Why This Micro-Cap NatGas Company Could Attract the O&G Majors!
By Doug Beiers
05 Apr 2006 at 02:45 PM EDT
TORONTO (TheSimpleInvestor.ca) -- How does a Canadian junior gas producer expect to grab the attention of major oil companies? For a start, by controlling what some consider the most prospective parcel of natural gas real estate on the North American continent.
Alberta gas and oil exploration lands are commonly bid at 10x the going rate of just 1-2 years ago. Northern Sun Explorations [TSXv:NSE] holds the rights to several million acres of prime natural gas property that adjoins the Alberta border in the Northwest Territories (NWT).
Location, Location, Location!
Deposits of oil & natural gas do not respect lines on a map. Major discoveries and established production border the south and west of the NSE property, plus, since the 1970s, Paramount Resources [TSX:POU] has been pumping gas from a small parcel surrounded by NSE lands.
Wells drilled here in the 50s and 60s were targeting oil but encountered gas. Gas was trading for pennies, so they were all shut-in. There are some wells that flared 50 mmcf/d (8,000 boe/d). A quote from a recent NSE power point description of their NWT land parcel: "The parcel surrounds Paramount / Husky Cameron Hills property, over 20 million mcf/d production, the only grandfathered producing land in the Ka’a’gee Tu Traditional Territory."
"Berger Inquiry"
In the 1970s all oil and gas development in the NWT was placed on hold as a result of a multi-year inquiry by Justice Thomas Berger. This resulted in a 1975 moratorium placed on all new resource development in the Western Arctic to allow land claim issues between the aboriginal population and Federal Government to be sorted out. This would appear to be in the final stages of completed agreements with only minor details to be ironed out.
A statement by NSE President Chris Cooper: "The Ka’a’gee Tu First Nation is currently awaiting an approval to a framework for the Oil & Gas Rights to their land from the Federal Government."
Motivation
It is obvious that there are serious world-wide concerns about capturing long-term access to reasonably priced energy. Natural gas is also considered by many to be "green" in that there is negligible pollution in gas consumption or production. It would seem that the only factor standing in the way of unlocking this 40-million acre natural gas treasure is a final agreement and trust. I expect that the new Conservative government will be motivated negotiators. NSEs successful history of working closely with aboriginal groups has built the trust that enabled this micro-cap company to access such a potentially rich resource.
NSE President Chris Cooper is a veteran of building success in the oil patch, and I expect Northern Sun Exploration to be Coopers' crowning achievement that follows many others, including:
Co-founder and director of Choice Resources Corp. [TSXv:CZE], an intermediate oil and gas producer with over 1,400 boepd;
Co-founder and director of Watch Resources Ltd. [TSXv:WR], a public gas producer in a joint venture with the Fishing Lake Métis Settlement in northern Alberta;
Co-founder and director of Banks Energy Inc. [TSXv:BKL], a public oil and gas producer in a joint venture with the Poundmaker Cree First Nation of Saskatchewan (recently acquired by Arapahoe Energy Corp. [TSXv:AAO]);
Former director of Pan-Global Energy [TSXv:PIE], a public oil and gas producer in a joint venture partnership with the Onion Lake First Nation of Saskatchewan.
Trust
In a recent conversation with Chris Cooper, he mentioned that they have been working with the Ka’a’gee Tu people for 5-6 years now. This is years prior to the 2003 launch of the company "Northern Sun Exploration".
Over this time the company has researched and documented such important details as: key hunting and trapping areas, sacred burial grounds, seasonal and migration patterns of wildlife, aspirations of the "First Nation" people for their future and the future of their children. They communicate pretty much on a daily basis. Nothing less would have been acceptable, and only a patient and culturally sensitive personality could have won the trust of the caretakers of this land.
To an outsider the logical choice for the Ka’a’gee Tu to pen this deal would have been an established "major" oil company, like Paramount Resources. After all they are already producing gas on this land from their "grandfathered" wells. That didn't happen, and it says a lot about the ethics and talent of Chris Cooper's management team.
Mackenzie Valley Pipeline
Does NSE need the Mackenzie Valley Pipeline to unlock their gas deposits? Yes and No.
The planned route for the MVP does cross this property, and will obviously greatly enhance its value. But, they are not waiting for this pipeline to begin the process of discovering and producing oil and gas on these lands.
There is a proposal currently in play to implement a "pilot project" on a small portion (4 million acres) that the company describes in these words: "The Company, the Ka’a’gee Tu community with the Federal governments cooperation propose to open selected Ka’a’gee Tu Traditional lands for development."
There are a number of underutilized National Energy Board regulated pipelines that the company could tie-into immediately - if and when this pilot project is successfully launched.
NSE Is Undervalued Based on Current Production
Current production in Alberta and Saskatchewan of approximately 550 boe/d is expected to be above 1,300 boe/d by the end of 2006. This means that the company is actively increasing value even without consideration of the NWT property. Once existing reserves are tied in, production will exceed 1,000 boe/d.
NSE have a very aggressive drilling program underway in Alberta and Saskatchewan. With 1.5 million cash, $250,000/month in gross revenue, 9 wells waiting for results, drilling another 11 (or more) wells this year - the company is continually building value. One well they expect to begin drilling in June is "high impact" which alone upon success could add from 250-400 boe/d. The company is confident about their chances for success on it.
With a NAV of $0.72 using $7 gas (not including 200 boe/d behind pipe or the NWT lands) NSE appears undervalued by any measure. At the time of this article the share price was trading around $0.60 giving it a fully diluted market cap of just $36 million. Most juniors with such a 1st class management team and historically successful exploration team trade at a premium to their NAV.
Sometimes markets are inefficient, and this could be the case here. NSE is scheduled to more than double production by year end, and they have the outstanding blue-sky potential of 40 million acres in the NWT. This to me presents an outstanding investment opportunity. Maybe that is how some succeed so well with their investments, by accumulating overlooked gems like Northern Sun and waiting for the market to recognize their true potential. I'm betting on it.
If this company interests you I recommend you visit their website and call them with your questions. They have an up-to-date power-point presentation that they will email to you upon request. It tells the story very well.
Copyright © The Simple Investor 2006
DISCLAIMER: The author has owned shares in Northern Sun Exploration for over one year, and has continued to accumulate.
Doug Beiers is a private investor who spends several hours a day seeking investments that are undervalued and under appreciated. As his website title states, his focus is simple straight forward companies in “country safe” locations. There is no fee to access his research which is available on his website for any who may be interested.
