The Little Gas GiantPETROGLOBE: A Little Gas Giant
by Jim Willie CB
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December 12, 2006
https://www.321energy.com/editorials/willie/willie121206.html
Corporate website: https://www.PetroGlobe.com
PetroGlobe Inc is the parent company, with two wholly owned subsidiary companies, PetroGlobe (Canada) Ltd and PetroGlobe Energy USA Ltd. The Canadian firm PetroGlobe Ltd is a full service, worldwide consulting, and project management company in the energy business. Current projects are primarily in Alberta, located in the Pembina property. The wholly owned US subsidiary PetroGlobe Energy USA Ltd is headquartered in Calgary Alberta in Canada, but whose current efforts are to explore for natural gas in Floyd and Motley Counties in the Palo Duro basis of West Texas in the United States. The company is busy with drilling in Alberta, tying in its recent discoveries to the gas pipelines, and collecting revenues. The immediate goal is to establish the West Texas second front, and create a second revenue stream. All is on track to do precisely that.
The stock price broke above the C$1.80 mark in November, registering new highs. Insider buying triggered the spurt, as the CFO bought 50k shares, and then the CEO bought 25k shares, both in the open market early in November. Corporate officers are voting with their personal money. The big news for the company on expansion has been the potential realized establishment of the West Texas second front with the cooperation of a partner. Initial results are pending, but a discovery has been logged of uncertain magnitude. Recent stock trading patterns might indicate a rather significant gas field discovery, and confirmation of a second zone of production, this outside the resource rich Alberta province.
Total energy production is likely to double from 2006 to 2007 for the company, just based on the current drilling schedule, as PetroGlobe affirms itself as one of the fastest growing exploration and production energy firms in Canada. Chairman & CEO Cliff Johnson has embarked on a new course, in order to leverage production through ownership rather than to offer consulting toward similar work done by others. VP of Operations Darcy Spadey leads the successful projects in Alberta. CFO Mike Walsh manages the financials, limiting dilution, which to date have earned considerable returns on capital. They have chosen explosive exponential growth in production output rather than steady consulting. In the first nine months of this year in comparison, consulting revenue has grown only 2%, clearly not a strategic priority. Their years of experience in energy related consulting has enabled them to exploit their vast expertise, while enjoying the stability from core operations and its inherent revenue stream. They priority is now to realize strong capitalization growth in the stock.
There are 27.4 million shares outstanding, the same number fully diluted. This is extraordinarily low, a clear benefit for investors. No burden of a huge stock float. Stock options have been exercised in the last few months, ensuring ample additional funds. As the fundamental growth story is appreciated as a massive success story, the low float will provide few shares to accommodate the new demand assured to come, and in progress. The stock has “blue sky†opportunity which is being realized in the last few weeks, with no resistance. The robust autumn recovery in the natural gas price has proved to be a sturdy tail wind to help lift the PGB share price. The Texas discovery clearly is the driving force for the recent share price breakout. This is a stock with a low float under control and strong growth in progress, a dream for investors.
ALBERTA
This energy rich province is the headquarter home for PetroGlobe, and the main foundation for current oil and natural gas production. In Alberta the company completed a 12-well drilling program during 1Q2006, of which six Pembina wells have been tied in. They are currently producing about 2.0 million cubic feet of natural gas per day with an average 39% working interest. Progress continues to extend output in its primary Alberta project currently. Two new wells were tied in during the recent Q3 quarter in Pembina. The next phase of drilling in this area of Alberta has commenced, which involve eight new wells. By the end of the 4Q2006, the firm expects to complete tie-ins for an additional ten gas wells, which will add to the six gas wells already now tied to production. Construction is ongoing on the trunk line and gathering system for the next four wells to be tied in to the Keystone gas plant, now a completed pipeline. On a net basis, factoring in its partner portion in stakes, PetroGlobe will have 7.2 net gas wells producing output from the Pembina field by the end of this month of December.
Seven more gas wells in the Pembina project field await imminent tie-in with similar expected output rates. The key fact on current output is that even after four to eight months of production, the flow rates have remained constant with no apparent decline, an important gauge to watch. These are not deep wells, thus not high cost wells. PetroGlobe is currently over halfway through an 18-well program in Alberta, with the next stage of drill activity (fully licensed) underway. Soon they will approach 50 gross wells in Canada next year. In the Leduc area of Alberta, a well was fracture stimulated and tested. Plans are being drafted for a permanent production facility there devoted to both oil & gas. The Leduc field is not as far developed as Pembina, but progress is being made toward imminent prospects in this second project in Alberta.
Strong healthy growth is coming from Alberta development, where continued growth is expected due to a well funded capital program. PetroGlobe has succeeded to control its costs, despite rapidly increasing industry costs, driven by rig and oilfield service staff shortages. Capital expenditures have risen by over 420% to C$3.7 million this year, with huge payoff. Production of oil & gas has reached a level of 139 barrels of oil equivalent here at the end of 2006. The company ships gas from 6 wells in the Pembina area with an average output of 300 thousand cuft per day per well. The Q3 oil & gas revenue has reached C$469,000. That soon might change.
WEST TEXAS
PetroGlobe has a 55% working interest in the Palo Duro Texas project covering 100k acres in the West Texas basin, with a 4-well drill program which began in September. This property lies nearby a tract operated by Bankers Petroleum, with whom the company owns a 10% working interest separately. Vintage Petroleum is the operator. Acreage is to be earned as drilled over approximately 63,000 acres under exploratory lease. In time, gas pipelines must be constructed over a short 10-mile stretch so as to connect to the regional system. As output flow rates are determined, future capital funding will be secured easily, and at a higher share price. The Palo Duro basin has several other drillers at work, where some production capability has been proved. Conceivably, PetroGlobe could earn transit fees as landlord on a new pipeline, yet to be built.
PetroGlobe hit natural gas in its first well in the Palo Duro Basin of West Texas (drilled to 9900 feet) in early November, and has found evidence of oil at 5800 feet in its second well in West Texas. The standard flow test required by the state of Texas will be followed so as to determine reservoir parameters, gas content, and flow potential. So far the West Texas project is a quiet staggering success, but enthusiasm has been restrained to date within public pronouncements. It is evident that the prized second front in Texas has been established, a production beach head. Its volume has yet to be determined and measured accurately. If output matches nearby discoveries by other companies, their Texas gas wells might each conceivably boast flow rates over two million cuft per day.
ENERGY MARKET FACTORS
The bold chicanery and duplicitous games conducted by our crafty political leaders are over in the energy market. The US election is finished. An 8-point game plan to steer energy prices lower, overstate inventory levels, and order lower energy demand forecasts failed to prevent a change in US Congressional majority shift. This detailed deceptive initiative is outlined in my Hat Trick Letter October report, entitled “Control of Energy & Industry Response†available to paid members. Expect only minor change on the political front, less destructive policy and more gridlock, but tragically little to reverse the march away from a Constitutional government. More importantly to use in the here & now, the energy market has reacted to the lifted heavy hand of manipulative interference. The natural gas price has made significant steps upward, as it has climbed the contango curve. With each contract expiration, the natgas price jumps higher.
Without much public comprehension, the sliding USDollar works to lift energy prices. So if the USDollar continues to plumb lower depths, despite a slower USEconomy and reduced energy demand, the energy prices (crude oil & natgas) should be expected to rise, not fall. The USDollar has suffered a quantum decline in exchange rate versus the euro, the swissy, the Aussie Dollar, and to a greater degree British sterling currencies. In the case of crude oil, the price has lifted over $60 without fanfare. Can anyone recall the nonsensical calls made in October by shills that crude oil would force its way down to $50, perhaps lower? They evoked laughter in the cockles of my heart, pure political hokum, if not deliberate deception by Wall Street firms seeking a better price for newly placed long position investments.
The main output product by the little giant PetroGlobe, natural gas has seen its price complete a recovery reversal. The recent foray above 8.60 toward 9.0 has sparked some profitaking. Expect support to be found at the two critical long-term moving averages. The 20-week MA is at 7.25 and the 50-week MA is at 7.45 with both in rising mode. More importantly, if and when the more jumpy 20wMA crosses above the more stable 50wMA, a critical technical signal would be written on the exchange wall and chart room billboards, observed by savvy technicians. This would be very bullish for the natgas price. But first, the natgas price must find some support from the pair of moving average, which is highly likely from technical precedent. Previous highs in July and April of 2006 should also provide technical support.
Winter has yet to take a firm cold bite on the economy for either the United States or Canada. It is early. With two feet of snow dumped on the US prairie states, such as the St Louis area, winter has knocked on the door and delivered a facial slam. It is early. A hilarious story was released earlier this week, which floored me on its callous bold duplicity. A story hit the wire of expected warmer temperatures in the next two weeks. The MidWest and East coasts are being slammed by a sudden burst of winter. In Pennsylvania and New York states, temperatures dropped 30 degrees (F) or 16 degrees (C) in a matter of hours on a single day. Snow is next. Yet the market sold natgas and crude oil on the controlled press story! Let’s see if any warmth follows the winter introductory dance. My guess is not much. It sparked a technical selloff. If the natgas price touches 7.0 or shows a 6 handle, it will last only a matter of minutes in my view.
The other major external factor for US-based investors of energy stocks from north of the border is the Canadian Dollar exchange rate. Look for the loonie to track the crude oil price closely, as it has done for the last four years. Other key dynamics are involved, like Bank of Canada interest rates and USTreasury Bond purchase in sterilization. These are fully discussed in the Hat Trick Letter, covered in the upcoming December issue out in midmonth.
QUICK CONCLUSION
The PetroGlobe stock is poised to capitalize on the rising recovering rebounding natural gas price, leveraged on that price. The much more critical factor is the burgeoning growth of this little giant from two distinct zones, Alberta and Texas. Establishment of the second production zone in West Texas is crucial to pushing the stock above the C$5.0 target. This is a well managed company, which is taking its investor relations function seriously. Its biggest share holders offer the stock firm stability in a steadily rising valuation, which should surpass the C$100 million market capitalization very soon, tied to a C$3.50 share price. Strong Texas flow rates will lead to the share zooming toward C$5.0 early next year. Personally, I own shares in the company, as any prudent investor would. I have not been compensated in any way by their management, who are unaware of this article.