miliion to annualized revenues.
Expenses
UPDA's operating expenses rose to $12.6 million in the first nine months of 2007 mainly due to the purchase and consolidation of Continental Fuels, Heartland, Catlin and Aztec. In addition, the Company reported other expenses of $90.9 million mainly due to a non-recurring loss on the settlement of Notes Payable for Common Stock relating to the Continental Fuels acquisition.
As a result, the Company reported a net loss of $102.1 million or $0.47 per share for the first nine months of 2007.
Exhibit 13: Income statement, $ thousands
Income statement, $ thousands
Liquidity and capital resources
The Company has reported operating and net losses, negative cash flow and working capital, and an accumulated deficit that raise doubts about its ability to continue as a going concern. UPDA has secured financing for its operations mainly by issuing shares of common and preferred stock and notes.
During the first nine months of 2007 the Company consumed cash of $5.9 million in operations and $3.4 million in investing activities. Cash raised through financing activities totaled $9.8 million and consisted of the following:
$3.5 million from the sale of Class B preferred stock;
$1.8 million advance received under a line of credit;
$0.9 million proceeds of cash received from Heartland subsidiary acquisition;
$2.7 million proceeds of notes and loans payable from related parties; and
$1 million proceeds of notes and loans payable from third parties.
Exhibit 14: Balance sheet, $ thousands
Source: SEC Filings
Valuation and Analyst Summary
High energy prices are encouraging oil and gas companies to increase drilling investments and actively develop new oil and gas reserves. Strong revenue and earnings growth for these companies is driving valuation multiples above historic levels and close to S&P 500 levels.
For valuation purposes, we divided UPDA's business into two segments:
Trading: This business is conducted though the Company's Continental Fuels segment and entails petroleum storage and the operation of a terminal facility in the Port of Brownsville, Texas, as well as blending and distribution businesses.
Oil and gas exploration: These operations are conducted by Heartland Oil and Gas Corp, Aztec Well Services, Canyon Creek and Catlin Oil & Gas. The Company has interests in oil and gas leases encompassing approximately one million acres and 216 operating wells.
Exhibit 15: Peer comparison
Source: Yahoo Finance
Oil and gas storage and distribution businesses are currently trading at Price/Sales multiples averaging around one time forward revenues while early stage oil and gas exploration companies are trading at Price/Sales multiples ranging around four times forward revenues.
UPDA's energy trading business
The Company's trading business generated revenues approaching $12 million in the third quarter of 2007. Going forward, the acquisition of Geer Tank Trucks is likely to add approximately $50 million to annualized revenues. This acquisition, combined with the Company's marketing and facility expansion initiatives, will likely push 2008 pro forma revenues to a $120 million range.
Multiplying our 2008 revenue estimate by the peer group 1.0 times Price/Sales multiple we derive a $120 million value for UPDA's energy trading business.
UPDA's oil and gas exploration business
At year-end 2006, UPDA had proven reserves of approximately 16,000 barrels of oil (MBD) and 110 million cubic feet (MMCF) of natural gas. Through the April 2007 purchase of a majority interest in Heartland Oil and Gas Corporation, UPDA gains drilling access to more than one million acres in the gas-prolific Cherokee Basin and Forest City Basin in Kansas. The majority of this acreage has yet to be explored and developed.
The reserve potential for both the Cherokee Basin and the Forest City Basin is enormous. The Petroleum Technology Transfer Council (1999) estimates nearly 10 trillion cubic feet of natural gas in eastern Kansas alone, while the Forest City Basin is believed to contain approximately one trillion cubic feet of natural gas.
Going forward, additional drilling and connecting venting wells to gas pipelines could easily push production capacity to 2,000 MCF per day in 2008 and 4,000 MCF per day in 2009. Considering also the significant production increases targeted for the Palo Pinto wells in Texas, these estimates could prove conservative. At production levels of 4,000 MCF/day, oil and gas exploration revenues could approach $10.1 million by 2009.
Multiplying our 2009 revenue estimate by the peer group 4.1 times Price/Sales multiple and discounting the result by a 12% weighted average cost of capital, we derive a $37 million value for UPDA's oil and gas exploration and production business.
UPDA valuation
UPDA's value is the $157 million sum of the fair values of its oil and gas trading and exploration businesses. Also taking into account the Company's 87% ownership interest in its largest subsidiaries, we derive a $0.16 price target for UPDA shares.
Accordingly, we are initiating coverage of Universal Property Development and Acquisition Corporation with a Speculative Buy rating and a $0.16 price target. However, we strongly advise investors to consider the risk factors mentioned below since the Company faces many challenges in attaining its production targets.
Investment Risks
Risks related to the oil and gas business
The search for oil and gas reserves frequently results in unprofitable efforts, not only from dry holes, but also from wells that, though productive, fail to produce in quantities sufficient to produce a profit after costs are deducted. No assurance can be given that UPDA will be able to find, acquire or develop economically viable oil and gas reserves.
Uncertainty of reserve estimates
The process of estimating oil and natural gas reserves is complex. Reserve estimates require interpretations of available technical data and many assumptions. Inaccuracies in estimating reserves could materially affect the Company's future reserve value and revenue prospects.
Uncertainty of reserve estimates
The Company competes for acquisitions and resources with a number of companies that have greater financial resources, longer operating histories and a record of successful exploration. The acquisition market for oil and gas properties has become extremely competitive and the Company may be unable to acquire additional oil and gas properties on acceptable terms.
Need for additional financing
Since UPDA begun its oil and natural gas operations, it has reported operating and net losses. Although the Company anticipates rising revenues in 2008, the Company currently must rely on external financing to fund its ongoing operations. Additional equity sales dilute the ownership interest of existing shareholders and more loans could constrain the Company's operations by increasing debt service requirements.
Management
Kamal Abdallah,
Chairman, CEO Mr. Abdallah brings to the Company over 15 years experience in commercial real estate investment, financing and development. Mr. Abdallah became UPDA`s Chairman and CEO in 2005 and successfully implemented a strategy to position the Company as an energy asset holding company and incubator. He managed its asset acquisition program and expanded its holdings to include multiple subsidiaries and investments in publicly-traded energy companies. Mr. Abdallah has promoted UPDA's business in Dubai, Casablanca, Zurich and Frankfurt. In addition, he has met with investment bankers and institutional investors in New York, Washington DC and other US money centers. Mr. Abdallah attended Oakland Community College and Oakland University in Michigan where he studied accounting and finance.
Christopher J. McCauley,
Vice President and Secretary Mr. McCauley has over 20 years experience in the areas of real estate and commercial law and over 10 years experience in oil and gas acquisitions and operations. Since joining UPDA in 2005, Mr. McCauley has served as its Vice President, Secretary and a board member. Mr. McCauley chairs the Company's due diligence committee and has played a major role in acquisitions that have expanded UPDA's asset base and operations. Mr. McCauley is also responsible for UPDA's IR/PR programs and has overseen the expansion of the Company's Internet presence to facilitate communications with shareholders, the investment community and the general public. Mr. McCauley graduated from Ohio State University and Cleveland-Marshall College of Law.
Steve Barrera,
Director Mr. Barrera brings over 30 years experience in real estate development and construction to UPDA. Mr. Barrera spent over 17 years performing large loss mitigation for insurance firms such as Lloyd's of London, AIG, Royal Insurance, CIGNA and USAA as well as for the United States Department of Agriculture and Department of Labor. Mr. Barrera currently heads UPDA's acquisition area and has been instrumental in developing and implementing its aggressive growth strategy. Mr. Barrera received a marketing degree from St. Mary's University in San Antonio, Texas.
Brad Moore,
Vice President of Human Resources Mr. Moore has over 30 years experience in business administration. Prior to joining UPDA, Mr. Moore served as an administrator at the Hughes Corporation, President of Bramo Corporation and Vice President of Rowell Distributing Company. He was appointed UPDA's Vice President of Human Resources in October, 2006. Mr. Moore graduated from the University of Florida in Palm Beach.
Joseph M. Angioi,
Corporate Finance Mr. Angioi is UPDA's Manager of Corporate Finance. Prior to joining UPDA, Mr. Angioi worked in investment banking, holding the position of President and CEO of TAG Financial Group LLC, a firm that structured financing for power generating plants, hotels and commercial real estate developments across the US, Europe and Latin America. In addition, Mr. Angioi held positions with nationally recognized financial institutions such as Morgan Stanley, Merrill Lynch and UBS as an Investment Advisor. Mr. Angioi graduated from Suffolk College.
Jack Baker,
Corporate Communications Mr. Baker has over 12 years experience in public relations and investor relations through positions held with companies such as Sound Money Investors, Continental Capital and Equities, Marana Group, Sequence Marketing and the Cervelle Group. Mr. Baker directs UPDA's day-to-day PR and IR activities and also serves as Communications Officer for UPDA`s Heartland and Continental Fuels subsidiaries.
A business model capitalizing on exploration and production synergies
UPDA owns controlling interests in six operating subsidiaries involved in oil and gas exploration and production, distribution, storage and trading. The Company's business model focuses on joint-ventures that expand its assets and operations and provide it with the services of skilled energy industry professionals and financing support while reducing operating risk. The Company's operating subsidiaries and joint ventures are UPDA Operators, Inc., Catlin Oil & Gas, Inc., Canyon Creek Oil & Gas, Inc., Aztec Well Services, Inc., Continental Fuels, Inc. and Heartland Oil & Gas Corp.
Aggressive acquisition strategy
During 2007, UPDA acquired 87% interests in two important assets: Continental Fuels (OTCBB: CFUL) and Heartland Oil and Gas Corporation OTCBB: HTOG). Consequently, the Company re-organized it business into two operating segments
Oil and gas trading operations conducted though Continental Fuels' distribution of oil. This segment operates a petroleum storage and terminal facility in the Port of Brownsville, Texas, and provides blending, transportation and distribution services.
Oil and gas exploration operations through Heartland Oil and Gas Corp, Aztec Well Services, Canyon Creek and Catlin Oil & Gas. The Company has an interest in oil and gas leases encompassing approximately one million acres and 216 operating wells
Geer Tank Trucks, Inc. acquisition completes vertical integration of Continental Fuel
On December 17, 2007, Continental Fuels purchased all the outstanding stock of Geer Tank Trucks, Inc., a crude oil purchasing company with five locations in North Texas and nearly $50 million in annual revenues. The Geer Tank Truck acquisition includes four pipeline terminals with connections to major pipelines owned by Colonial, Teppco and Plains and five service yards across North Texas, as well as over 20 large transports, 50 frac tanks and water hauling and disposal facilities which include two commercial salt water disposal wells.
Through this acquisition, UPDA gains all of the equipment necessary to transport and process crude oil and access to major crude oil pipelines that will enable it to efficiently deliver its production to market. Continental Fuels has emerged as a fully-integrated operator with port facilities; contracts for the purchase, storage, sale and delivery of light crude in South Texas; facilities and equipment to transport and deliver crude, and contracts to purchase and sell crude in North Texas.
Significant acreage in prolific Cherokee and Forest City Basins
Through the purchase of majority ownership of Heartland Oil and Gas Corporation UPDA acquired drilling rights to more than one million acres in the gas-prolific Cherokee and Forest City Basins of eastern Kansas. The Petroleum Technology Transfer Council (1999) estimated nearly 10 trillion cubic feet of gas in Eastern Kansas alone (Cherokee Basin), while the Forest City Basin contains an estimated one trillion cubic feet of gas.
Only a small fraction of the acquired acreage has been explored and developed; the Company is currently producing around 500 MCF per day in Kansas. Going forward, UPDA believes it could easily quadruple production volume in 2008 but exploring its remaining land leases in Kansas and sustain triple-digit production growth in 2009 and 2010.
Robust revenue growth
Following a series of completed acquisitions and joint ventures, UPDA has begun generating meaningful revenues, mainly from its energy trading business. Revenues increased to $21 million in the first nine months of 2007 from $0.3 million in the same period last year. Revenue growth reflects contributions from Continental Fuels, Catlin and Heartland Oil & Gas.
The Geer Tank Trucks, Inc. purchase and Heartland's expanded exploration and production activities should enable UPDA to increase pro-forma revenues to $140 million in 2008 and $170-200 million in 2009.
Rising oil and gas demand
World energy demand is supporting premium valuations for companies with significant oil and gas reserves, particularly US reserves. In 2007, global oil demand is expected to increase by 1.3 million barrels per day (bbl/d), mainly due to increased demands from China and the US. According to the Energy Information Administration, world oil demand in this year's fourth quarter is 1.8 million bbl/d more than fourth quarter 2006 levels. In addition, the EIA projects world oil consumption will increase another 1.4 million bbl/d in 2008.
Business Model
The Company's business model focuses on identifying acquiring exploring and developing oil and natural gas projects in proven producing regions. UPDA operates as a holding company, providing funding and support for reserve development. Through this business model, UPDA is able to expand and diversify its assets and operations.
The Company pursues low-risk oil and gas prospects offering high net revenue interests, usually in areas of proven production. Risks are minimized by utilizing advanced technologies for geological interpretation, drilling, geophysics and production engineering such as 3-dimensional seismic and magnetic survey data.
The Company operates through six subsidiaries which are either wholly-owned or operated as joint ventures. These include UPDA Operators, Inc., Catlin Oil & Gas, Inc., Canyon Creek Oil & Gas, Inc., Aztec Well Services, Inc., Continental Fuels, Inc. and Heartland Oil & Gas Corp.
Corporate strategy
The Company plans to increase production from its existing wells by upgrading the well equipment, drilling additional wells and applying enhanced recovery technologies. UPDA aims to establish a well-capitalized growth platform for assets and cash flow. Specific aspects of its strategy include:
Investing in oil and gas projects offering attractive rates of return on capital employed;
Growing its Aztec Well Services business, and
Expanding its Continental Fuels trading business.
UPDA expects to achieve these objectives by:
Exploiting and developing its existing energy properties and pursuing additional property acquisitions;
Contracting with third parties for well maintenance services, and
Increasing condensate trading volume and expanding into the fuel blending and distribution markets.
Continental Fuels, Inc.
Continental Fuels, Inc. (OTCBB: CFUL) was incorporated under the name First Lloyd Funding, Inc. in 1989. On April 23, 2007, the company closed a business combination transaction pursuant to a Stock Purchase Agreement with UPDA, acquiring two petroleum trading and storage companies from UPDA - UPDA Texas Trading, Inc. and US Petroleum Depot, Inc. - for $2.5 Million in cash and convertible preferred stock valued at $5.0 million. As of August 13, 2007, UPDA owned approximately 87% of Continental Fuels' voting capital stock.
Continental Fuels focuses on nationwide distribution and retail gasoline operations, as well as international sourcing, marketing, and distribution of upstream and downstream petroleum products. It serves as the trading arm for UPDA, operating a petroleum storage and terminal facility on the Port of Brownsville, Texas, as well as blending and distribution businesses.
The Brownsville facility originally consisted of four oil storage tanks representing an aggregate capacity of 48,000 barrels. Continental Fuels recently installed two new storage tanks at its Port of Brownsville facility and is in the process of relocating its rail spur to allow transport via large tank cars. Continental Fuels is presently receiving approximately 6,000 barrels of condensate (light crude) per day.
Continental Fuels' contribution was the main reason the Company has reported spectacular revenues growth in the first nine months of 2007. Third quarter 2007 revenues were approximately $11.7 million.
Exhibit 1: Continental Fuels' revenue, $ thousands
Source: SEC Filings
Continental Fuels plans to expand into gas marketing, fuel blending and transport, and trading of refined products, including low sulfur diesel on barges or via pipeline. On the international front, CFUL has developed valuable relationships abroad and plans to open offices outside the US that will facilitate its international trading business.
Continental Fuels' management has reorganized operations, increased condensate trading and developed additional supply contacts with top-tier customers. In addition CFUL is pursuing acquisitions of oil and gas marketing companies and similar businesses consistent with its goals. In August, 2007 Continental Fuels established a wholly-owned subsidiary in Aruba to invest in the general energy sector, the commercialization of hydrocarbon by-products, and the financing of industrial projects and energy infrastructure.
Recent events
On December 17, 2007, Continental Fuels acquired all the outstanding stock of Geer Tank Trucks, Inc. Founded in 1945, Geer has five locations in North Texas and generates nearly $50 million in annual revenues. Continental Fuels has completed a key phase of its business plan by securing a consistent crude oil supply, gathering all of the equipment necessary to transport and process crude and gaining access to major crude oil transportation pipelines.
The Geer Tank Truck acquisition was financed by Sheridan Asset Management, LLC of New York. In addition to financing this purchase, Sheridan has committed a $3 million working capital credit facility to finance Geer Tank Truck's ongoing operations and Continental Fuel's expansion activities at the Port of Brownsville.
Heartland Oil and Gas Corp.
Heartland Oil and Gas Corporation (OTCBB: HTOG), founded in 1998, explores, develops and markets Coal Bed Methane (CBM) gas, which is found in the Cherokee Basin and Forest City Basin in eastern Kansas. In April 2007, UPDA purchased 52% of HTOG capital stock. As of August 13, UPDA owns 87% of the issued and outstanding HTOG common shares.
HTOG holds interests in over one million acres (about 700,000 are still undeveloped) of prospective CBM leases expiring between 2007 and 2012 and in various stages of development. Its holdings include 88 wells, including 43 CBM wells in eight pilots that were dewatering and/or venting gas, 37 CBM wells awaiting stimulation, and eight saltwater disposal wells. HTOG has drilled 20 new wells in Kansas, 10 of which are already producing. Production has increased from about 200 MCF to 500 MCF. The Company has a dominant acreage position in the Cherokee Basin and is negotiating pipeline rights-of-ways across its producing areas.
At year-end 2005 HTOG contracted to sell gas and committed funds to construct a 5.5 mile gas gathering line and processing plant to initiate sales from Lancaster, its largest battery1. Continuous gas sales commenced last February. Gas from three additional batteries is being vented while awaiting pipeline hook-up. Lancaster is currently producing approximately 300 MCF and generating sales of approximately 225 MCF, net of fuel gas, shrinkage, dehydration, and carbon dioxide extraction. After processing, gas delivered to the sales line averages 1006 million British thermal units (BTU) per thousand cubic feet. The system and facilities are sized to support Lancaster production growth, connection to the adjacent batteries currently venting gas, and future development drilling. The adjacent batteries are currently venting approximately 200 MCF.
Exhibit 2: Heartland Oil and Gas revenues, $ thousands
Source: SEC Filings
Recent events
In September 2007, UPDA assigned its Texas oil and gas wells and leases to its Heartland Oil and Gas Corp. subsidiary. In Jack County, Texas, UPDA assigned its 2,700 acre Catlin Oil and Gas Field to Heartland, transferring production valued at approximately $100,000 per month, as well as the related gathering system, extensive pipeline and surface equipment on as many as 65 wells.
UPDA also assigned a large gas field consisting of several leases and more than 10 producing wells in Palo Pinto County, Texas to Heartland. The Palo Pinto County field currently generates revenue in excess of $100,000 per month. With the installation of a new salt water disposal well, production is expected to significantly increase as many presently shut-in wells are re-completed in the Barnett Shale.
Aztec Well Services, Inc.
Aztec Well Services, Inc. is a wholly-owned UPDA subsidiary that provides drilling and well services to UPDA's exploration and production subsidiaries. Aztec is currently drilling wells in the Cherokee Basin CBM field in eastern Kansas owned by Heartland Oil and Gas Corp. Aztec is seeking authorization to provide services in Texas and will soon begin work on the leases and wells owned by Catlin and Canyon Creek.
Canyon Creek Oil & Gas, Inc.
Canyon Creek Oil & Gas Inc. (CCOG) was formed in July 2005 as a joint venture for acquiring currently producing oil and gas properties, low-risk drilling prospects and existing oil and gas wells on properties across Texas. UPDA owns 60% of CCOG capital stock. CCOG holds leases to 63 oil and gas wells located on more than 2,700 acres in Archer, Palo Pinto, Young, Victoria and Coleman counties in Texas. CCOG is upgrading some of its properties, with the goals of improving production and profitability and bringing more wells on line. CCOG owns a 100% working interest in all of the lease wells.
Catlin Oil & Gas Inc.
Catlin Oil & Gas Inc was formed in 2006 to acquire currently producing oil and gas properties, low-risk drilling prospects and existing oil and gas wells in Jack County, Texas. Catlin holds leases on 65 oil and gas wells located on more than 3,000 acres. Catlin is also upgrading its existing properties to improve production and bring new wells on-line and may also expand its operations in North Texas.
UPDA Operators, Inc.
UPDA Operators, Inc. is designated by the Texas Railroad Commission as the operator of all UPDA subsidiaries leases. This subsidiary also provides managerial, legal and administrative services for all of UPDA's drilling properties. UPDA-OI, among other things, provides operational, geological, engineering, legal and land purchasing services and handles the accounting and bookkeeping activities necessary to commercially operate UPDA's assets. By centralizing subsidiary administrative functions at UPDA-OI, the Company capitalizes on economies of scale, increases the productivity of its employees and avoids duplicative costs and activities.
Exhibit 3: Summary of Company's properties
Source: SEC Filings
1 A battery is a well or group of wells and associated production facilities in one general area
Competitive Analysis
UPDA competes for acquisitions, exploration and development projects with other oil and gas exploring companies holding properties in Texas and Kansas. Some of these competitors are described below:
Index Oil and Gas Inc. is an independent oil and gas company. It holds drilling leases on 16,500 gross acres in Kansas, Texas, and Louisiana. Index is the parent company for four group subsidiaries. The company has participated in a number of drilling prospects in Kansas and enjoyed an 80% drilling success rate. It also had success with two wells drilled in Texas. At March 31, 2007, Index`s estimated total proved oil and gas reserves were approximately 114.6 Mboe2, consisting of 24,300 barrels of oil and 541.5 million cubic feet of natural gas.
Tandem Energy Holdings, Inc. focuses on low- risk drilling prospects in Texas, New Mexico, Oklahoma, and Kansas. Tandem has enough offset drilling locations in its lease portfolio to drill 250 low-risk development wells over the next three years. At September 30, 2005, estimated net proved reserves were 8.9 MMboe, of which approximately 64% was crude oil and 36% was natural gas. Preliminary due diligence indicates probable reserves and "behind pipe" opportunities of an additional 16 MMboe.
Baseline Oil & Gas Corp., formerly known as College Oak Investments, Inc. is an independent exploration and production company. Baseline has 20% to 100% interests in three core areas which include: the Texas Gulf Coast, specifically the Blessing Field area, located in Matagorda County, Texas; North Texas, specifically the Blessing Field, located in Stephens County, Texas; and, the New Albany Shale, located in southern Indiana. Since 2004, the operator has drilled and completed 12 wells in the Eliasville Field. Each was a producer, representing a 100% success rate. Baseline's proved reserves in this field are 7.0 MMboe. The proved reserves on 4,600 acres in the Eliasville Field are estimated at 4.3 MMboe.
Noble Energy, Inc. explores for oil and gas in major basins across the US, including Colorado's Wattenberg field, the Mid-Continent region of western Oklahoma and the Texas Panhandle, the San Juan Basin in New Mexico, the Gulf Coast and the Gulf of Mexico. At year-end 2006, the company's reserves totaled 835 million barrels of oil equivalent (55% were located in the US). Western Mid-Continent region proved reserves were estimated at 59 MMboe. In 2006, the company drilled or participated in 116 development wells in the Buffalo Wallow and Billy Rose fields, located in the Texas Panhandle, all of which were successful.
Petrosearch Energy Corporation is an independent oil and natural gas exploration and production company with existing production in North Dakota, Texas and Oklahoma. The Company's three core areas of operation include the Barnett Shale project; the development of 28 locations of the Texas Panhandle water flood project; and the exploitation of the Wilcox trend in the Southwest Garwood Field of South Texas. Petrosearch Energy Corporation has two additional development locations on its Southwest Garwood, Wilcox properties, and has 23 producing locations for development on its Texas Panhandle water flood project. The company's prospects indicate opportunities for 300 new wells drilled over the next three years.
Exhibit 4: UPDA peers
Source: SEC Filings; Analyst estimates.
2 Mboe, defined as thousand of barrels of equivalent oil, is calculated by converting gas volumes to oil volumes at the ratio of 6:1.
Energy Industry Outlook
World oil demand is expected to remain strong for the foreseeable future due to population and economic growth as well as technology improvement. With the United Nations predicting world population growth from 6.4 billion in 2004 to 8.1 billion by 2030, demand for energy will increase substantially over that period. In addition, increasing standards of living in developing countries will trigger strong energy demand, expected to grow 1.6% per year from 2004 to 2030.
World energy consumption is projected to increase 57%3 from 2004 to 2030, reflecting GDP growth over the next 25 years that will be higher than the rate recorded over the last 25 years. Emerging economies will comprise an increasing share of world GDP.
Exhibit 5: GDP growth by selected countries and regions, % per year (based on year 2000 dollars)
Source: www.eia.doe.gov/oiaf/ieo/pdf/0484(2007).pdf
Oil supply and demand
World oil consumption in the fourth quarter of 2007 is expected to rise by 1.7 million barrels per day above fourth quarter 2006 levels. According to EIA, US consumption increased by 0.17 million bbl/d year-over-year in the first half of 2007. Consumption in 2008 is projected to rise by 1.4 million bbl/d.
Exhibit 6: Oil: Demand, m b/d
Source: http://www.eia.doe.gov/emeu/steo/pub/3tab.html
On the supply side, EIA projects declining oil inventories. OPEC crude production in 2008 is expected to average 31.7 million bbl/d, or 1.4 million higher than 2007 levels. Even with increased OPEC output, however, world surplus production capacity will remain fairly low at around 2-3 million bbl/d.
Exhibit 7: Oil: supply, m b/d
Source: http://www.eia.doe.gov/emeu/steo/pub/3tab.html
In 2007, inventories remain well below prior year levels. Data for the US indicate that inventories declined below the 5-year average in November. As inventories continue to draw down and demand rises, crude oil becomes even more valuable.
Exhibit 8: Inventories in three major OECD Markets
Source: http://www.neb.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/nrgytlk/tlkwntr/tlkwntrprsnttn-eng.html
EIA projects OECD commercial inventories will reach a five-year low by year-end 2008.
Steady oil prices
Daily closing spot prices for benchmark West Texas Intermediate (WTI) crude peaked at $99.16 per barrel on November 20 but have since declined to a $94-96 range in anticipation of increased OPEC production. Prices for benchmark WTI are projected to increase from an average of $66.024 per barrel in 2006 to $71.36 per barrel in 2007 and to nearly $80 per barrel in 2008.
Exhibit 9: NYMEX Crude Oil Futures Close (Front Month)
Source: www.wtrg.com/daily/crudeoilprice.html
Natural gas market
Natural gas consumption is expected to rise 4.6% in 2008 because of increased demand from the residential, commercial, and electric power sectors. Total US natural gas production is expected to rise 1.3% in 2007 and 0.9% in 2008. As of November 30, 2007, natural gas in storage was 3.44 trillion cubic feet, or 400 billion cubic feet above the 5-year average.
In November 2007, Henry Hub spot prices for natural gas averaged $7.31 per thousand cubic feet (MCF), which was 5.1%, higher than the average October spot price. Henry Hub spot prices are expected to peak at $8.22 per MCF in January 2008. Natural gas futures are expected to trade between $7.00-8.00 per MCF.
Record high crude oil prices are not pushing natural gas prices significantly higher. Stronger US domestic production and higher liquefied natural gas (LNG) imports have offset reduced Canadian gas production. Overall, the North American natural gas supply is expected to remain fairly flat over the winter and begin building again late in the spring.
Exhibit 10: Natural Gas Spot Henry Hub
Source: www.wtrg.com/daily/clfclose.gif
3 http://www.eia.doe.gov/oiaf/ieo/pdf/0484(2007).pdf
4 www.eia.doe.gov/emeu/steo/pub/contents.html
Financial Analysis
Income statement
Following a series of acquisitions and joint ventures, UPDA has begun generating meaningful revenues from its oil and gas operations.
Exhibit 11: Revenue, $ Thousand
Source: SEC Filings
In the nine months ended September 30, 2007, natural gas revenue rose to $712,000 from $70,000 in the prior year nine-month period. This revenue growth is attributable primarily to production contributions from Catlin and Heartland.
Revenues from oil and condensate sales increased to $19.9 million during the first nine months of 2007 from $274,000 in the prior year. Revenue gains reflect condensate sales by Continental Fuels and from storage tanks in Port of Brownsville facility. In addition, revenues benefited from increased production from producing wells owned by its Canyon Creek and Catlin subsidiaries.
Exhibit 12: Revenue segments, $ thousand
Source: SEC Filings
Going forward, the recent completed Geer Tank Trucks, Inc. acquisition further expands the Company's growth opportunities and adds $50 miliion to annualized revenues.
Expenses
UPDA's operating expenses rose to $12.6 million in the first nine months of 2007 mainly due to the purchase and consolidation of Continental Fuels, Heartland, Catlin and Aztec. In addition, the Company reported other expenses of $90.9 million mainly due to a non-recurring loss on the settlement of Notes Payable for Common Stock relating to the Continental Fuels acquisition.
As a result, the Company reported a net loss of $102.1 million or $0.47 per share for the first nine months of 2007.
Exhibit 13: Income statement, $ thousands
Income statement, $ thousands
Liquidity and capital resources
The Company has reported operating and net losses, negative cash flow and working capital, and an accumulated deficit that raise doubts about its ability to continue as a going concern. UPDA has secured financing for its operations mainly by issuing shares of common and preferred stock and notes.
During the first nine months of 2007 the Company consumed cash of $5.9 million in operations and $3.4 million in investing activities. Cash raised through financing activities totaled $9.8 million and consisted of the following:
$3.5 million from the sale of Class B preferred stock;
$1.8 million advance received under a line of credit;
$0.9 million proceeds of cash received from Heartland subsidiary acquisition;
$2.7 million proceeds of notes and loans payable from related parties; and
$1 million proceeds of notes and loans payable from third parties.
Exhibit 14: Balance sheet, $ thousands
Source: SEC Filings
Valuation and Analyst Summary
High energy prices are encouraging oil and gas companies to increase drilling investments and actively develop new oil and gas reserves. Strong revenue and earnings growth for these companies is driving valuation multiples above historic levels and close to S&P 500 levels.
For valuation purposes, we divided UPDA's business into two segments:
Trading: This business is conducted though the Company's Continental Fuels segment and entails petroleum storage and the operation of a terminal facility in the Port of Brownsville, Texas, as well as blending and distribution businesses.
Oil and gas exploration: These operations are conducted by Heartland Oil and Gas Corp, Aztec Well Services, Canyon Creek and Catlin Oil & Gas. The Company has interests in oil and gas leases encompassing approximately one million acres and 216 operating wells.
Exhibit 15: Peer comparison
Source: Yahoo Finance
Oil and gas storage and distribution businesses are currently trading at Price/Sales multiples averaging around one time forward revenues while early stage oil and gas exploration companies are trading at Price/Sales multiples ranging around four times forward revenues.
UPDA's energy trading business
The Company's trading business generated revenues approaching $12 million in the third quarter of 2007. Going forward, the acquisition of Geer Tank Trucks is likely to add approximately $50 million to annualized revenues. This acquisition, combined with the Company's marketing and facility expansion initiatives, will likely push 2008 pro forma revenues to a $120 million range.
Multiplying our 2008 revenue estimate by the peer group 1.0 times Price/Sales multiple we derive a $120 million value for UPDA's energy trading business.
UPDA's oil and gas exploration business
At year-end 2006, UPDA had proven reserves of approximately 16,000 barrels of oil (MBD) and 110 million cubic feet (MMCF) of natural gas. Through the April 2007 purchase of a majority interest in Heartland Oil and Gas Corporation, UPDA gains drilling access to more than one million acres in the gas-prolific Cherokee Basin and Forest City Basin in Kansas. The majority of this acreage has yet to be explored and developed.
The reserve potential for both the Cherokee Basin and the Forest City Basin is enormous. The Petroleum Technology Transfer Council (1999) estimates nearly 10 trillion cubic feet of natural gas in eastern Kansas alone, while the Forest City Basin is believed to contain approximately one trillion cubic feet of natural gas.
Going forward, additional drilling and connecting venting wells to gas pipelines could easily push production capacity to 2,000 MCF per day in 2008 and 4,000 MCF per day in 2009. Considering also the significant production increases targeted for the Palo Pinto wells in Texas, these estimates could prove conservative. At production levels of 4,000 MCF/day, oil and gas exploration revenues could approach $10.1 million by 2009.
Multiplying our 2009 revenue estimate by the peer group 4.1 times Price/Sales multiple and discounting the result by a 12% weighted average cost of capital, we derive a $37 million value for UPDA's oil and gas exploration and production business.
UPDA valuation
UPDA's value is the $157 million sum of the fair values of its oil and gas trading and exploration businesses. Also taking into account the Company's 87% ownership interest in its largest subsidiaries, we derive a $0.16 price target for UPDA shares.
Accordingly, we are initiating coverage of Universal Property Development and Acquisition Corporation with a Speculative Buy rating and a $0.16 price target. However, we strongly advise investors to consider the risk factors mentioned below since the Company faces many challenges in attaining its production targets.
Investment Risks
Risks related to the oil and gas business
The search for oil and gas reserves frequently results in unprofitable efforts, not only from dry holes, but also from wells that, though productive, fail to produce in quantities sufficient to produce a profit after costs are deducted. No assurance can be given that UPDA will be able to find, acquire or develop economically viable oil and gas reserves.
Uncertainty of reserve estimates
The process of estimating oil and natural gas reserves is complex. Reserve estimates require interpretations of available technical data and many assumptions. Inaccuracies in estimating reserves could materially affect the Company's future reserve value and revenue prospects.
Uncertainty of reserve estimates
The Company competes for acquisitions and resources with a number of companies that have greater financial resources, longer operating histories and a record of successful exploration. The acquisition market for oil and gas properties has become extremely competitive and the Company may be unable to acquire additional oil and gas properties on acceptable terms.
Need for additional financing
Since UPDA begun its oil and natural gas operations, it has reported operating and net losses. Although the Company anticipates rising revenues in 2008, the Company currently must rely on external financing to fund its ongoing operations. Additional equity sales dilute the ownership interest of existing shareholders and more loans could constrain the Company's operations by increasing debt service requirements.
Management
Kamal Abdallah,
Chairman, CEO Mr. Abdallah brings to the Company over 15 years experience in commercial real estate investment, financing and development. Mr. Abdallah became UPDA`s Chairman and CEO in 2005 and successfully implemented a strategy to position the Company as an energy asset holding company and incubator. He managed its asset acquisition program and expanded its holdings to include multiple subsidiaries and investments in publicly-traded energy companies. Mr. Abdallah has promoted UPDA's business in Dubai, Casablanca, Zurich and Frankfurt. In addition, he has met with investment bankers and institutional investors in New York, Washington DC and other US money centers. Mr. Abdallah attended Oakland Community College and Oakland University in Michigan where he studied accounting and finance.
Christopher J. McCauley,
Vice President and Secretary Mr. McCauley has over 20 years experience in the areas of real estate and commercial law and over 10 years experience in oil and gas acquisitions and operations. Since joining UPDA in 2005, Mr. McCauley has served as its Vice President, Secretary and a board member. Mr. McCauley chairs the Company's due diligence committee and has played a major role in acquisitions that have expanded UPDA's asset base and operations. Mr. McCauley is also responsible for UPDA's IR/PR programs and has overseen the expansion of the Company's Internet presence to facilitate communications with shareholders, the investment community and the general public. Mr. McCauley graduated from Ohio State University and Cleveland-Marshall College of Law.
Steve Barrera,
Director Mr. Barrera brings over 30 years experience in real estate development and construction to UPDA. Mr. Barrera spent over 17 years performing large loss mitigation for insurance firms such as Lloyd's of London, AIG, Royal Insurance, CIGNA and USAA as well as for the United States Department of Agriculture and Department of Labor. Mr. Barrera currently heads UPDA's acquisition area and has been instrumental in developing and implementing its aggressive growth strategy. Mr. Barrera received a marketing degree from St. Mary's University in San Antonio, Texas.
Brad Moore,
Vice President of Human Resources Mr. Moore has over 30 years experience in business administration. Prior to joining UPDA, Mr. Moore served as an administrator at the Hughes Corporation, President of Bramo Corporation and Vice President of Rowell Distributing Company. He was appointed UPDA's Vice President of Human Resources in October, 2006. Mr. Moore graduated from the University of Florida in Palm Beach.
Joseph M. Angioi,
Corporate Finance Mr. Angioi is UPDA's Manager of Corporate Finance. Prior to joining UPDA, Mr. Angioi worked in investment banking, holding the position of President and CEO of TAG Financial Group LLC, a firm that structured financing for power generating plants, hotels and commercial real estate developments across the US, Europe and Latin America. In addition, Mr. Angioi held positions with nationally recognized financial institutions such as Morgan Stanley, Merrill Lynch and UBS as an Investment Advisor. Mr. Angioi graduated from Suffolk College.
Jack Baker,
Corporate Communications Mr. Baker has over 12 years experience in public relations and investor relations through positions held with companies such as Sound Money Investors, Continental Capital and Equities, Marana Group, Sequence Marketing and the Cervelle Group. Mr. Baker directs UPDA's day-to-day PR and IR activities and also serves as Communications Officer for UPDA`s Heartland and Continental Fuels subsidiaries.
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