Posted on Wed, 28 January 2015 23:29 | 0

Ten Reasons to Love this Small Company in an Emerging Shale Region That is STILL Economic at Current Oil and Gas Prices

Low oil prices continue to slam the energy sector, forcing oil and gas companies to gut capital expenditures and severely narrow their ambitions.

For the energy investor, not only are we in tough times, but there is virtually no safe-haven as stocks get clobbered in everything from oil field services to refining and manufacturing.

But the fact remains: the world needs oil as there is essentially no alternative. That ensures robust demand for the long haul. After excess supplies are soaked up, the companies that reemerge on the other side of the abyss will be healthier and lead a newly ascending industry.

While it may be difficult to see right now, the key for investors is to find the companies that have been battered by the markets, but still have robust fundamentals: they have exciting acreage and a strong reserve base, low-cost production, a solid balance sheet, and a vision for future growth. When the smoke clears, it will be these companies that really take off, and the investors along from the beginning will be the ones that profit.

One way to find value is to look at low-cost oil and gas producing regions. There may be an array of shale basins to choose from, but the Montney Shale in Western Canada should be at the top of every investors watch list. According to the Bank of Canada. the Montney has some of the lowest short-run marginal costs of production at sub $50 per barrel. That is lower than the Bakken, lower than the Eagle Ford, and lower than the Permian three much more famous shale regions.

That means with lower oil prices the Montney stands as the best play to weather and thrive.

Why is the Montney the prospect to invest in? According to a joint assessment by several of Canadas top federal and provincial energy boards, the Montney Shale holds some of the largest and least-explored oil and gas reserves in North America.

Located on the border of Alberta and British Columbia, the Montney Shale potentially holds 449 trillion cubic feet (tcf) of natural gas trapped in shale, along with 14.5 billion barrels of natural gas liquids, and 1.1 billion barrels of oil.

There are several companies that operate in the Montney, including NuVista (NVA.TO). Encana (NYSE: ECA). Sinopec. and Royal Dutch Shell (NYSE: RDS.A). But it is a smaller company that has the largest upside potential. Blackbird Energy Inc. (CVE: BBI). a small cap Canadian company, has flown beneath the radar and put together an impressive portfolio of acreage. Having spent a few years slowly and strategically acquiring prospective land, Blackbird kicked off its drilling campaign in the fourth quarter of 2014.

On December 9, Blackbird reported that it successfully drilled a well in its Elmworth block, and initiated drilling on a second. The first well, known as 6-26, was drilled at 4,730 meters (15,518 ft, or longer than 51 football fields), including a 2,000-meter (6,562 ft) lateral. The second well was spudded and will be drilled to 2,340 meters (7,677 ft) in depth, and then shift laterally for 2,000 meters (6,562 ft). Both wells are 100% owned and operated by Blackbird. At the time of writing this piece, Blackbird has finished drilling and completing both wells and is likely nearing the testing phase.

These are enormous milestones in the history of this small company, and here are ten reasons why investors should love Blackbird Energy.

1. Near Term Catalysts. Blackbird announced that it had successfully drilled its first well in the Elmworth block in December and is in the process of completing its second. Both wells will undergo flow-testing, with results due out in February. The February announcement provides a huge near-term catalyst that could rocket its share price upwards.

2. Upside Potential. Blackbird is still just a small company, with a market cap in the range of $88 million. Its share price shot through the roof last year, jumping more than 600% between January and its peak in September. Since then the stock has come down a bit, but from a valuation standpoint, Blackbird offers investors a mouthwatering opportunity to get in before it really takes off. The upside potential is even higher when you consider what successful wells could translate into if each well has a NPV10 value of approximately $4.0 — $4.5 million per well and these wells could potentially prove up 10 or so sections then, based on four wells per section over both the Upper and Middle Montney, this could translate into approximately $320 million of value.

3. Great Land Position. Blackbird has spent the last two years strategically consolidating some of the best acreage in the Montney. It has put together 47 sections (30,080 acres) of contiguous land in a resource-rich area, an impressive feat for such a small company. In fact, in November, Blackbird pulled off an amazing acquisition of 10 sections (6,400 acres) that sit adjacent to acreage on which it drilled the 6-26 well and the 5-26 well. In a full development scenario, Blackbird could hypothetically drill 564 wells on its 47 net sections.

4. Impressive Resource Base. The entire 200 meter (656 ft, taller than a 65 story office tower) Montney shale is prospective with 3% or higher porosity. The Upper Montney is liquids-rich (54 API). As mentioned above, the Montney is a giant, and has so far been underexplored. Blackbird is at the heart of it, surrounded by much bigger players.

5. Growth Through The Drill Bit. After completing its land acquisition strategy, Blackbird has moved into its next growth phase one in which it begins generating revenues from production. The successful drilling of its most recent wells, with flow test results expected in February, will set the stage for more drilling in the months and years to come.

6. Lots Of Cash. Blackbird had positive net working capital of $42.5 million after it had drilled the 6-26 well and prior to drilling the 5-26 well. The company also has no debt, and is strongly positioned in the low oil price environment relative to its peers.

7. Strong Management. The management team has proven to be shrewd and aggressive, particularly with its land acquisition strategy. While details were undisclosed on its November land deal, it appeared to pay well below the market rate for the acreage. NuVista, a company nearby, purchased land in September at $2.9 million per section. But based on its corporate presentation. Blackbird only paid a fraction of that amount in its November purchase, perhaps as low as one-tenth the market rate. The move shows that management has the intelligence, the business sense, and the strategic timing needed to profitably exploit its resources. The management team is Blackbirds Ace in the hole.

8. Neighbors Have De-risked Area. Several of Blackbirds much larger competitors have drilled nearby and with each successive well, more and more detailed information about the geology has been discovered. As time has passed, this intel has shown that Blackbird has hit a bulls-eye with its acreage. Blackbirds neighbors have redirected their drilling plans to target more prolific and more liquids-rich sections, which have converged on Blackbirds land. Encana drilled a well just west of Blackbirds acreage and flow-tests showed 1,310 barrels of oil equivalent in daily production. Other wells from NuVista and Canadian International Oil Corp. have also posted impressive production figures to the south of Blackbirds acreage.

9. Low Marginal Costs of Production. The Montney Shale offers some of the lowest operating costs among a long list of productive shale basins, including some of the more famous ones in the United States. And costs will only come down as companies scale up and learn more about the geology.

10. Improving Infrastructure. The Montney is finally starting to see the drilling activity it deserves. But as more oil and gas production comes online, there is a greater need for infrastructure to offtake the volumes. A flurry of construction is being planned, with new compressor stations, pipelines, and storage tanks set to spring up in order to service the growing supply. This will open up markets for drillers and further bring down costs.

And even though we did say 10 reasons to love this company there is an 11th!

Potential Takeover Target. Even though companies have begun to batten down the hatches on capex it should not go unmentioned that many large companies currently have less than stellar economic plays. During this down cycle in commodities, certain companies will inevitably decide to redeploy their capital to the resources with the highest economic returns, while some will go one step further if they already dont have these plays in their portfolio acquiring companies with established positions in areas where these highly economic plays exist. With Blackbird targeting the high-liquids window in the Montney, it provides a potential acquirer the ability to take control of a large contiguous position in what is a highly economic resource play that is still able to create value at these lower commodity prices. Furthermore, with no debt and cash on hand Blackbird appears to be that much more attractive. In terms of a takeover, the question is when and not if.

Blackbird is one of the best growth picks in a region that is still attracting capital. The decline in oil prices is a temporary setback to a lot of producers, but the ones that survive will thrive. Blackbird, with a strong balance sheet, no debt, and at the beginning stages of a major growth phase, will continue to attract investors, institutions and potentially a takeover offer. After Blackbird releases the results for both the Upper and Middle Montney wells, I will write a follow up article discussing the relevance, economics and impact these wells have on Blackbird as it continues its exceptional growth trajectory.

By. James Burgess of Oilprice.com

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