Petro One Energy J5 April 3, 2012 Press Release, Market Commentary
Installment (i) J5 10A-15 & J5 Test Wells

Market Commentary:

Petro One’s April 3, 2012 Press Release and MD&A were not well received by the market and met with selling from April 3 – April 4.  Last week’s final trading session, April 5 saw the third day of volume tightening and a modest price uptick to close at .41 cents.  In all, price decline was about 25% with about 1M shares changing hands. 

Some sellers simply “had enough” of POP’s market and the news lead them out. 
For every seller, there is a buyer, and there was no shortage of investors catching knives from the sky.  The buy side were certainly bargain hunters with a firm understanding of POP’s future potential.  If you come in on the buy side in times like this, it means only one thing:  Finding the bottom, building the floor, and rebounding off of it.  We don’t know when the next news will come, but the stock has found bottom and will build off it.  Next news, the stock moves will be up. 

J5 10A-15 & J5 Test Wells:

Petro One’s 10A-15 well on J5 does not have abnormally high or generally increasing water cut.  Estimating water cuts of 50% - 70% is common for developing initial conservative estimates for vertically producing Viking wells in the Milton area.  If water cut was increasing over time, production would not spike from 20.8 bpd in August 2011 to 46.9 in October 2011, an increase of +125% over that 3 month period. 

Another spike played itself out from 32.7 bpd to 36.2 bpd in November - December, 2011.  This 11% increase took 2 less production days to achieve than the previous month. 

Petro One’s news release of April 3, 2012 indicates 5 new test wells are producing oil and running smoothly.  The company is fine-tuning them to optimize production.  Petro One plans to continue that process into the early summer and establish sustained and predictable production over a minimum three month period. 

For the April 3, 2012, Petro One had the emulsion (oil + water) production figures but not the water cuts for the emulsions on these new wells.  Oil production cannot currently be determined without those emulsions.  However, water cuts of 50% and 70% represent the typical range of water cuts observed to date in the Milton wells after initial production and have been used to frame the results.  Past that, the company anticipates full initial production reports by early summer.

Natural gas has been produced by some of the wells during testing.  Petro One is investigating the economics of a gathering system for the by-product gas from J5.  The northwest property boundary features an above-ground riser that provides a direct tie-in to an active pipeline operated by Altagas, and Petro One has been informed that the line has spare capacity.  Additional testing will be necessary to determine whether a tie-in will be economic based on gas volumes produced over the next three months. 

Summary Commentary:

This reservoir is only in its early stages and is moving towards stable and predictable production rates.  In the meantime, wells have run intermittently as the reservoir cleans itself up and infrastructure is deployed and brought online.  This is normal and the deposit continues to be economic. 

The assets are 51-101 compliant at 1.74 million BOEs of NI 51-101 proved + probable + possible reserves.  Petro One is proceeding with caution to enhance overall future economic recovery as well as reservoir lifespan.  No doubt the wells are choked back to resist depletion of the gas assets and to further regulate the overall production strategy. 

Water cut instability will certainly improve as the oil pool cleans up and the company’s assets get dialed in.  Instability like this is a natural part of developing a virgin oil pool.  With a $5M budget, Petro One impressed us all with a knack for discovery on both J5 and J1, and subsequent raises were well spent bringing on 6 producing oil wells with a possible gas tie-in.  

Petro One’s share price would not have fallen without risks or bugs in the exploration and development process.  If there is one legitimate gripe, it is that the results published April 3, 2012 fall short of the market’s expectation for the time and capital intensity required to convert an exploration target into stable exploitation assets.  This is the prime driver behind recent selling, but also the prime entry point for new players and loyal investors, which is why Petro One’s market remains orderly. 

Speculations and suggestions in the market persist regarding Petro One’s approach and sense of timing with capital raises. It is safe to say existing shareholders would have been more pleased with a larger raise, done higher, at an earlier time.  Rather than trying to time the market, management elected to follow the conservative approach of fully disclosing results before raising capital.  This was done against the backdrop of a rapidly deteriorating stock market and a European financial crisis.  Management deserves full credit for the appropriate size and quality of each raise over the past few quarters, all of which have been oversubscribed.  They didn’t run the stock and tuck private placement investors away at a high price, only to leave them hanging later. 

That shows integrity.

No doubt the current oversubscribed non-brokered private placement of $2,450,000 will soon be deployed to advance overall production and potentially address game-changing exploration targets. 

All told, J5 is shaping up nicely, but it is in a much earlier state than the market wanted.  Management has done a fine job with the resources it had at hand. 

This stock is attractively valued at this price.  For me, it is a strong buy.  If that thinking ever changes, I will let you know. 

I will soon follow up with additional installments featuring discussion of J5, J1, other exploration targets, and Goldstrike Resources. 

James Hudson, AlphaFlight Portfolios Inc.
Twitter.com/AlphaPortfolios