Tipping PointThe price point at which cardium and heavy oil are equally attractive is worth further consideration.
This is the point at which both have the same NPV (net present value).
OBE told us last Monday, they were at that point.
Reflecting upon this makes me wonder if the NPV for the heavy oil side is understated.
If true, then the heavy oil wells have a higher NPV than presently calculated.
NPV takes future prices, and brings them back to present values.
Financial theory says that an assets future price should be higher than present prices, because you could short the asset today, and lock in a purchase today at a future date, and the difference should be the interest you would earn inbetween.
Oil markets have constraints, like the cost of storage etc that sould make future costs even more expensive.
However future oil prices are lower than present prices. Future oil prices (more than a year out) are not set by supply and demand - they are set by speculators, speculating.
If actual future oil prices (ie the price that a prop well drilled today, will get from much of its oil over the next 10 years) are higher than the present future strip price, then the NPV for those heavy oil wells is higher than it presently appears.
If US$85WTI and current heavy oil discounts are the tipping point using current future strip pricing, then as WTI increases OBE may be adding a whole lot more PROP wells - which may end up paying out much more than expected.
Buying that 45% of PROP for next to nothing, and then having the oil price pass the tipping point to favor heavy oil over cardium, is in fact, a company changer.
Others like BTE have their teath in some heavy oil ground around OBE, but BTE has so many shares outstanding, and so much other production and debt, that all their potential clearwater (heavy oil) production isn't enough to swing their cash flow per share sufficiently to significantly move their share price.
OBE's shares on the other hand are geared to move strongly
Both BTE and OBE could add 20,000-30,000 boe to their production in the same time frame. Thats nice for BTE, but it would really push up OBE!