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Junior Oil Buyout Validates all Cardium Players-Valuations Moving Higher

Companies / Oil Companies Jan 06, 2010 - 03:22 AM GMT

By: Keith_Schaefer


Junior oil producers with land packages in the Cardium formation are jumping up today after Berens Energy (BEN-TSX) was bought out today by Petrobakken for $2.70 a share. Berens’ stock price had moved up from 50 cents to $2 over the last six months as its Cardium land position became more widely known.

This transaction is significant for a couple reasons.  It’s a huge validation of the emerging Cardium play.  The Cardium has quickly become the next “hot” play in Canada, after the high profile Bakken play in Saskatchewan.  And Petrobakken is one of the top intermediate producers in Canada.  The market has great respect for this management team’s (CEO John Wright and CFO Corey Ruttan) technical and business expertise.

I would suggest that Berens was sold at a significantly higher valuation than people expected – $90,000 per flowing barrel of oil equivalent (boe) based on average December production of 3700 boe/d. 

Part of the reason was Berens land base – Petrobakken indicated it saw 100 Cardium drilling locations there.  One analyst report on the deal this morning noted that even backing out the land price at $2 million per section, the deal was worth $70,000 per flowing boe.

The market is taking this news and immediately re-rating all of the juniors in this play (which is great for our subscriber portfolio!). Many of the juniors are natural gas weighted, with high debt issues – just like Berens was/is – and were/are trading at roughly $35,000 per flowing barrel.  That leaves a lot of upside for investors.

Another significant issue this transaction highlights – and I’ll have a more detailed story on this issue later this week – is that the price takes into account the low risk nature of the Cardium wells.

What I mean by this is that Berens’ Cardium land package has a very high “repeatability” factor.  Each drilling location should produce like all the ones before it. 

This is great news for investors.  It means that valuations are moving higher, as the seller is getting a larger portion of the future cash flow in their purchase price.  (This is why all the juniors in this play are up 10%-15% this morning.) Between the consistent geology and production rates, and technologies like 3D seismic, the exploration risk on these plays has been greatly reduced over the last 5-10 years.

And for the Cardium in particular, the risk is almost zero, as this large formation is well known and has been drilled through for 50 years.  Everybody knows exactly where it is. The excitement is around a well known zone in the formation that has only recently been accessible due to improvements in horizontal drilling and particular multi-stage fracing.

For Petrobakken, this is their first major step outside the Bakken play and could be the start of a new round of buyouts by the company.  Their major competitor in the Bakken, Crescent Point Energy, has a better cost structure and if Petrobakken was to move outside of its core area to differentiate itself, it would make sense to buy up these cheap Cardium plays.  The Cardium is generally regarded by Canadian analysts as having the second best economics of any play in Canada, after the Bakken.

As a caveat, Berens may have got a premium valuation because it was one of the lowest cost gas producers in the country – a significant feat because of its small size.  It also reported a boomer of a well in late November – 1250 bopd over a 3 day test – and an average of 220 bopd over the first month.  That initial production can greatly help payback.

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One of my portfolio stocks grew from 2,000 bopd to 12,000 bopd in

2009.  One of Canada’s top oil and gas analysts say they could hit

50,000 bopd in 3 years.  It has already doubled for my subscribers -

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About Oil & Gas Investments Bulletin

Keith Schaefer, Editor and Publisher of Oil & Gas Investments Bulletin, writes on oil and natural gas markets - and stocks - in a simple, easy to read manner. He uses research reports and trade magazines, interviews industry experts and executives to identify trends in the oil and gas industry - and writes about them in a public blog. He then finds investments that make money based on that information. Company information is shared only with Oil & Gas Investments subscribers in the Bulletin - they see what he’s buying, when he buys it, and why.

The Oil & Gas Investments Bulletin subscription service finds, researches and profiles growing oil and gas companies.  The Oil and Gas Investments Bulletin is a completely independent service, written to build subscriber loyalty. Companies do not pay in any way to be profiled. For more information about the Bulletin or to subscribe, please visit:

Legal Disclaimer: Under no circumstances should any Oil and Gas Investments Bulletin material be construed as an offering of securities or investment advice. Readers should consult with his/her professional investment advisor regarding investments in securities referred to herein. It is our opinion that junior public oil and gas companies should be evaluated as speculative investments. The companies on which we focus are typically smaller, early stage, oil and gas producers. Such companies by nature carry a high level of risk. Keith Schaefer is not a registered investment dealer or advisor. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer to buy or sell the securities mentioned, or the giving of investment advice. Oil and Gas Investments is a commercial enterprise whose revenue is solely derived from subscription fees. It has been designed to serve as a research portal for subscribers, who must rely on themselves or their investment advisors in determining the suitability of any investment decisions they wish to make. Keith Schaefer does not receive fees directly or indirectly in connection with any comments or opinions expressed in his reports. He bases his investment decisions based on his research, and will state in each instance the shares held by him in each company. The copyright in all material on this site is held or used by permission by us. The contents of this site are provided for informational purposes only and may not, in any form or by any means, be copied or reproduced, summarized, distributed, modified, transmitted, revised or commercially exploited without our prior written permission.

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