My Fav Small Oil This investment situation is about converting a low market multiple disappointment, to a rapid growth high market multiple market darling.
As such, reserves are a consideration, but its the rate of growth in production, and the associated cash flow which will be the price determinants.
At the time of sale of N.Gas assets was announced at the start of Jan, the remaining VRO production was reported to be 1634 BOE.
In early March, they reported production has reached about 2200 boe.
Thats a 35% increase in production in two months. Thats fantastic.
Its very hard to put an accurate cash flow estimate on those 2200 boe's but its probably close to 82c/share annualized.
There is a good chance their prodution growth rate will be 50% plus this year - maybe a lot more........
To get an average 2011 prodution of 2200 boe, that implies an exit production rate of about 2750 boe, or about 70% growth over the 12 months from the start of Jan.
That kind of growth rate, will justify a high cash flow multiple, probably in the 6-10 range...........meaning a share price in the $5-8 range........
High growth market darlings often get over priced............ie this could exceed that range.
I expect a few hickups along the way - for example its unclear to me what happens if N.Am gas storage fills up...........does this mean all wells producing any gas byproduct, have to be shut in temporarily? That just might happen for a month or two, but it won't stop drilling............and it probably won't change the exit rate.
In any event, I see this as an ugly duckling turning into a swan, and so far, only the most perceptive have noticed.