Why Trivello Energy Corp. is my pick for top shale play.
For the record, I am not a professional writer but I do really enjoy the exchanges between investors. So, given the opportunity, I was intrigued to put something together.
Trivello Energy Corp. (TSX: V.TRV, Stock Forum) trades on the TSX Venture Exchange under the trading symbol “TRV”. It’s a small cap junior energy company and what I believe to be a good speculative buy. TRV has been trading in and around 10 cents, which would give it a market cap of around $6.2 million. I have a number of reasons for my position; but first a little background.
The company has some existing oil production in Alberta, and a 10% working interest in a shale gas play consisting of three sections of land in northern B.C. located on the southeast edge of the Horn River Basin. The property is known and referred to as the “Lucy Property.” Essentially, the current oil production pays for operations, and the Lucy property is the company’s blue sky opportunity that offers great potential upside.
The simple reasoning is that with a low market cap of approximately $6.2 million it would not take much to have a big positive impact on the company’s stock if the Lucy goes into production with one well. The added upside is the fact that TRV has drilled two wells on the property, and there is a third historic well originally drilled by Mobil. The opportunity exists to go in to all three wells, fracture the shale rock, test and bring each one into production. I believe some might think that this is a one-well opportunity. But it is in fact a three-well opportunity.
In this most recent well, TRV drilled and completed the well and completed the initial testing. This testing was positive and considered “above average.” Subsequently, an independent report was completed on the Lucy Property which indicated a medium case of 96 billion cubic feet of natural gas (9.6 BCF for TRV’s 10% working interest).
http://www.trivello.com/news/default.aspx?item=149&year=2008
Now in comparison, there are very few companies that have actually drilled wells and completed initial testing. Most of the participants in both the Horn River and Montney have just acquired land leases in the last six to eight months, producing a huge cash windfall for the B.C. government. So TRV is ahead of most companies and has a lower risk profile, having already drilled and conducted initial testing on its well with positive results.
According to Trivello, the plan is to enter back onto the property in the upcoming drilling season, fracture the shale, test and bring the well into production “in the near term.” TRV is also in the fortunate position to have a pipeline crossing over the property so connecting the well is not an issue or concern. If successful, this will prove out the reserves on the property and put TRV in the fortunate position of booking potential reserves on its balance sheet. Doing so would have a positive impact on TRV’s value. In addition, by bringing this first well into production it will provide the basis for moving forward with fracturing the other two wells. There are also indications in the press release that the group might consider divesting this first well once it has been successfully tested and brought into production.
So the “pros” are:
- low price / low market price (at 10 cents / share it has approx. $6.2 million market cap)
- strong upside potential (bringing one well into production should impact the market cap)
- two holes completed and one historical completed (they have three wells to work with and bring into production)
- positive initial test results (see link above)
- pipeline infrastructure crossing the property and in close proximity to the well
- experienced management team (as stated they have been working this property / area for longer than most)
The “cons” are:
- small debt (small but manageable; company has been paying this down)
- shares issued outstanding (approx. 62 million)
I think the “cons” are addressed if this first well goes into production. First, TRV would most likely pay off its remaining debt and have increased cash flow to finance further operations on the Lucy Property. Second, the shares outstanding are reflected into the current market cap, and if the company’s asset value increases the price will do the same regardless of the shares issued and outstanding. So my position is that it will not take much to increase the company value from the current market position of approximately $6.2 million.
For more information you can go to the Trivello Energy website at www.trivello.com.
It is also interesting to note that Apache Corp. (NYSE: APA, Stock Forum) and Encana (TSX: T.ENC, Stock Forum) were the first players up in the Horn River basin. Their story is almost identical to TRV. They originally went into the area to drill the Keg River zone and then realized something bigger in the Muskwa shale. It’s this same Muskwa shale that TRV is targeting in the Lucy Property. I think the following newsletter from Apache is worth reading: http://www.apachecorp.com/Explore/Arrows%5FNewsletter/Arrows%5FArticle/?docdoc=732
On April 8th, 2008, Apache announced results on three wells flowing from the Muskwa shale located to the northwest of Lucy. The three wells were 8.8 MMcf, 6.1 MMcf, and 5.3 MMcf per day respectively. Press release here: http://investor.apachecorp.com/releasedetail.cfm?ReleaseID=303676
Lastly, I think the following BNN video clip originally aired in June is worth watching. It is purely about the potential of the shale gas in northern B.C. and provides a good visual perspective of what we can expect in terms of activity in the region.
http://watch.bnn.ca/the-business-news/june-2008/the-business-news-june-11-2008/#clip59230
Disclosure: Author is currently long Trivello Energy.
This article was written by a member of the Stockhouse community.
