Sintana Energy: Enormous Return Potential With Catalysts In Plain Sight
Apr. 6, 2021 2:07 PM ET |About: Sintana Energy Inc. (ZDEXF)
Summary
Sintana Energy is an under-followed oil and gas explorer sitting on a massive oil discovery in Columbia.
ExxonMobil will spend US $53 million on horizontal fracking wells as part of their 70% farm-in agreement.
The upside of investing in Sintana is multiples of its current stock price, with important near-term catalysts in plain site.
Sintana Energy Inc. is an oil and gas exploration company listed on the Canadian TSX Venture Exchange under the trading symbol “SEI”. At the time of writing, Sintana had 130.4 million shares outstanding and a market capitalization of CAD $26 million. The company describes itself “as targeting conventional and unconventional oil and gas assets in South America, with a focus on exploration in Colombia”. In reality, Sintana has interest in one property in Columbia — 43,158 gross acres referred to as VMM-37 Block, in the prolific oil producing of the Middle Magdalena Basin.
The Middle Magdalena is the oldest producing basin in Colombia, dating back to the 1918 discovery of the giant La Cira-Infantas field complex (900 million barrels). Historically, only the Tertiary section (conventional reservoirs) has been systematically explored. Approximately two billion barrels of oil have been produced in the basin over the last century.
Key Developments
In 2012, Sintana Energy completed a farm-out agreement in which ExxonMobil Corporation would earn a 70% participation interest in Sintana’s unconventional oil resources on the VMM-37 Block. The agreement also allows Sintana to retain 100% of all conventional resources, with ExxonMobil paying 100% of the exploration and development costs for the first two wells.
The agreement with ExxonMobil has two components — the Farm-Out and the Work Program:
VMM-37 Farm-out with ExxonMobil
Major elements of the VMM-37 Agreement between Sintana and ExxonMobil are as follows;
· ExxonMobil will acquire an undivided 70% participation interest and operatorship in the formations defined as unconventional by completing the Work Program.
· Sintana will retain the remaining 30% interest in the unconventional play as well as its current 100% participation interest in the conventional resources overlying the top of the unconventional interval.
VMM-37 Work Program
· ExxonMobil will pay 100% of all Exploration Phase I well costs (2 wells + 1 horizontal leg, with a minimum 4,000’ lateral). Additional consideration was paid to compensate Sintana for its past expenses connected with the block.
· ExxonMobil will have an option to proceed to the next phase. In this development phase, it will pay 100% of all additional costs to a maximum of US $45 million, of which US $10 million will be recouped by ExxonMobil from 50% of Sintana's production proceeds.
· As agreed by Sintana and ExxonMobil, as joint participants in the Block, good faith efforts will be made to locate exploration wells targeting the unconventional play in such a way as to also test conventional prospects.
In September 2015, ExxonMobil completed the drilling of the first vertical well (the Manati Blanco-1 Well), to ~14,345’ - 3,100’ gross pay (~1,000’ net), thereby identifying a large potential oil discovery.
An independent NI51-101 evaluation of the VMM-37 Block completed by Petrotech Engineering Ltd., calculated the unrisked prospective recoverable P50 estimate of Sintana’s interests to be 210 million barrels of unconventional and 50 million barrels of conventional oil. A Statement of Reserves Data pursuant to NI 51-101 has not been completed making this estimate unproven, however, the VMM-37 Block is also surrounded by producing oil wells, suggesting the potential for a large, verifiable oil discovery is very real.
However, since ExxonMobil completed the Manati-Blanco-1 Well, they have been awaiting a government permit to frack and complete the well. The key holdup is that Columbia has a moratorium on commercial exploitation of unconventional energy deposits in Colombia, which includes the hydraulic fracturing of shale reserves. This explains the long delay in moving the Manati-Blanco-1 Well on Sintana’s lands towards a production decision.
An Important Catalyst Finally Emerges
Columbia has been an oil producing nation since the early 1900’s. However, more recently, it is on the verge of a production crisis with oil reserves precariously low. In April 2020, the Colombia Ministry of Mines and Energy declared that Colombia had just over two billion barrels of proven oil reserves with a 6.3 year production life and just over three trillion cubic feet of natural gas which will last eight years. That stresses the urgent need for Colombia to boost its hydrocarbon reserves, which can only be achieved through additional significant investment in exploration.
Following on the heels of the ministry’s declaration, Colombia’s National Hydrocarbons Agency (the ‘AHN’), announced they were going to accept proposals from oil companies for the development of pilot projects for hydraulic fracturing. While the moratorium on commercial exploitation of unconventional energy deposits including the hydraulic fracturing of shale reserves remains in place, the Columbia courts have said that pilot projects can proceed with the intent of gathering scientific information. The information gathered by running the pilot projects will be used to consider the future potential for commercial development of unconventional resources.
ExxonMobil Receives Government Approval for Frac Pilot on Sintana’s VMM-37 Block
On April 1, 2021, The Journal of Petroleum Technology published a story titled: “Colombia Gives Provisional Nod to ExxonMobil Hydraulic Fracturing Pilot”. The story went on to report:
”Colombia’s National Hydrocarbons Agency (AHN) has given a provisional go-ahead to ExxonMobil’s plan for the development of a pilot project for hydraulic fracturing in the country’s Middle Magdalena Valley basin. ExxonMobil submitted its pilot plans last month. The contract for the project is expected to be signed on 8 April, according to Reuters citing an AHN official. ExxonMobil holds a 70% stake in the VMM37 block. Canada’s Sintana Energy holds the remaining 30%.”
The pilot project to be carried out on Sintana’s property has been dubbed “Platero”. Exxon also went on to announce they will spend US $53 million to conduct the test pilot.
What does this all mean for Sintana and its stock price?
Speculating on the value of the VMM-37 Block to Sintana and its potential stock price would certainly place an investment in the stock, in the speculative and high-risk category. Using the independent, unrisked reserve calculation produced by Petrotech Engineering Inc., Sintana appears to have the potential for 210 million barrels of unconventional and 50 million barrels of conventional oil. Using a very simple back of the envelope calculation of $1 per barrel of oil x 260 million barrels, would suggest a value of CAD $260 million. With 130 million shares outstanding, this would imply a value of CAD $2 per share. While that figure is arguably highly contentious given the early stage nature of the discovery, even if one was to discount that figure by a further 50%, the stock could be worth CAD $1 per share. With the stock closing March 31 at CAD $0.20 per share, there is arguably a case to be made for a 500% return from current levels.
What are the risks?
There are plenty to be sure, but the two most prominent are:
1. Exxon determines that it is uneconomic to produce oil from the property after conducting the pilots; and
2. The Columbian government fails to approve hydraulic fracking oil production beyond the scientific / pilot discovery phase.
There are risks to Sintana as well given that the company has no revenues, and has minimal cash on its balance sheet. For the year ending December 31, 2020, the company reported a cash balance of CAD $104,049. The good news is that the company has minimal operations and experienced a cash outflow of only CAD $69,926 in 2020. Over the last few years, the company has been able to meet its financial obligations by raising cash through the exercise of issued warrants. In the company’s 2020 Management Discussion and Analysis report, they disclosed they will likely have to raise capital in 2021 to carry on operations.
Bottom Line
Sintana Energy is a penny stock trading at CAD $0.20 per share. They own a large oil property in a proven oil producing region of a country that desperately needs to find new sources of oil production. Sintana has attracted one of the world’s largest oil producing companies in ExxonMobil, who has completed drilling, and is willing to invest an additional US $53 million to investigate whether they can bring the property into production. In exchange, Sintana does not have to spend or incur any direct out of pocket costs for Exxon to run the pilot projects, and Sintana still retains 30% of any shale production and 100% of any conventional production that may result.
At the end of the day, it comes down to this. Why would a company the size of ExxonMobil be interested in a small Canadian company with a far off property in Columbia unless there was something significant to pursue. And that reason alone, may be worth investing in Sintana to find out.
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