The Trading Floor

[Arctec]

Weekly Update March 11, 2007

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The oil & gas sector has performed very poorly this past year as oil stabilized and natural gas prices fell in 1/2 from highs hit last winter. Because of this performace, we've had little interest in the sector until now. In past years we've done very well with these stocks by tracking cashflow mutliples and managing risk by using guidelines on their reserves and debt levels.

During 2006 I found many oil & gas companies took on terribly high levels of debt and were not able to justify these levels with strong reserve or production growth. Yet the cashflow multiples in most cases have remained quite high - primarily because the price of oil has remained high (although gas has suffered significantly). Because of these high cashflow multiples I avoided new oil/gas picks because the risks were too high.

Geocan is our first entry back into the sector. Natural gas is stabilizing again and crude oil prices continue to do very well. Even at $40 or $50 per barrel (currently $60), these companies can make great money. Geocan is trading near the 52 week low (and has good liquidity down here), is one of the few trading with a low cashflow multiple, and after Q1/07, should move production into the 4500 boepd range.


Geocan Energy (GCA.T $1.28)
www.geocan.com

52 week High $2.20 / Low $1.26

The stock always runs the risk of moving a bit lower because that is the current trend. However, the numbers indicate that there is excellent value down here and the best gains will (in theory) be made by fighting this current negative bias towards the sector. In the past I only followed companies with debt equivalent to one year cashflow, but that is very difficult to find right now. And those with better ratios, are also trading at much higher cashflow multiples. If Geocan moves production into the range of 4500 boepd (barrel of oil equivalent per day), they should generate cashflow in the range of $30 million annually or $0.55/share. At $1.30 this is a cashflow multiple of 2.3 - very attractive when 4 or higher is not uncommon.

They have a $31 million capital budget approved for 2007 (detailed below) and an 87% drill success rate this past year. If things go well in 2007, they could hit 5000 boepd. At this level, annual cashflow would move into the range of $35 million or $0.63/share. A realistic multiple would be in the range of 4 times cashflow or approx. $2.50/share. Under this scenario we're targeting a 12 month double from this level. Low compared to what we're normally looking for but Geocan provides less risk than normal and with any oil/gas play, they can hit wells that change fundamentals quickly.

There is decent liquidity near $1.30, the fundamentals are strong, and the chart is very attractive from a risk perspective. Increased activity may spook the sellers at this level but with patience, a person can do quite well with scenarios like this.

Key Fundamentals

Development: target drilling in Q1 could add approx. 500 boepd (8 wells at a cost of $3.5 million)

Exploration: target drilling in Q1 could add approx. 450 boepd (7 wells at a cost of $4.8 million)

Total cost in Q1 = $8.3 million
900 boepd produces approx. $6 million in pure annual cashflow
Existing production approx. 3600 boepd (prior to the above)
Behind pipe at 2006 year end - 300 boepd

2006 est. YE debt $48MM = 1.65 X 2007 Projected cashflow

55.6MM shares basic (62.4MM diluted)
30% + institutionally held
10% + by mgmt & directors

Net undeveloped acres of exploration land - 134,480

current reserves approx. 9 million boe
38% natural gas, 23% light/medium oil and NGL's, and 39% heavy oil
2006 third party assessed $2.37 NAV

$31.5 MM 2007 capital budget funded by cash flow and existing bank facilities

34 wells to be drilled in 2007 split 44% exploration and 56% development - 53% of the wells will target oil and 47% of the wells will target natural gas. High drilling success rate with more than 87% of wells completed

Analyst Coverage (stock is down since all these)

Octagon Capital Corporation - Jeffrey Fiell CFA - Perform (Jan 31/07)
Maison Placements Canada - Josef Schachter CFA - Outperform (Sept 25/06)
Haywood Securities - Fredrick Kozak P.Eng - Perform (Jan 09/07)
Acumen Capital Partners - Rob Moss CFA - Buy (Oct 27/06)




Danny Deadlock
Microcap.com

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