Value Microcaps Junior Energy

[kipp440]

TXCO - $10/shr BMO Capital Markets $24/shr target.

I have had TXCO for a while and it hasn't done much, now closer to low than $14 high. I came across a BMO C. M. research report that talks about huge potential in late 07 through 09. I am going to copy the text and paste it here so be warned it will be a little hard to read. Comments welcome!

Link yo TXCO website: http://www.txco.com/

( FC ) 03:55pm EDT 3-Aug-07 BMO Capital Markets-US (Deacon, Raymond 303-436-1113) TXC TXCO --Raising Target Price to $24; Maintaining 2007 Volume Target - Part 1/2


Details & Analysis

Our thesis on TXCO remains that the proven reserves and the Glen Rose Porosity

inventory is worth somewhere between $9 and $10 a share and that investors gain

exposure to the San Miguel tarsands play, the Pearsall Shale play, and the

horizontal Glenrose shoal play on the Output properties essentially for free.

The following table shows our estimate for the value of the company's 300

locations in the Glenrose Porosity play, typical IRRs, and the NPV per well

assuming a $55/bbl oil price.



Exhibit 1: Glenrose Porosity Economics & Inventory



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Source: BMO Capital Markets Estimates and Company Reports.



Additional conference call and recent Boston/Chicago roadshow highlights:

" Schlumberger has been hired to do a reservoir study on the company's Glen

Rose Porosity play to determine oil in place, and recoverable reserves as well



as to suggest a secondary recovery program for the future. This may result in

play being classified as one reservoir and allow the company to book PUDs

(positive F&D impact). The company is working diligently on ways to lower the

reservoir pressure to allow the oil to escape from the porosity matrix.

" Deep Bossier. Peers are drilling wells in excess of 65 mmcfpd on the same

"shelf" of the Bossier as TXCO in the vicinity of the Fort Trinidad field. We

look for a well to be drilled in 2008.

" Tar Sands. We expected news on pricing of tar sands product from Corpus

Refinery at this point and it looks like that news is further away than we had

thought. By year end we hope to see commercial production from a pilot that may

consist of as many as 32 wells.

" Pearsall. Because of the completion technique equipment that will be

required it is likely two months until results from fracture stimulation are

known. Anadarko recently permitted its first horizontal well to test the

potential of the Eagleford and Pearsall shales in the Maverick basin, having

drilled five vertical wells. The lateral in the well extended 1,560' versus

2,500-4,000' planned lateral since Encana, the operator, had difficulties

handling pressures encountered. TXCO intends to drill its next well

underbalanced to avoid formation damage in, it hopes, to improve deliverability

from the well.

" 3-D defined Glenrose Shoals on Fort Trinidad field have significant

potential. The first of seven planned wells targeting the Glen Rose B is slated

for September. The Glen Rose C shoal had been the primary target given that it

had oil while the Glen Rose B was never targeted for development.

" Capex. We believe that in order to fund expected drilling in the San

Miguel tar sands play the cap-ex will go up.

Company Description

TXCO Resources is a small-cap ($365 million) independent oil and gas E&P

company. The company's core area is the Maverick Basin (85% average working

interest) in Southwest Texas, with more than 600,000 acres in the basin. TXCO

also has interests in the Marfa Basin in West Texas. The company reported year-

end 2006 reserves of 41.4 Bcfe, 48% of which are proved developed. On a pro

forma basis for the merger, the company has 81.4 bcfe, and production of

roughly 21.4 mmcfepd and net acreage of more than 723,000 acres. With the

acquisition now closed, the company has in excess of $90 million available for

development capital expenditures on its credit lines. The company also owns a

91-mile pipeline system in the Maverick basin with current capacity of 35

mmcfpd (33% utilized) with expansion potential to 100 mmcfpd.