Two-month gain for paid subscribers peaks at 240% this week
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.
Porto Energy (TSX: V.PEC, Stock Forum; 19.5 cents)
This summer I felt like an analyst adrift in a life raft, bottom fishing stocks few had any interest in. For those that did take the plunge with Porto - even over the past few weeks - it generated gains in the range of 50%.
For paid subscribers we were fortunate to see gains surpass 200% this week (I started coverage of this company mid-August near seven cents).
Even for free Ticker Trax weekend report readers, the stock is up 30% from my original August 31st report – short link available here:
I have been following only four oil & gas stocks this year and started coverage of them early summer. Porto gains were the strongest near 200%, Manitok (TSX: V.MEI, Stock Forum; $2.10) has gained 80% in three months, we are even on another and up 30% on one more (these were all reserved for paid subscribers except for Porto).
By comparison, the BMO Junior Oil Index ETF (TSX: T.ZJO, Stock Forum; $18.20) is up only 60 cents, or 3.4%, during the same three month period – and this ETF is sold to investors as being the best of the best in Canadian junior oil stocks. Many people are quick to criticize MicroCap (penny) stock investors but it is easy to make a case for how grossly over-promoted the ETF industry is.
Back to Porto….
In typical oil & gas (deep discovery well) fashion, there should be a point in the next couple weeks when a substantial amount of speculative trading emerges.
Volatility can be extreme as the closer they get to target, the more nervous everyone becomes. Rallies can be interpreted as a commercial discovery (yet they can easily be wrong) and selling can be viewed as a commercial failure – but that too can easily be wrong.
Few will know except those working on the well – and insiders. And I suspect this is a tight hole so information will be closely guarded (as best they can). At this later stage of the drilling phase, I find these difficult to play because they can be nerve racking – often exciting – but equally nerve racking.
If you are not familiar with this story I would suggest going back and reading my Ticker Trax weekend report from August 31st - http://bit.ly/TtNK9w - this explains better the target objective over the next few weeks.
The news October 9th that generated the strong buying this week contained two different but very important (and encouraging) developments:
1) Their joint venture partner on the Portugal Lias Concessions completed a 23 shallow-well drill program designed to assess the onshore oil & gas potential of that particular concession. This was fully funded by the partner. Intention was to drill 19 wells but they increased it to 23. They did not provide specifics but clearly alluded to the program going very well. The plan is to now correlate the 3D seismic with a geochemical and geological analysis of the drill core.
2) The more important news was an update on their deep Alcobaca 1 presalt well. This was encouraging for the following reasons:
a) A 3300 metre well can encounter many problems enroute. While we are not out of the woods yet, we are 90% of the way there. This de-risks the drilling phase dramatically.
b) The salt formation was thicker than expected. This is a large salt dome (that they theorize) caps a very large natural gas deposit. On their 3D seismic (which I discussed in earlier reports) something big appears below this dome - but it is technologically challenging to hit it. The thicker salt formation increases the odds that commercial quantities of natural gas have been trapped below.
c) Once they drilled through the salt, they encountered elevated gas readings. While this is very encouraging, they still have 400 metres of drilling to go (to target) and this will take another two weeks. They will continue logging and analyzing core as drilling progresses. That is why we should see speculation building back into the share price soon.
It was also encouraging to see them run a "liner" before they resumed drilling to target.
A liner is often started at a significant depth by using a "hanger," which is cemented into place. A liner is still made up of separate joints of tubing, but often saves the company money (on both steel and cement) - although it is a decision that is only made if companies feel the economics warrant it (i.e.: the odds of success look promising).
The liner can be used for any number of reasons/benefits:
- assist in the retrieval or running of downhole tools
- reduce the risk of losing circulation (of mud and fluids) during drilling
- reduce problems with wellbore wall stability (a liner can be installed relatively quickly)
- A liner is less likely to damage the formation than a full casing string
- a liner is less likely to cause cement contamination
- liners provide for better cement repair options if required
- Liners can also be a precautionary measure in circumstances where they could encounter high volumes or high rates of gas.
Here is an excellent six-minute video (animation) that explains the entire drilling process for an oil or gas well. It will be very similar to what Porto is doing.
Below is feedback I received this week from a subscriber. You may also find this helpful with respect to Porto.
I have some comments on the running of a "liner." As a bit of background I used to design geothermal wells and I am a member of the society for petroleum engineers. The oil and gas industry is notorious for inconsistent use of terms. Generally a liner refers to a production liner, which in oil and gas is cemented in place through the payzone and then perforated.
In geothermal and sometimes in oil and gas particularly, when sand production is an issue the production liner is made of slotted tubing or screen and is not cemented in place. The key though is that the production liner runs over the production zone.
In Porto’s Alcobaca well they have not reached the pay zone yet so the liner needs to be thought of as an additional casing string that does not come to the top of the well. They likely needed to run this extra casing string because the salt formation was deeper than they expected and they are having to cross the salt formation with two strings.
Salt is difficult to drill through and you need to use salt saturated mud so the hole walls don't dissolve. The likely reason for using a liner and not running casing to the top of the well is to keep the production bore larger in the top of the well as the extra string means the well diameter will be smaller than initially planned and this well may be flow restricted if it is a good well.
Ideally they would have extended the length of the upper liner to the bottom of the salt formation but they probably could not for design/safety or well stability reasons. I am sure they would on a subsequent well.
PS: The other design safety reason for running the extra casing string now is that if the reservoir is deeper than planned the assumed pressure will be also be proportionally higher and the formation at the upper casing shoe may not be able to hold the pressure.
We will continue to follow Porto until we see final results (good or bad) of this current deep well. If they hit a commercial well the impact on the share price will be significant as the company owns a very large land position with extensive 3D seismic to target further drilling. If this well is not commercial, I would expect to see a pullback closer to 10 cents.
The gain “potential” even from this current level is substantial – however it comes with risk. When I first started following this at seven cents I knew the upside heading into the drill phase was substantial. I am equally confident these next few weeks will also be exciting (I would be very surprised if it wasn’t) – simply because people like to play these high impact oil & gas projects.
Just don’t speculate with money you cannot afford to lose half of. Even if the risk was not that high, I never speculate on any penny stocks unless I can afford to lose half my investment. It rarely happens but even at seven cents I planned the same thing. At 19 or 20 cents, it is only common sense that the risks are now higher.
Disclosure: Danny Deadlock owns 100,000 shares of Porto Energy (TSX: V.PEC).
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.