Daybreak Oil and Gas Inc (DBRM)

[downsideup]

The prospects with estimated gross reserves... ???

Take the 9 million barrels, think of it as "perhaps" being a total figure of the original oil in place, then figure they can extract a (probably low end) 50% of the oil from these high porosity sands... so, call it 4.5 million barrels extractable, and, given a 1/3 interest for DBRM, call it 1.5 million barrels for the DBRM share... then price it at $10 a barrel for the lowest possible probability factor... and, using 50 million shares, you get a raw asset value for those prospects of a solid $0.30 a share.

The most obvious paths to larger value are tied to expansion of the reserve total, improvements in the "industry standard" probability factors that enhance reserve asset values... and to valuation that is based on production values rather than asset values.

The first of those elements they'll need to prove over time through drilling and production... but, you can expect that success over time will move the numbers higher, so that you can accept their 9 million barrel figure as solid. Do that, and you could easily double the asset value to $0.60 a share.

The second of those elements they've likely got largely in hand already, given they already have high res 3-D seismic coverage of all of these prospects. When there is well control and a solid production history available to validate what the 3-D shows... not only will the reserve figure move higher to better reflect what the data show, that conservative view I used for pricing reserves at $10 a barrel should be replaced with a "proven" value ranging between 70% and 90%. Being conservative... use the 70% figure for the lower value of the heavy oil... use 9 million barrels for the reserve total... and you get $4.20 in proven asset value only for the new prospects.

Third... finance the project and spend the money you need to be able to produce that oil... and then you can compute a new price based on earnings from production and a P/E multiple ?

The largest fraction of asset value increase is that tied to the transition from "we think it is there with X% probability" to "we know it is there with high % probability". With these prospects, that proof should ramp the asset value from $0.30 to $2.10 without other changes occurring... but, of course, reality tends to be that you don't get singular step changes that occur... rather than a mix of changes that occur over time. As wells are drilled, more value is proven, with some rapid increases occurring, but, as wells are drilled, liabilities also increase, and, at the same time, more oil is produced.

With oil prices where they are now... given DBRM's proven ability to contain costs (which has them solidly among the lowest cost producers) and given they're already moving toward solidly cash flow positive... they are in pretty solid position to be able to increase the value of production rapidly enough to more than offset the liabilities in the cost of borrowing.

The last time they were in this sort of position... they made deals with the new partners that traded off some % interests of current production for what was basically bridge financing... and that deal got us to where we are now... on the cusp of larger success.

Previously, they'd established production from prior drilling successes in Louisiana, and then sold off the proven production they'd established... for $8 million in cash (or about $0.16 a share ?) which they then used to fund the acquisition of interest in California.

Now, we see the benefit of that long term approach... as they've swapped that original $8 million deal (a value of $0.16 a share) for a value of (at least)... $0.30, $0.60, $2.10, $4.20 a share, etc... Will probably prove to be quite a bit more when they're at the comparable point of having established production from around 50% of the prospect location potentials.

Obviously, they've still got some work to do to convert the value they have from an "on the hoof" value, to one that is wrapped in sytrofoam and cellophane, ready for the grill... but, when you get right down to it, steak is steak.

Have a good holiday weekend, all...