Connacher Oil & Gas Ltd (CLL)

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Connacher Oil Gas Com Npv (CLL) $4.70
Change: 0.01 (0.21%)
Volume: 509,988
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Jun-13-08

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OT.
Reminder of Merger - Fusion - Quest for an oil sands partner
Calgary-based firm gets confirmation of major Axe Lake resource in Saskatchewan

By DAVID PARKINSON
November 12, 2007 at 6:25 AM EST

Oilsands Quest Inc. has found the oil. Now it wants to find a deep-pocketed partner. Last week, the Calgary-based exploration company released results from an independent evaluation that confirmed what the company had already been saying - that its Axe Lake property in northwestern Saskatchewan contains a substantial in-situ oil sands discovery. "It's instant credibility," said analyst Menno Hulshof of Blackmont Capital.

Now, the firm is embarking on a $70-million winter drilling program to better define the reservoir, before putting a majority stake in the property up for sale by next spring - a sale that could lift the company another rung on the credibility ladder. "To bring on an operator, it legitimizes the story," said Adam Zive, analyst at Desjardins Securities.

Oilsands Quest president and CEO Christopher Hopkins said the company has always said it would bring in a major oil sands firm as operator and majority owner of Axe Lake. "We will not be the team to spend the billions of dollars."

Axe Lake, Saskatchewan's first oil sands exploration project, could cost more than $4-billion to bring into commercial production, based on the indicated size of its resource. The independent evaluation, conducted by petroleum consultant McDaniel & Associates, pegged the discovered bitumen resource at 1.12 billion to 1.55 billion barrels - exceeding Oilsands Quest's internal high-end estimate of 1.5 billion. Oilsands Quest has also estimated that there are another roughly one billion barrels on the site that it has yet to discover.

But knowing the oil is there and being able to profitably extract it can be two different things, especially given the complicated nature of bitumen. That's why analysts feel landing a senior partner with oil sands experience would not only contribute crucial cash and technical expertise, but would help validate the commercial potential of the find.

"There are a lot of technological and financial challenges to overcome," said Richard Wyman, energy analyst at Canaccord Capital. "Taking on a partner would help with that."

Oilsands Quest plans to set up a data room for buyers in the first quarter of 2008. The firm has its fingers crossed for a quick sale, because while it does have cash in place to finance the winter drilling, the next step - a pilot project slated for 2008-2009 - will require up to $200-million the firm doesn't have. The pilot project will establish whether the oil trapped underground can be brought to the surface in sufficient volumes and at low enough cost to make a large-scale oil sands development commercially viable.

Oilsands Quest would like to sell about 60 per cent of Axe Lake and retain about 40 per cent. Analysts believe a sale at this stage could bring in a few hundred million dollars.

The sale should also attract plenty of tire-kickers, in Canada and internationally, analysts said. Although Axe Lake is on the fringes of the Athabasca oil sands, it is part of the same deposit, one of the few sources of large-scale untapped oil reserves in the world. However, some analysts think it might take Oilsands Quest up to a year to negotiate the right deal - meaning the company might have to raise money on its own for the pilot project. Oilsands Quest last week filed a shelf prospectus with Canadian and U.S. regulators for the future issue of an unspecified amount of equity.

Despite a market capitalization of more than $1.5-billion, Oilsands Quest has been beneath the radar of most Canadian investors. Part of the problem has been lack of a Canadian stock listing; its shares trade only on the American Stock Exchange (Amex). But it recently applied to the Toronto Stock Exchange for a listing, which suggests the stock could be trading in Canada by early next year, if not sooner.

Perhaps of bigger issue is the fact that until last week, this was a highly speculative play, with nothing more than management's word the firm had a significant discovery. The independent assessment has removed some of the speculative risk. Mr. Hulshof last week upgraded Oilsands Quest to "buy" from "speculative buy." He said the McDaniel report, by extension, provides greater confidence in the potential of Oilsands Quest's extensive land holdings surrounding the Axe Lake discovery. Axe Lake makes up just 5 per cent of the company's land base in the region, which straddles the Alberta-Saskatchewan border just east of EnCana Corp.'s Borealis project. Oilsands Quest believes the lands could contain 10 billion barrels of oil. "The potential upside is massive," Mr. Hulshof said.

Still, that potential is preliminary. And as Mr. Wyman noted, the region's geology could present problems extracting the oil using standard steam-assisted techniques. "There's a science project here that has to unfold."

The uncertainty has fuelled a significant range in analysts' outlook for the stock. Among the four analysts who follow the company, 12-month target prices range from $4.30 (U.S.) to $7.50. (The stock closed Friday at $5.79.)

As for the longer-range potential, both Mr. Hulshof and Mr. Zive believe the stock could reach the $20 range in the next three to five years. But Mr. Wyman feels there are just too many unknowns about the deposit to assess long-term values.

"This is in the very early stages," he said. "I'm not sure I'm bearish, I'm just more cautious."

Oilsands Quest Inc.

Friday's close $5.79, up 11¢

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