How to Build a Junior Oil Producer: Petro One Energy (TSX:V – POP)
The Fast Track to Production

Today’s news from Petro One Energy is a breath of fresh rush of air in a sector often filled with directionless, wheezing companies. Stocks have their bursts of energy, but the best typically buck the trend to the upside, no matter what the market looks like. And we have certainly seen POP perform over the past 6 months, with the stock following an effortless pace upwards of 55% against a market that is out of breath. Investors presume a lot of risk in junior stocks. However, a quality, undervalued junior will quickly pass many in a crowded field with enough “gas left over in the tank” for a winning sprint to the finish line.

It’s important to understand just how significant Petro One’s achievements have been to date: A company will not run against a market this materially, for this long, unless institutions and investors of all types, have decided, en masse, that the company is a winner. Like Benjamin Graham said, "In the short-run, the market is a voting machine but in the long run, the market is a weighing machine." Petro One has been jogging upward from the start of 2011. Smart investors have picked up the presentation, done the research, and are now voting with their feet. Today’s news of Petro One’s obvious near-term production goal has quickened the pace further. POP has the finish line in mind and has kicked it into high gear. In fact, they’ve even established a timeline:

June 6, 2011 - Petro One Energy Corp. (TSX:V-POP) is pleased to report that it has commenced a summer drill program targeting light oil on several of its 100% owned oil and gas leases in Saskatchewan and Manitoba, Canada. Multiple wells are planned to test strong targets generated by both seismic and well log control. The Company plans to complete, and bring into production all successful wells by summer's end, and to lay out an extensive Phase 2 development and exploration program.

Viking property (J5)

Initially at least three wells are planned to target the Company's J5 property south of Dodsland, SK. The first well will twin an existing Viking oil well that was drilled in 1965 and flowed an average of 34.6 bpd oil…Based on the production from the existing well on the J5 property, Petro One has already been credited with 214,000 bbl of NI 51-101 probable and possible reserves in the Viking (Petro One News Release October 14, 2010).

This oil zone remains untapped, and Petro One looks forward to exploiting its full potential. Reservoir parameters are comparable to a vertical well in the Smiley field northeast of the J5 property that has cumulative production of over 390,000 bbl.

A high-resolution seismic program shot by Petro One in March 2011 has confirmed the presence of a structurally favorable corridor within an extensive Viking sand fairway. Seismic has identified at least 13 strong drill targets on the property. The technical team believes that the probability of significantly upgrading and expanding the reserves on the property is excellent.

Petro One has recently expanded its land position in this area by a factor of four.

Frobisher-Alida property (J1)

The first well is planned to target the Frobisher-Alida reservoir on the west side of a prolific oil field with a vertical producer 1500 m northeast that averaged 500 bpd for its first three months, with cumulative production of 900,000 bbl to date. 3D seismic and well control have confirmed four strong drill locations in the Mississippian Frobisher-Alida limestone, which is characterized by prolific, long lived producers with excellent flow rates from both horizontal and vertical wells.

The initial target to be drilled is flanked on two sides by producers, one 100 m downdip with cumulative production of over 183,000 bbl, and the other 200 m updip with cumulative production of nearly 60,000 bbl. Petro One has already been credited with a NI 51-101 unrisked best estimate prospective resource of 500,000 bbl on this property (Petro One News Release October 14, 2010). The Company is optimistic that the first well has strong potential to both increase and upgrade this resource to reserve status.

Spearfish (Amaranth)-Mission Canyon-Lodgepole property (J4)

The first well is planned to target 3 prospective oil zones indicated by seismic in the Mississippian Mission Canyon and Lodgepole limestone, as well as the Triassic Spearfish (Amaranth) formation, a widespread tight sand reservoir that is currently the focus of more than half of current exploration activity in Manitoba, including the likes of EOG and Halliburton. The property is located directly between two oil fields that are producing from the Mission Canyon. The nearest well located only 470 m east of Petro One's J4 property had three month average initial production (IP) of 406.7 bpd, and a vertical producer 1 km west of the property had a three month IP of 103.8 bpd. The planned drilling is located on a seismically defined east-west trend that joins the two producing fields, and the probability of success is considered to be excellent. Petro One has already been credited with a NI 51-101 compliant unrisked best estimate potential resource of 228,000 bbl in the Mission Canyon alone (see Petro One News Release October 14, 2010). The Company has recently increased its land position in the area by a factor of five.

Other projects

Petro One continues to advance work on its other properties that cover a variety of plays across Saskatchewan and Manitoba, including the Cantuar, Bakken, Red River, and Mississippian carbonates. All of these are in close proximity to existing production and infrastructure. The Company looks forward to exploiting their full potential in subsequent programs. The Company has expanded its 100% controlled land position to 3145.64 ha, an increase of 41% since its January 13, 2011 News Release.

Like any winning racer will tell you, the best way to finish strong is to start strong. My most conservative, starting bare-minimum assessment of the assets, excluding the huge exploration potential gives me the following metrics:

• 214,000 BBL Light Sweet initial on Viking / J5
• 500,000 BBL Light Sweet initial on Frobisher-Alida / J1
• 228,000 BBL Light Sweet initial on Spearfish / J4

= 942,000 BBL Light Sweet

942,000 BBL * current WTI Brent price $100 BBL = $94,200,000 Gross

• Conservative average cost of Light Sweet / BBL from vertical wells with no fracking = $15 / BBL
• 942,000 BBL * $15 = $14,130,000 Cost

$94,200,000 - $14,130,000 = $80,070,000 Net Value
Petro One’s current MCAP = $26,000,000
Difference = $54M

Petro One’s current Market Cap is $54M dollars less than the value of the Light Sweet Oil it plans to press into production by summer’s end. That is a near 70% discount (!)They are starting off with a minimum of 23, first-rate targets. Folks, this is the most undervalued junior oil explorer and emerging producer I have every seen.

My metrics completely discount the millions of dollars of cash and securities held in POP’s treasury, the first-rate Yukon Gold assets optioned to AXP, as well as their excellent, proven management and TRULY world-class exploration potential.

We are in a new reality of scare oil that has built a perfect technical base over $90 / BBL, and Petro One is exploring in Southeast Saskatchewan and Southwest Manitoba, which are ranked as the two best places on the continent to look for oil from the standpoint of exploration potential, year-round access, political stability, infrastructure, and ultra-low royalty regimes.

Petro One has full, surface to basement Oil and Gas rights on all of their properties. In other words, they will be able to take 100% benefit of any economic Oil and Gas reserves they hit, very rare in this field. It shows this team knows exactly what they’re doing.

This company has been in existence for approximately 1 year. In that time, they have achieved two financings, both of which were at or above market price, with no warrants. The share structure is very tight and the company should have $5-6M dollars in the till. The share price has more than doubled since that time, with a 55% increase this year alone, and zero dollars spent on IR, conferences, promotion, which is just another way POP has separated itself from the pack of trudging hopefuls. They run this company on an all-in burn rate of less than $7K a month, which is so far below the industry standard, it doesn’t even register. Last I heard, they have NO employees, and everyone simply owns stock or options. Petro One is simply building a high-quality, soon-to-be cashflowing business, which is happening faster than anyone expected. That’s the essence of a winner: getting the job done quickly, until market attention finally catches on.

If it looks like a winner, talks like a winner, acts like a winner, and most importantly—runs like a winner—then it is a winner. I am well on board and will only add more, as are many established and smart folks on this forum. Best to catch what you can, while you can, in the market, because this one is charging hard and starting to pull away from EVERYONE.