Crude Oil Tar Sand Companies

[NYBob]

RealYellowbeard's Take for August -
Since January of 2006, I have been a shareholder in
Oilsands Quest (AMEX:BQI), which was previously known as
Canwest Petroleum (OTC.BB:CWPC).
I have actively participated in investment discussion forums since I bought in.
After a while, people began asking me for my opinion on the status of the company, so from time to time, I published my “take” of where I felt the stock had been, and where I thought it was going.

Over time, I have received many kind comments on these postings from investors of all sorts.
I hope to continue to post updated “takes”, especially for those new investors who would like the benefit of one man's due diligence and opinion.
Now, you should bear in mind that my ramblings are only that… my opinion.
But having said that, you should know that I try my best to neither pump nor bash… I try to call the situation as honestly I can.

ANCIENT HISTORY:
Back in 1974, Shell Clearwater drilled a number of test wells in northwestern Saskatchewan, and found bitumen in an unknown number of them. They did keep cores from a pair of bitumen bearing wells in T94R24W3 and T94R25W3. That’s Township 94, Range 24-25 West 3 for those who haven’t read many plat maps. This defines two 6 mile by 6 mile “townships” on the Saskatchewan-Alberta border. Gulf Canada came back into the area two years later, and drilled 6 more holes right in this same area. Now, at this time, bitumen that was 650 feet down was not good for anything. There was no economical way to extract it, and no real need to… so they filed away the information, stored those cores, and eventually sold off the land. The land passed from hand to hand, but was essentially left alone for many years.

LESS ANCIENT HISTORY:
Now, fast forward to 2002… when an ex-Uranium/Oil Shale venture named Uranium Power Corporation was bouncing from project to project, looking essentially for anything that would make them money. I won’t go so far as to call it a pump-and-dump, but they knew much more about corporate option plans and issuing stock than they did about oil exploration. They were very clever at hype, good at farming out projects, acquiring new land, and then promoting their holdings. These holdings eventually included the Pasquia Hill Oil Shale land, and (in 2004) a 1.4 million acre area of leases called the Firebag East permit area. They hired a Ph.D. geologist with experience in the area, and found that there might be a viable oilsand project in this area, as discovered by Shell and Gulf some 20 years before. At this point, they formed a subsidiary company, and brought in several people to run it, including Christopher Hopkins, who had been a part of a successful Synenco oilsands project, and who had a great deal of experience in this sort of project. One of their first orders of business (at this point) was to change the name from Uranium Power Corporation to Canwest Petroleum Corporation, and increase the amount of capitalization from 40 million shares to 100 million shares… because good news required more shares. (grin)

As time went on, it became evident to those of us observing, that Canwest Petroleum was still better at hyping and handing out free shares and options than developing an exploration program. Despite this, the OQI team was able to prove a discovered bitumen resource existed on the land. The friction between the OQI team and Canwest management increased as time went on, and eventually, a deal was struck, and the old management was bought out, and new management was brought in. The name of Canwest was dropped, and the corporation became Oilsands Quest, Inc. (BQI). By this time, despite all the fundamental promise that the BQI permit lands had, many major institutional investors had already formed their opinions of Canwest. In addition, the terms of the combination created a number of shares that some felt was excessive. These “exchangable shares” acted as a negative influence over the next several months, and gave the market a reason to pass over BQI.

RECENT HISTORY:
Since the combination, the company was listed on the American Stock Exchange (AMEX), and was recently added to the Russell 3000. The first year’s drilling program of 24 holes became 174 holes by the end of the second year, with larger and larger amounts of bitumen being discovered. More adjacent leases in neighboring Alberta were added, and the company continues to try to prove resources on their lands. The new management team has started to win the respect of the market, and remove any doubts that had carried over from the old Canwest days.

MY PREVIOUS TAKE:
In June, I listed a number of upcoming events which had a good chance of having a significant effect on the price of BQI. Several of these events have now come to pass. They were: inclusion in the Russell 3000, publication of new SK lease regulations, and the announcement of final relinquishment. While each of these were positive news, I think the Russell 3000 inclusion had the most dramatic effect. It seemed to get BQI back on the institutional radar, which when coupled with the surprise announcement of 10 billion barrels of resource potential, has kicked off this most recent rally (which I did not see coming, by the way). I genuinely felt that BQI was undervalued, and figured it was only a matter of time before the rest of the market realized this… but I’m always surprised at how quickly this stock can move up. This is twice in the last 15 months when I’ve seen gains of more than 20% in a single day on this stock. That is the reason why I buy and hold, rather than trying to trade this stock.

In June, I had also listed a number of events which have not yet occurred. This time around, I will describe them in a little better detail, so you can judge how big of a deal they are (or not).

Application for listing on the Toronto Stock Exchange (TSX)
- This should provide for another “hey, here we are” moment among institutional investors. In addition, there may be funds which only acquire stocks which are listed on the TSX. I think the media and market exposure will be much more valuable than the actual listing.

The new permits for sale in Saskatchewan, south of BQI.
- There are about five townships for sale, which are just south of BQI’s core holdings in Firebag East (which includes the Axe Lake Discovery). The sale will be final on August 18th. BQI was very open recently, in showing the new seismic isopach maps for much of their land, but they were pretty quiet about their southern border. I think that this points towards them making a move on this land. By not releasing any seismic data, no other company will be willing to risk millions of dollars to acquire permits on this land. There have been a couple of land merchants who have acquired the permits in Alberta, which are south of BQI’s Alberta permits, but the Saskatchewan land has never been available before. If BQI bids for these lands, they could hold another couple billion barrels. At recent land sale prices, this would be a cost of pennies on the barrel, which would be a large coup for BQI. If BQI hadn’t expressed an interest, then why else would they be posted?

The new Exchangable Shares which free up in August
- In February and March, there was a great deal of talk on the message boards about how the last batch of exchangable shares from the Canwest/BQI combination sent the PPS into the dumper. However, we won’t know the real story until the most recent annual report comes out at the end of July. It seems as if there is more to the story there. We now know that one of the major institutional investors (Goodman) sold off millions of shares during this time, and that had nothing at all to do with exchangable shares. I think the effect of the exchangable shares are more minimal than they have been given credit for, although I’m sure the bashers and shorters will try to scare up some business with them again. I suppose it doesn’t matter what the true effect of the exchangable shares is… but it is the perceived effect which will drive selling. One big difference is that these exchangable shares belong to Chris Hopkins himself, and he may not be so quick to exchange them… especially if they have a negative impact on PPS, during a time when further corporate funding might be required.

Released results from summer seismic testing and drill program
- It seems like every time BQI submits a plan for a “summer” drill program, the Saskatchewan government delays it until winter. I don’t know why this is the case. With the approval delay, I doubt we will see anything at all from this. Even if they get approved, they may choose to keep quiet about any summer results because of the new southern permits for sale.

Independent OBIP Norwest assessment for Phase I and II
- This is probably the biggest single PPS driver out there. Currently, BQI has a pair of estimates out there. They have stated that their Axe Lake Discovery has between 1.25 billion and 1.50 billion barrels of Original-Bitumen-In-Place (OBIP). This is considered their management’s P10 estimate, based on actual drilling results. They have also made a second estimate, which seems to use state-of-the-art seismic data to forecast the bitumen on areas that have not yet been drilled. I’m taking this as a P10 number, as well, although a P10 without actual holes drilled is not “old school” thinking. BQI obviously has studied the seismic results to see how well the seismic matches the actual drill results. They wouldn’t have released the “10 billion” resource potential estimate without a solid grasp of the limitations of this new seismic method, as it compares to actual drilling results on their land, so I’m comfortable with the idea of that being a P10 equivalent.

For those of you new to these terms, P10 is possible reserves… which in general terms says that there is a 10% chance that you could extract that much bitumen. P50 is probable reserves… or a 50% chance that you could extract that amount. P90 is proven reserves, and that is the 90% chance that you could extract that much bitumen. An important thing to remember is that a P50 estimate is NOT automatically “half the P10 number”, but could be larger or smaller than that based on the continuity of the resource.

Let me explain… let’s say that you had a perfect reservoir with exactly the same depth, thickness, porosity, and amount of bitumen. No clay or shale lenses (barriers), no erosion zones… nothing but a single bitumen layer of even thickness. (It’ll never happen, but it’s fun to pretend.) If you drilled four holes, in a square, 800 meters apart, you could extrapolate the results of each hole out to 1000 meters, and declare a P10 estimate. Next, you could drill five more holes (halfway between each), and get a 400 meter grid, with 500 meter radii. You could estimate a P50 number from this, and since the reservoir is perfect, the number for P50 would be the same as the P10. Finally, you could drill holes 200 meters apart, and extrapolate each hole to 250 meters. Once again, the perfect reservoir would have no loss, and the P90 and P10 would be the exact same value, because there is no loss “between the holes”.

Now, in real life, we have all kinds of varying bitumen thicknesses, erosion zones, lenses, areas of top or bottom water, and other such realities. These are all a part of the business. In the same way that a digital picture with 4 pixels paint a very general average of what you’re looking at, a 9 pixel image gets you a clearer idea… and a 25 pixel image might show enough detail to get you to identify it. The more areas of loss that are seen, the bigger the difference will be between P10 and P90… but it is NOT automatically one-half or one-ninth of the original P10.

According to company reports, BQI has no lenses, and no top or bottom water. The erosion channels are the only detriment to recovery and estimates. An earlier supposition that a lack of caprock would be an issue has been laid to rest. A thick layer of clay acts as a seal above the reservoir. This has effectively kept the water out. In addition, the porosity and permeability of the reservoir don’t require high pressure to force out the bitumen, so the lack of cap rock is not an issue. Remember, there’s still 650 feet of rocks and dirt packed on top of the reservoir… that’s as thick as a 65 story building. That would resist a little pressure anyways. For this reason, I’m still very optimistic that the P50 or P90 numbers will be higher than some anticipate, and should provide a boost to the PPS (when announced). I think the independent lab (Norwest) may even choose to announce a P50 or P90 for specific areas of Axe Lake in September. I STILL think that the true P10 OBIP estimates for Axe Lake will come in between 1.6B and 1.8B barrels OBIP… and the total P10 estimate from all 174 holes should still be in the 2.3B to 2.6B ballpark. Whether Norwest chooses to validate the new seismic technology as a legitimate estimation tool remains to be seen. Don’t discount the possibility that technology might be improving in this area, and modern state-of-the-art seismic might soon be seen as valid as delineation drilling by everyone in the industry.

SEC redefining reserves per Royal Dutch Shell's request
- The SEC currently allows bitumen extractable using in-situ methods (such as SAGD and THAI) to count against a company’s reserves. However, any bitumen which is extractable by strip mining cannot be counted towards a company’s reserves. Oil companies understand this difference, but investors (seemingly) do not. Once the SEC follows through on a change to this policy, there will be lots of articles in the media crowing about how the Oilsands are now countable against reserves. This media flurry will help BQI, even though the ruling won’t really affect BQI’s attractiveness to any JV.

Findings from the pilot program - Further land acquisitions - JV announcements - Permits Fulfilled and Leases Obtained
- These events are all too far out on the timeline to be covered in much detail. I think most of their land acquisition interests will be complete after the August 18th land sale is done, and I’ve now got information that it is in the better interest of BQI and any future JVs that the permits be kept as long as possible, before being converted to leases… so look to the final expiration date of the Firebag East permits before conversion occurs.

Way back in April, I pulled out the crystal ball, and made some forecasts:

FORECAST #1: More Land
I previously said, “I am convinced there will be more land permits or leases acquired in the next year.”
This became more public with the announcement of the SK lease and permit sale. The only question is whether BQI will bid... and will they bid successfully. I believe they are interested, and will bid on at least some of the property. After this, I think they will not pursue further lands. They don’t seem to be interested in T96R01W4 in Alberta. It is obvious in their last map that they did lots of drilling along the border of T96, and they must have come up pretty empty there. If they HAD found lots of bitumen, I’m sure the Alberta government would already have that township posted.

FORECAST #2: Expansion of the Seismic Program.
I previously said, “I expect they will be expanding their seismic program (if approved), and using it to evaluate what land must be given back to the government to complete their final 40% cut.” And “ I expect the cut will be announced sometime in 2007.”
Both turned out to be right on the money. They not only used seismic to determine what land to relinquish, but they also used the data to create that 10 billion barrel resource estimate… and the final relinquishment has now taken place. They don’t have to turn in any more land to the SK government.

FORECAST #3: Extraction Method
As I said in June, BQI management has already shown the way forward. They said right away that low pressure SAGD with the use of solvents is a strong path worth investigation. Early lab results showed recoverability of 54% to 83% using simple low-pressure wet steam… and they haven’t even USED solvents yet. Solvents are a very interesting method to reduce the requirement for steam, and reduces the cost of extraction. You need solvents to thin the bitumen in order to get it through a pipeline, so why not introduce them into the reservoir? You reduce energy costs, and emissions. Solvents work well when there is good permeability, and I am told that 5 Darcies is about twice as good as normal. The coarse grained sand with low fines you keep hearing about means that the passages for the bitumen to leave the rock are very open. This means that solvents and steam should yield even better recoverable rates. As a test, you could even try pure solvent without steam… or heated solvent. Porosity is the other measure of reservoir quality, and that has been shown in the past to also be excellent. I like this direction. I know we’ve discussed THAI on this board before, but I don’t think this is a good fit for this situation. THAI would use much higher heating temperatures and pressures, which could adversely affect the clay cap. I’m very optimistic about the LP-SAGD/Solvent approach.

FORECAST #4: Share Price
I’ll be honest… in 2006, I got lucky with some of my short term price direction picks… but the market is a fickle beast. I did not see the announcement of 10 billion barrels creating such a firestorm of interest, and if I had been playing short term trading games, I think I would have lost out big. Thankfully, I know my own limitations, and have never sold a single share of BQI, but have only averaged down, and accumulated more. I’ve heard that you should never add to a losing position, but when the company has SO MUCH going for it, and the fundamentals are SO solid, it’s tough for me to ignore a value.

…but I did say this: “When this stock moves, however, it moves up quickly… very quickly. From January 2006 to March of 2007, a move of 30% in a day or two or three is no strange occurance.” …which is exactly what we saw over the last two weeks.

…and: “I hope to see a couple more analyst’s reports (and since the last media day included analysts, this seems to have been anticipated). More analyst’s reports would also get this on the institutional radar, and that’s where the large scale PPS shifts could come from.”
Blackmont is the second analyst to provide coverage of BQI. I’m glad to see this, and expect still more reports will be coming out. These sort of reports do get generated when enough investors are asking their investment firms about a given company. As word of BQI gets out, I would expect exponential coverage and buzz to be generated.

I said it in June, and I’ll repeat it. I am still convinced that this is one of the best long-term prospects in the market. Every time that management releases news, it is in line with the assumptions that I have made. I do not see any long term risks which could cause a major loss from this point out, as long as the fundamentals remain as they are. I still would recommend this stock to anyone as a buy-and-hold. My long-term price target has always been in double figures, and I see no reason why that won’t happen. The timeframe is the only question mark… if management wants to wait in order to reach even higher prices in the long run, I’ll wait with them. They’ve got a lot more “skin in the game” than I do anyway. I can wait.

NEW THOUGHTS:
1) When will BQI start to look into getting an access road to link them up to Fort McMurray or Fort McKay in Alberta?
It’s only about 26 miles from the edge of their Alberta permits to the Fort McMurray airport. They could link up with existing roads fairly easily, and this might make a number of things a little easier. The recent blockade by the Clearwater River Dene Nation (CRDN) might cause management to consider a secondary land link to civilization. On the other hand, if they choose to work WITH the Dene on this, a new road between LaLoche and Fort McMurray could be built. If you then add a bridge across the Clearwater River, you could cut many miles off the BQI supply route. This way, both the Dene and BQI would have the advantage of a shorter route to the largest population center in the region. Saskatchewan would probably be very supportive of a link to this area, as it would foster development. I’m not sure what Alberta’s take on this would be.

2) Joint venture timing
Just how far does BQI have to go before they would get a fair value from a JV? A pilot plant is the next obvious step, once the labwork confirms that low pressure steam and solvents will allow higher extraction rates than anything that has been seen in Alberta. The quality of the reservoir, and the high saturations should speak for themselves… so I wonder just how far BQI will go into this process before they get “an offer they just can’t refuse”. While they have said publicly that they are not currently in discussions, you KNOW that doesn’t prevent an interested party from sending them an initial offer. If one really knocks their socks off, I’m willing to bet they’d at least bring them in and talk… whether the pilot plant is 100% on line or not. Venezuela’s recent shakeup has left a number of majors looking for more heavy oil reserves. I think there are several who would like a piece of BQI, once things are far enough along.

3) Next year’s Drilling Program
It is easy to forget about right now… but BQI must be currently filing their proposals with Alberta and Saskatchewan to let them know where they would like to drill next year. Since Bertram Drilling owns stock in BQI, I’m hoping they will be just as open as last year to provide as many rigs as BQI requires. Now that BQI has the facilities to handle eight rigs right off the bat, I’m assuming they would ask for at least that many. If they went out in pairs, they could have four teams… one for each of the locations (A,B,C, and D), as defined in BQI’s most recent presentation. Using last year’s actual drilling rates as a model, they could get 28 holes drilled per rig in a given season. Adding 56 holes up in T97-T98 (by the north camp) to the 15 holes they already have there should give them enough for a solid P50 estimate, and a new “discovery”. 56 new holes in Alberta, or in areas south of Axe Lake would do the same for those areas. If they win the bids for the new townships south of their current land, they’ll probably make extensive use of seismic, early on… but I wouldn’t be surprised if they broke loose a pair of rigs late in the season to look around down there, as well.

FOB-Must ReadYellowbeard''s Take for August
Posted By: ujaack at another BQI forum

thanks ujaack -
for another BQI good message -

Cheers
welcome to BQI -
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Sentiment : Strong Buy









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