Value Microcaps Junior Energy

[Ed Ajootian]

Osage Exploration (OEDV.OB) -- now that their drilling program in into full swing its time to get down to what the value proposition is here and how they will get to the promised land:

The Size of the Prize

For starters, see a report issued last March on Osage's Mississippian acreage by a PE firm called Pinnacle Energy Services at http://finance.groups.yahoo.com/group/EnergySectorInvesting/files/ (you need to join the group to download files, its easy & free to do so). In that report, which Osage used to shop its farmout deal and which was good enough to get Slawson to buy in a month later for 45%, Pinnacle concludes that of the 37,760K acres that comprise Osage's whole project, they believe there is 58,526 mbo and 209,652 mmcf of gas that is recoverable. So far Osage and its partners have leased up 20,000 acres in this project and Osage has a quarter of that. So let's keep the math simple and just divide Pinnacle's #'s by 2 to get a figure for gross recoverable hydrocarbons on the 20K acres that have been leased up so far.

This means that net to Osage, assuming a 78% NRI, they could be sitting on 5.7 mmbo and 20 bcf of gas. Using $25/bbl. for oil and $1/mcf for gas for in-ground values we then arrive at a potential value of $163M. Not too shabby for a company with a market cap at just above $20M!


How Do They Finance Their Drilling

OK, so we see they could be sitting on the mother lode. That may be great but if they can't figure out a way to finance their drilling without diluting the hell outta everyone by issuing cheap stock, it will all be for naught. As of the end of last quarter they had about $2.9M of cash but that's probably only going to be enough for their share of the first 4 wells, including one paired SWD well per producer. Since the operator of the project, Slawson, has 2 rigs going, that doesn't leave much time before Osage will run out of money.

This is where their Colombian Connection comes in. They own a small but very valuable interest in a pipeline in Columbia that currently is generating about $450K/qtr. in cash flow net to Osage. Also they own a small interest in a mature oilfield there that has an after-tax PV10 value net to them of about $5M. Right now Osage has zero debt. I believe these 2 assets alone could support a loan of $2-5M.

A loan of even just $2M would get them through the next 3 wells. By that point they would have 7 wells producing. Assuming Osage is able to generate 30-day IPs the same as what SandRidge has been getting, which is about 300 boepd, 50-50 oil vs. gas, this means their first month's production revenue will be about $90K per well, and then it will taper off from there. So with 7 wells cranking away they should then have no problem in borrowing more money, to keep the drilling going.

The Bottom Line

So net-net I believe they can get this entire multi-year project done without issuing much if not any more stock. If they do have to issue any it will probably be very soon and will not need to be very much (maybe a couple million $$ worth). So 3 years from now we could be looking at a company that is so far along in drilling out its $160M worth of reserves that the market has decided to give it value for all of them, with say 55M shares out and maybe something like $20M of debt. The stock could be had today for under $.50/share but it could be a $2.50 stock in 3 years.

The stock price has gone up more than 10-fold in the past year so it would not be an immense surprise if we see some indiscriminate selling going on in the first few weeks of this year, from profit-taking. If in fact this occurs this would provide an excellent opportunity to build a position in this stock.