If you can stomach the risk, the upside potential can be large because the targets are large
Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.
First - Clarification to August 24th TTrax Report – Monthly Junior Gold Valuation Table
Last Friday I discussed what appeared to be a recovery “finally” emerging in the penny stocks but in the report I referenced the junior gold valuation table I have been publishing monthly since December 2011.
The powers that be at Stockhouse decided we would reserve for paid subscribers only that monthly gold report and another table I publish monthly of 90 cash rich junior exploration companies – I called that one our Virtual Vulture Fund.
Considering an annual subscription is only $99 I had no problem with this decision but thought we were starting in September. I sent my free weekend TTrax report to them and through a miscommunication an older version of that report went out (referencing the gold table).
My apologies for the confusion it created as I know a lot of you depend on that gold table each month. I will still reference the monthly average $ value but understand why the detailed tables will be restricted to paid subscribers. If an annual subscription was far more expensive I might question the idea but considering they keep the annual cost ridiculously low, I see no problem with this decision.
Porto Energy (TSX: V.PEC, Stock Forum; 15.5 cents)
Shares Outstanding: 200 million/Market Cap: $30 million
High impact oil & gas exploration in Portugal
This week I am presenting Porto but it is a departure from the norm for me because the stock has already doubled in the past few weeks and it has resulted in my personal investment being larger than normal for stocks I write up. This spring and early summer I accumulated 125,000 shares near seven and eight cents so the current value is almost $19,000.
I think this is still a great story but if you find there is too much bias given the personal share position, don’t read any further. The earliest I would sell any of the position would be November or December but the intent was (is) to hold into 2013. It all depends upon drilling progress.
The last update on Porto to paid Ticker Trax subscribers was August 13th at seven cents – I have included part of that report below as it relates to their seismic.
Random stocks featured to paid subscribers are often featured in this free weekend report but typically I prefer to wait a minimum of three to four weeks if the price and valuation is still attractive. In the case of Porto the company is being featured this weekend because they announced an important drill program was starting.
High impact oil & gas stocks can be exciting to play and can be very financially rewarding. However, these can also be very high risk.
Had you invested in Porto’s IPO in March 2011 - $70 million raised at $1 per share – you would have lost 93% of your investment by this summer. A complete disaster unless you were fortunate enough (like we were) to purchase at the bottom.
Another high impact oil & gas disaster was Zodiac Exploration (TSX: V.ZEX, Stock Forum; five cents). This was a deep exploration play in California that raised $50 million near 50 cents in August 2010. This play was a favorite of Canaccord. The stock hit $1.30 mid 2011 on drill speculation but then watched 96% of its value wiped out.
In Porto’s case they missed on their first two wells (using 2D seismic technology), subsequently spent a lot of their money shooting advanced 3D seismic across a huge land (and ocean) base, and were also caught in this horrendous market we have seen for small stocks the past year.
That is an example of the downside risks when buying these early. The downside from 15 cents on Porto is still there but as I have noted below with the value of their land position and the 3D seismic database, the risk should be mitigated.
If you can stomach that risk, the upside potential can be very large because the targets are very large.
Porto presented at an oil & gas conference in Denver August 15th so here is the link to that presentation. This provides a better overview of the company than I could do in this limited space.
Drilling starts August 30th
Porto announced Thursday night that they have started drilling their deep gas exploration well in Portugal. It is estimated (assuming no drill problems) they will hit TD in about six weeks.
This is a very important well. The target is 1/2 billion cu.ft of natural gas in this zone alone (see images below). Natural gas pricing in Europe is dramatically better than we see here in North America.
In the United States it is currently $2.90/MMBtu. Overseas it is much different. Most parts of Asia pay about $14/MMBtu and Europe averages $11/MMBtu.
Natural gas has only been available in Portugal since 1997. Gas primarily originates from Spain and LNG (liquefied natural gas) comes from Nigeria. Because the country is so heavily dependent upon Spain, they desperately want (need) more local exploration and development - Porto is leading that effort.
Portugal's oil & gas company is Galp (Galp Energia). Their activities span from exploration and production of oil and natural gas to refining and marketing oil products, natural gas marketing and sales and power generation.
Galp is Porto's 50% partner on this well - this is critically important should they hit.
Since we started following Porto with paid subscribers I have been discussing the importance (and value) of 3D seismic to an oil & gas company - and Porto in particular because they have so much of it completed in Portugal.
Porto drilled a well last year based on 2D seismic that missed its target. This well (ALJ2) is shown in the 3D seismic image below. You can see why they missed.
The well spud Thursday (Alcobaca-1) is targeting the orange dome that shows up in the image and also shows the structure in the smaller image to your right. You can see the dramatic difference that 3D seismic makes. As I previously mentioned, this is what revolutionized oil & gas drilling in North America this past decade.
Just keep in mind that this is not a fool-proof process. It is estimated that 3D seismic improves your drilling odds to approx. 30%. This still leaves a large margin of error (don't forget the target is 9000 feet deep). They can also hit drilling problems enroute so a lot can go wrong.
If however they hit, then this is a company maker. Not only because the economics of this well are huge, but it then opens up the entire field and they know the 3D seismic work will pay off. It means the reserve estimate for the region (that goes well beyond 1/2 billion cu.ft) is dramatically de-risked.
In the image below you can see where several targets exist both on and offshore. If this well is successful, they would likely do three more wells in 2013.
This is oil & gas exploration in a region that has employed very little modern technology so the growth potential is very large. Yet it is also very risky - were it not this would be a $1 stock and not a 15-cent stock.
If they miss on this well the company has a lot in the pipeline and I suspect we would still be sitting on paper worth at least a dime. If all goes well however, then the upside is dramatic. Institutional money will typically not touch a company at this stage of its life but could buy in huge volume should they hit.
Just don't forget that Porto has invested millions in 3D seismic this past year and consulted with many experts prior to drilling this well. However, we are dealing with Mother Nature and sometimes she doesn't want to cooperate.
Here is an excerpt from my August 13th report to Ticker Trax subscribers.
I. Seismic Value
Porto has about $5 million in the bank. With 200 million shares out, the market cap is $14 million. This means their underlying assets are only worth $9 million at seven cents.
You will see in Part II below where the potential could be dramatically higher (IF) they hit on drilling in Q4 or 2013. These big overseas oil plays are very high risk but very lucrative when companies hit. Africa Oil (V.AOI) watched its market cap go from $170 million in Nov/11 to $2.4 billion by May/12.
Porto has no oil or gas production but 1.9 million acres (100% working interest) of exploration potential, joint ventures and 3D seismic. Should they ever hit an economic well when they control this much land and seismic, the valuation would rise remarkably – even with 200 million shares outstanding.
We will value ONLY the 3D seismic based upon industry norms. I researched 2012 seismic contracts in Africa and Australia to arrive at a fair market value of $12,500 per square kilometre (km2) of 3D seismic. Porto has completed the following 3D seismic both on and offshore Portugal.
Offshore 3D - 1100 km2 x $12,500 = $13.8 million fair value
Onshore 3D - 500 km2 x $12,500 = $6 million fair value
Estimated fair value of Porto 3D seismic inventory is approx. $20 million (10 cents per share). This assigns zero value to the land itself or the underlying resources of oil & gas if they are fortunate to hit economic wells.
2012 3D Seismic average of $12,500 for Porto was based upon the following:
a) Murphy Oil – offshore Papua - $9 million 600 km2 –$15,000 per km2
b) Senex Energy – onshore South Australia – 790 km2 - $11 million – $14,000 per km2
c) Australia – $5 million for 400 km2 of offshore 3D seismic survey and reprocessing – $12,500 per km2
d) BHP Australia – $12 million for 923 km2 seismic survey and geotechnical studies - $13,000 km2
e) Pancontinental Oil - Offshore Kenya - $14 million for 680 km2 - $20,500 km2
f) Chariot Oil – Namibia - $100 million for 4500 km2 of 3D seismic - $22,000 per km2
In addition to this weekend column and the bottom fishing research sent to paid Ticker Trax subscribers on Monday, I also provide free MicroCap alerts throughout the week. These are based upon News or Abnormal Price/Volume Activity on the several hundred stocks we track from our own research, brokerage analysts, or third-party newsletter writers.
Disclosure: Danny Deadlock owns 125,000 shares of Porto Energy (TSX: V.PEC).