STP.V: Bobwins, Thanks for the heads-up on this stock. Got in at 1.29 average. This article in resource Investor is a follow-up to the one you posted earlier. The author seems to be really pounding the drum on this one.
Little-Known Oil Sands Junior Trading at Fraction of Peer Valuations
By David J. DesLauriers
31 Jan 2007 at 05:23 PM GMT-05:00
TORONTO (ResourceInvestor.com) -- Your correspondent has frequently looked askance at proponents of the efficient market theory, and pointed to numerous examples in the junior sector that belie that school of thought.
Southern Pacific Resource Corp. [TSXv:STP] could be one the most powerful examples of this and we believe that it could be a multi-bagger situation – in months, not years, making it one of the best names that we have come across in any sector, in a long time.
Your correspondent has identified multi-baggers in the past, but this situation could be a particularly outstanding value proposition with a short catalyst fuse.
Valuation
STP was C$1.25 as this article was being penned, but by the time of publication the stock had jumped to a C$1.45 close, possibly because of the recovery in the oil price over the past week.
At today’s price, and with about 50 million shares fully diluted, Southern Pacific has a market capitalization of C$72.5 million, and a full treasury.
The best way to value the company is to look at what its principal asset is worth – and the most sensible way to go about that is to look at what has recently been paid for similar assets.
The South Koreans acquired Newmont’s [NYSE:NEM] oil sands assets a few months ago for about C$300 million or roughly US$1 per recoverable barrel for their 245 million recoverable barrels, across the Proven, Probable and Possible categories. These properties, just to the east of STP’s leases, are also amenable to SAGD, and at the same stage of development.
If one applied the same US$1 per recoverable barrel to Southern Pacific’s independent recoverable resource assessment prepared by international petroleum consultants Degolyer & MacNaughton, and factored in the current exchange rate, one would arrive at a valuation of C$184 million, or C$3.68 per fully diluted share.
This is where STP should be trading right now based on what Newmont was paid in real dollars just a few months ago. Investors need to keep in mind that, to our knowledge, STP may be the cheapest way to play the oil sands, as there are almost no pure oil sands plays listed, and definitely none with a market capitalization this small.
Comparables that have completed development work on a similar scale to where Southern Pacific should be by the end of April after its current comprehensive program include the well-followed and high-flying Oilsands Quest [AMEX:BQI], previously known as CanWest Petroleum, which boasts a market capitalization of US$700 million.
In addition to what we see as an immediate C$3+ per share price target for STP based on the Newmont valuation, we envisage a very dramatic expansion in recoverable barrels when the company’s current ongoing work program is completed, and new numbers are published in just 3 months.
Adding Recoverable Barrels
Southern Pacific expects that by the end of April it will have an updated independent resource assessment.
First, it is estimated that the recoverability factor on STP’s current 156 million barrels over 11 sections will grow from 35% to 50% with the added data from additional drilling, log and core analysis and seismic. This alone could boost recoverable barrels by 43% to 223 million barrels net to Southern Pacific’s interest in the leases.
Further, STP has 14 other sections (for a total of 25) on which work is being completed and which it is anticipated will show just as well as the initial 11. All of these lands lie within the same North-South channel system of the McMurray Formation. Indeed, given the large area and the significant amount of geological mapping that has been done on the oil sands formations in the entire “Oil Sands Fairway” in this area, there is no reason to believe that this environment will not be host to more of the same. As investors will see by looking at the map on Pg. 6 of Southern Pacific’s Corporate Presentation, the company is right in the middle of what it calls the “Oil Sands Fairway,” home to ubiquitous discovery.
If one chose to budget for this, and assumed that the company would be able to demonstrate the same success on a per section basis, the result would be an additional 283 million recoverable barrels net to STP across the 3P’s (Proven, Probable, Possible).
The grand total could therefore amount to 506 million recoverable barrels net to Southern Pacific across the company’s total land position of 25 sections, when Degolyer & MacNaughton update the numbers to incorporate the new data before the end of April.
At the Newmont valuation of US$1 per recoverable barrel, recently set and paid by the South Koreans, the result would be a valuation of C$597 million, or C$11.94 per STP share. Cut this number in half, risk adjust it any way you want, the addition of substantial recoverable barrels could catalyze something between a 5X – 10X return in STP from present levels, in the next three months.
Conclusion
We see this as one of the best opportunities that we have come across in some time. STP may be one of the last chances to play the oil sands in a pure play listed vehicle, with an early entry point at a tiny market capitalization, and with great leverage, still, to the tremendous number of recoverable barrels in the ground.
Based on the fact that all listed peers have market capitalizations in the centi-millions and billions, and given the precedent set by the South Koreans in establishing what these types of assets are worth, we believe that STP is hard to ignore, and could well become the next oil sands institutional market darling.
Indeed, we see STP as a potential re-run of Connacher [TSX:CLL] when it was all of a sudden discovered and ran from 80 cents to C$6 in a 6-month period between July 2005, and January 2006 (and as a second chance for those who missed that run).
