Shale gas junior on tip of Stockhouse members' tongues.
This is part two in a multi-part series of interviews with Stockhouse members who are focused on a shale gas area play that has recently gained media attention. Read part one, Shale gas companies draw a crowd.
Why Questerre?
Along with MrWarrenBuffet, who chose Questerre Energy (TSX: T.QEC, Stock Forum) as his favorite among the Utica Shale players, Stockhouse member Brymstone cast a vote for the Calgary-based oil and gas junior too. And so did group administrator Risktaker77, who identified it not only as his top pick, but as the largest holding currently in his portfolio. Here is Brymstone on Questerre, followed by Risktaker77, both edited for spelling, punctuation and grammar:
Brymstone: Rather than pick my two favorite companies, I picked only one. After doing my DD on the various players in the area, a couple of things became apparent. Everyone seemed to agree that the “fairway” was the hot property, and they compared themselves to how close they were to the Forest Oil (NYSE: FST, Stock Forum) exploratory well or the fairway. QEC was the dominant owner of the fairway, which is now referred to as the Talisman Energy (TSX: TLM, Stock Forum) and Forest Oil property. So I broke it down into fairway plays and everything else.
When you start looking at the geology you start to realize that the vast majority of these other plays are going to have different issues to solve based on the fault lines, porosity, depth, thermal age and organic content of their land.
What you’re left with is a choice between QEC, Forest, Gastem (TSX: V.GMR, Stock Forum), and Talisman. Forest and Talisman are large enough that this particular play isn’t going to hugely affect their stock price. That leaves QEC and Gastem, and since QEC owns more of the Forest/Gastem property, why buy Gastem? Play both properties with QEC and win regardless as to which of them gets there first.
Junex (TSX: V.JNX, Stock Forum) and Molopo Australia (OTC:BB: MLOOF, Stock Forum) have very large land positions in the lowlands in general but not on the fairway and with different geology.
At the end of all the DD it seemed that QEC was the best positioned to take advantage of the initial upswing when commerciality is confirmed. QEC properties also seem to have the highest chance of being commercial based on the geology. After the “fairway plays” have taken off, I expect to go back and review any new news or progress on the other players outside the fairway (such as Junex) and see which may make sense or be ready for their own dramatic moves.
Some extra pieces of info with respect the play and QEC:
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It has what it believes is the largest seismic database of the lowlands, which helped it pick the best pieces of land.
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Encana (TSX: T.ECA, Stock Forum) estimated 100 Bcf/section, Forest Oil estimates 93 Bcf/section.
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Three layers of shale on the property, Utica, Loraine and Trenton-Black River, all with good depth and each potentially commercial.
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5.3 Tcf of recoverable gas @15-20% recovery rate (attributable to QEC, low estimates based on what U.S. shale gas players are now quoting).
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QEC holds royalty on anything Talisman drills, plus WI.
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Royalty on Forest/Gastem adjacent property. Note: QEC owns more of this property than Gastem does. FST has 60% WI, QEC 20%, Gastem 15%, and Epsilon Energy (TSX: V.EPS, Stock Forum) 5%.
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QEC/Talisman property has 5x the geological length of the area Forest got 1 mmcf/d on exploratory vertical well.
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Talisman and Forest drilling now, with pilot launches in 2009.
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Natural gas pipelines adjacent to property.
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QEC has some downside protection from Alberta, Saskatchewan, and B.C. plays.
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Talisman and QEC have allocated more budget to develop the property than any of the other holdings in the area, $130+ million.
Risktaker77: Questerre Energy is the biggest position in my portfolio and it is also my favorite. With just over one million acres of land in Quebec, I believe Questerre has the best land position in the St. Lawrence River. It has partnered itself with Canadian senior Talisman Energy, an experienced oil and gas producer and explorer in Canada that also has other interests around the world. Talisman is one of the biggest producers of natural gas in Canada and has declared that it will be spending $130 million in the next two years to drill and explore the property. This property consists of approximately 719,000 acres of land and is located directly above the Utica, Lorraine and Trenton-Black River which is also referred to as the “sweet spot.” This block of land was the determining factor that made Questerre my top pick.
Questerre Energy has two other properties, its Yamaska property, which is approximately 102,000 acres in size and lies directly adjacent to its Talisman farm-in project. The St-Jean property, which is approximately 200,000 acres in size, is south of Quebec and lies near the U.S. border. Questerre Energy has a joint venture agreement with Gastem on both properties.
On a final note, on June 3 of 2008, Questerre has secured a $35 million equity offering at $4.70 for one common share. This past Friday, Questerre Energy closed at $3.17 per share which I feel is a real bargain considering the recent private placement. I have added to my position this week at prices under $3.00 per share. Based on my research and in my opinion, this private placement, its partner Talisman, and the location of the property gives Questerre Energy the most credibility and success probability out of all the other players involved.
Petrolympic (TSX: V.PCQ, Stock Forum) is the second biggest position in my portfolio. Petrolympic holds an interest in over 1.9 million acres of land in the Appalachian Basin of Quebec, which includes land positions in the St. Lawrence Lowlands and the Gaspe Peninsula. On June 30, 2008, Petrolympic acquired a 30% interest of Resources & Energy Squatex. Resources & Energy Squatex holds approximately 670,000 acres of land which is located directly over the highly prospective area of the Utica Shale and Lorraine formations in the St. Lawrence River. I jumped in Petrolympic because of its 30% acquisition of Squatex and its land position over the "sweet spot."
I have bought in the mid 30-cent range and have seen its new highs and recent lows. I still hold all of my original position and have been adding more in the past week as I feel that Petrolympic has the greatest risk reward scenario out of all the companies involved.
As far as the Utica Shale goes, I'm in until they further define the resources and evaluate the real potential that it has to offer. At that point, I will probably sell the majority of my position as I feel that the "easy" money will have been made and I will move on to other stocks, depending on how the economy is at that point in time. My favorite sectors are oil and gas exploration, precious metals and some tech stocks. I limit my portfolio to these sectors as they are the ones I understand and feel the most comfortable with.
Not the only game in town
Despite the general investor enthusiasm for Questerre, it’s not everyone’s favorite. Another member of the St. Lawrence Dream Team group, goldenTOE, likes a couple of other companies.
goldenTOE: Top choice - X-terra Resources(TSX: V.XT, Stock Forum)
They have exploration permits for close to 300,000 acres within the Rimouski and Shawi Regions.
The company recently closed a PP and raised $5 million plus it has a joint venture with Brownstone Ventures (TSX: V.BWN, Stock Forum) (XT owns 2 million shares of BWN). The interesting connection here is that Brownstone's CEO is Sheldon Inwentash (founder of Pinetree Capital (TSX: T.PNP, Stock Forum)). Mr. Inwentash is about to be elected to the board of directors of X-terra at its AGM later on this month. Brownstone is very well financed (they have something like $50 million in cash) and they will be the primary operator of the exploration program.
What is very attractive about this stock is that, as of today, it is trading at a 1:1 price-to-book ratio.
The stock got a little ahead of itself a couple months back (like most of the Utica plays), but it is looking like it has found a base around the 60-cent area.
XT's small float plus its aggressive management team is why I like this stock and have it rated as my top pick. The company is still years away from becoming a producer but it has a nice chunk of land and that makes it a potential takeover target down the road.
My second choice is Junex. Junex is not quite as speculative as XT in that it is actively drilling multiple targets as we speak. I like the fact that they Junex has already partnered with Forest Oil and that it’s also completed a PP, raising $22.2 million - so it has plenty of cash to explore its various properties. The big plus here is that Junex holds exploration rights on more than six million acres of land! If the Utica Shale turns out to be anything like the Barnett Shale play - Junex will be sitting on some pretty expensive land. At its current market cap (less than $200 million) it would be a smart purchase for Forest Oil today - but my guess is shareholders would not approve the deal.
