David Pescod's Late Edition June 1, 2007
AN INTERVIEW WITH ANDY GUSTAJTIS
(As of May 30, 2007)
We are with Andy Gustajtis, the D & D Securities financial guru, who probably has the hottest hand in the oil and gas patch in picking stocks over the last year or two. He picked Corridor Resources (CDH) – who would have thought there was gas in New Brunswick way back at under a $1.00, but he was there. Similar picks such as Rally Energy (RAL), Kodiak Oil & Gas (KOG) and many others have fared equally as well. It’s time for an update so we caught the busy Gustajtis late on Wednesday…
Dave: Andy, it’s time for an update on some of your favorite stories and I guess we should start with your most improbable success story, Corridor Resources.
Andy: Just because the discovery is in New Brunswick and no one in the fine City of Calgary seems to believe there is any commercial hydrocarbons outside of the western sedimentary Basin in this country of ours, I don’t know why you would call it improbable.
Dave: They should be on production here within a couple of weeks…
Andy: There is a ribbon-cutting ceremony set for June 27th. “Living Gresner’s Dream” is the Theme on their invention - marking the first McCully gas production to the Maritime/Northeast Pipeline. Now the reference to Dr. Gresner, a Nova Scotian if I recall, is rather apropos. He’s the gentleman that ushered in the petroleum age as we know it and saved the whales from extinction.
He patented the process of distilling hydrocarbons to make kerosene and with that invention, the need of Boston Whalers to travel to the four corners of the world to slaughter the mammoth whales ceased and everybody focused their attention on finding hydrocarbons in the ground. Dr. Gresner’s initial source of hydrocarbon feed stock was the oil shales in New Brunswick.
Dave: This makes sense. But back to Corridor, they have two big plays coming, despite the fact the stock is already a sixbagger for you.
Andy: In all fairness, if this discovery was lying somewhere in the foothills of Alberta, no one would be surprised where the stock price is and very few people would have any qualms about continuing to remain very, very positive on the company.
This company has drilled 23 successful back-to-back gas wells. There has not been a dry hole drilled in the McCully field to date. There has been and continues to have amazing positive surprises with the ongoing drilling. It’s the lack of market that has limited the amount of production that this company has been able to enjoy the last few years.
A mere million a day or two million gross production out of the field of which half belongs to Potash. That’s all going to change with this pipeline hook-up; we are going to see gas flowing into Maritime/Northeast. Company Guidance suggests that field production should be approaching 50 million mcf a day by the end of the year and I think anybody looking at this story dispassionately and objectively would say that this is literally chapter one of the McCully Saga.
This is far, far from the end chapter. This is their first production, there has not been a dry hole, and we don’t know whether or not the Frederick Brook Shale is going to lend itself to commercial production, but certainly the indications are that the Shale may be as good as the Baxter Shale in Wyoming and if that’s the case, this is a huge play. I said when they discovered the gas in Hiram Brook that this was probably one of the largest natural gas discoveries made with a drill bit in the last ten years in Canada and I stand by that.
Dave: Now what kind of chances of success would you expect on this Shale play and of course, later this year, I believe it’s the last quarter, the Dawson Settlement is still the big play. Correct?
Andy: The Dawson Settlement is a formation that has not been tested at this location in New Brunswick and there are good reasons to speculate that if the formation exists at depth and is gas-charged, it could be a major gas zone in its own right. Hiram Brook is a 1 ½ TCF gas field. The Frederick Brook Shale, we know very little about it except that it’s very thick, it’s fractured, it has over pressured gas, they are going to attempt to test that shale later this summer and also later attempt to frac it. If they get production out of that zone, it certainly will make Hiram Brook look pretty small in comparison, I think. We are talking about a shale that’s 1000 feet or thicker and it may all be productive.
Dave: Any thoughts on the use of a very valuable rig to go and dig around P.E.I. yet again? Be polite.
Andy: True “exploration” companies are run by dreamers, explorationists, individuals that have the courage or the convictions to risk millions of dollars on science and hunches and other tools that they use, not often found today because of the risks and the odds of failure. Corridor has been interested in PEI from the earliest day of its formation.
They’ve been trying to get a commercial discovery in PEI now for over 10 years, they are going back again to have a closer look at it and since none of the sands in any of the wells drilled on PEI have ever been fraced and there is some good scientific evidence to suggest that there is commercial gas in PEI. I wish them luck and hope they are successful. I generally don’t like to back exploration plays. The odds are stacked against you. I prefer to get involved in companies after they’ve made a discovery.
Sometimes you have to pay a little bit more because the exploration risk is gone. For a good part of the last several years, you could have bought this stock for a pittance because no one cared. Now it’s getting up to a valuation where it’s beginning to reflect a portion of its value. If the Frederick Brook Shale is commercial and if there is gas in the Dawson Settlement, it’s going to be worth a great deal more than it is today.
Dave: Some brief comments on two of your picks that have done really well – Rally Energy, Abby Badwi’s company and Kodiak Oil and Gas in Wyoming.
Andy: An interesting choice of companies. I spoke with the Presidents of each today. In terms of Rally Energy, the stock is off its historical highs here by about $1.50. There is no particularly good reason why it has sold off as much as it has except that it’s had a good run and I suspect there has been some profit taking on it. I think the company has in Egypt, a project that will ultimately, probably produce 20,000 barrels a day or more. It is currently at about 6000 barrels and they are going to be drilling here in the next few weeks the Satellite Discovery that they press released a few weeks ago. As soon as they get a rig into Pakistan, they will be drilling a very, very large structure (it’s a structure you can actually see from space – it’s that large). I see it doubling in cash flow next year for the company and I think it certainly will look like a great story over the next several years. I see no reason to be overly concerned or negative on it. It has pulled back and entering a pretty decent buying range.
As for Kodiak, amazing! Here is a company that just a couple of years ago was having a hard time raising $3 or $4 million. They are sitting with about $40 million in cash. Their entire program for this year is funded. They are drilling their first horizontal well into the Baxter Shale.
Questar, which is working immediately to the south of the Kodiak lands, continues to move higher. The stock has literally doubled. This is a company that added about $4 billion in market cap in the last 12 months and I think all that value creation in the case of Questar was on the Baxter Shale and the best way to play the Baxter Shale play is through Kodiak. They have the best leverage.
The company has a great following in the U.S. – I think there are at least eight or nine firms that have very positive research out on the company and my hat is off to them. They’ve done a fabulous job. They are in control, they own 100% of their lands and they’ve got the funds to drill it up. I’m pleased, delighted and amazed at how well that stock has done.
Dave: Which gets us to Connacher/Petrolifera. With Petrolifera, it’s starting to create a buzz around Calgary and people are kind of excited about the 50 wells they are drilling in Argentina, but very much looking forward to their play in Peru that’s expected to be drilled the first quarter of next year.
Andy: Things are going very well over there. The company wouldn’t give me any hint on what their production numbers are. They are going to be putting out a press release here shortly updating the market on their activity and they didn’t really want to jump the gun, but I get the sense just by the level of excitement in their voice, that they believe that they are going to see production begin to rise again and I think that will be welcomed by the market.
They’ve got the equipment, they are drilling, they fixed some of their problems in the field and I remain optimistic that they will probably add another 20% or 30% production to their base in Argentina in the next quarter or two.
As far as Peru – it’s elephant hunting time. As soon as they get a rig, they will be drilling there and the potential is for a couple of TCF’s of gas and probably two or three hundred million barrels of oil, depending on whether it’s the northern or southern block. I think on any kind of positive news in terms of guidance, production improvements, drilling activity or options on when we can expect activity in Peru; I think this stock should start moving higher. It looks to me as if it’s waiting for some kind of a trigger to let that happen.
Dave: Associated company Connacher, which owns 26% of Petrolifera….
Andy: The SAGD project will be steaming later this summer. They will be in production on the tail end of the third or fourth quarter of this year. I get the sense that they are getting ready to make an application for their POD 2, that’s going to be another 10,000 barrels a day. I am convinced that they’ve got a company that will be producing 50,000 barrels a day of bitumen within the next five years. It will be 100% under their control. Their refinery they purchased for less than $50 million probably is going to give them flow equal to that this year. A purchase at one times cash flow is pretty astute.
Dave: You have a fairly aggressive price on Connacher at this time, yourself?
Andy: I do?
Dave: You were saying $8.00 a year from today.
Andy: I don’t know how aggressive that is. For a company that’s which is going to add 10,000 barrels a day every ten to 24 months, that to me, looks like a pretty cheap stock price.
Dave: Just in case people think that Andy walks on water or has the cure for cancer, we should bring up Stealth Ventures, which like many gassy stocks, has not had a lot of fun.
Andy: I can only tell you that if you take a look at Stealth and you take a look at my Kodiak and Corridor – the trading patterns in those stocks early in their game were no different. What I like about Stealth David, is that I’m not paying for an exploration story. They have clearly a major, major asset in Nova Scotia with the CBM. Yes, there has not been any ability on their part to show any commercial rates out of the work that they’ve done, but the gas is there. It’s a question of time and experimentation before they get the right combination of completion and drilling and de-watering and I am confident that will come. It’s a trillion cubic feet plus resource with a company that’s got a market cap of $80 million. I am prepared to take a little bit of time and wait until I get my $2 billion worth of valuation in that stock. Why get overly concerned about it? On the shale play in Alberta and Saskatchewan, there is some very, very positive news beginning to come out. They plan 25 additional wells, they’ve got five wells that they have on production, they are getting commercial rate out of the shale and they’ve assembled over a million acres net to their interest on this shale play.
The company is properly funded to carry on a very aggressive program. They are in a market that to date has not been that interesting, so you can buy the stock without having to pay a big premium. Just give them time.
There is nothing wrong with the Stealth story. It’s a real bargain waiting to be discovered.
Dave: Now we get to the exciting part of this whole affair. After all these successes over the last while, what would be your top three buys today?
Andy: On this reference to Corridor, we are in the bought-deal syndicate, so I’d rather not make any comments on that, because of regulatory issues. In terms of Stealth, the stock has not yet seen any share price appreciation.
It’s been around the $1.30 range for a while and common sense just tells me that you want to buy some of these stocks that just haven’t reacted. I think the natural gas market looks very, very positive to me over the next 12 months. I think you can virtually buy any wellfunded gas stock and expect at least a 30% to 50% gain.
I think in the case of Stealth, it will do better than that because I think they have a bigger bang for their buck than most. So I would put them on that list.
With Connacher, with all this good news with steaming imminent and production just around the corner, the financing is out of the way, and filing of POD 2 application, and additional 3D seismic that will probably identify POD 3 here in the coming months, I think it’s time to back up the truck.
I would certainly be buying Rally Energy into this recent weakness.
Dave: Thank you so much Andy!
AI
