Natural Gas Outlook PositiveI believe the entire junior oil and gas sector is poised for a major recovery and turnaround. Given the substantially depressed valuations, such a recovery could result in share price gains of between 50% and 100% in a year - yet such gains would still not be at new 52-week highs for most names.
I mean look at the big caps (CNQ, ECA and TLM) - they are at 52-week highs and have made a huge surge. That's because the market has responded to a major (and likely sustained move) in oil prices from the low 50's to the low 60's. Also, natural gas has moved up significantly.
The average Henry Hub price in Q4/2006 was $6.04/mmbtu. In Q1/2007 it was $6.39 - up 6% (a slight, but meaningful improvement). Today it is just under $8.00/mmbtu - that's a 25% increase quarter-over-quarter. The EIA predicts that summer (April-September) gas prices will average $7.64/mmbtu - up 18% from the same period last year.
Remember, given that operating costs are mostly fixed (service costs will vary with relative strength in commodity prices, but it is more fixed than variable) changes in prices (and thus revenue) will have a greater change in cash flow. so expect substantial improvements in year-over-year cash flows across the sector in general in Q2 and Q3.
As importantly, it isn't just an improved commodity price outlook that we have to look forward to. Many juniors had disappointing production profiles in 2006. For some unexplained reason it seemed that production shortfalls were more rampant last year for juniors than in any other year in recent memory. 2006 was just "bad karma", I guess. That said, many juniors with "disapponting" results in 2006 were not all in vain. Some have built up a lot of knowledge from last year's activity and the less noticeable exploration successes often lead to substantial development locations to be exploited in 2007.
For DFR, 2006 was a year of disappointment - no question. But it appears 2007 will turn out to be the year of redemption.
I believe what investors don't (or aren't able to) see is the fact that DFR has assembled extremely important knowledge from last year's drilling program (including its failures). Plus the few successes that it did achieve will have substantial positive consequences in 2007 and beyond.
DFR's recent announcement of significant drilling success (and more importantly, a big increase in production - $$$) is just the beginning. The company has identified a number of high IRR well locations. Particularly exciting are its sweet gas Halfway targets, which are "high-impact".
Furthermore, DFR will advance its initial success in sour Halfway pools discovered earlier last year. It was these discoveries that initially propelled DFR's stock to over $4.00/share. Because these pools are sour, DFR has had a hell of time trying to permit drilling locations. However, that long process is coming to a head and I expect the company to begin drilling these sour gas targets in Q3.
There is a lot of excitement in DFR to be expected in 2007. I will settle for nothing less than hitting its previous highs by the end of this year.