I received this article from Seeking Alpha Summary The rights to exploit crown oil and gas in British Columbia is acquired through public auction. The February 2018 auction, when compared with recent drilling activity of Chinook Energy, suggests positive results and a promising addition to Chinook's Montney holdings. Although Chinook faces other challenges in the coming months, we rate it watch and accumulate. Chinook Energy (OTCPK:CNKEF, TSE:CKE) is a Canadian small-cap oil and gas company active in North East British Columbia. It has struggled lately with low gas prices and some challenges related to its pipeline access to markets. It has recently drilled two exploratory wells. Chinook's simultaneous activity in recent auctions for crown land allows us to deduce that these wells have produced promising results. We recommend that investors interested in small-cap energy stocks add this stock to their watchlists and accumulate the stock on weakness. To understand the argument, we need to first to review the crown auction process in British Columbia. 1. Almost all subsurface minerals in British Columbia, including oil and gas, belong to the Crown. The right to exploit them through drilling or mining or harvested is auctioned off by the provincial government every month. The auction process is multi-stage. (See this link for the process). First, an interested party will nominate the posting of the petroleum and natural gas (PNG) rights in a certain formation at a certain locale. Second, this posting undergoes a pre-tenure review to ensure that it presents no environmental or jurisdictional issues, and that there are no indigenous claims to the land in question. Until it passes this review, the posting is 'deferred', where it can languish for months or years. (For a list of currently deferred blocks for Northern BC, see this link.) Third, if the posting passes review, it is publicly posted for a period of two months. (For the timetable, see this link.) 2. In April 2017, two blocks of Montney rights totalling c. 4400 acres were nominated for inclusion in the July auction. This block of land failed to pass the pre-tenure and it still languishes with other deferred packages. These two blocks are in purple ('deferred auction') in the following map, which I have adapted from a recent presentation from Chinook Energy. (See packages 1707011 and 1707012 at this link.) Source: Adapted from Chinook Energy (Corporate Presentation, Nov. 2017, slide 8) Source: adapted from Chinook Corporate Presentation (Nov. 2017, slide 8) 3. In November 2017, another request was made to post two more contiguous blocks of deep rights in the Feb. 2018 auction, each of 559 hectares = 1380 acres. These are the green block and blue block in the map above marked "Feb. 2018." (For the posting see p. 23, parcels 66687-8 at this link.) 4. Both these requests were, it has to be assumed, made by Chinook, since they are between Chinook's holdings near Martin Creek and those at Umbach/Birley, and this foreshadowed a strategic move that soon followed. On Dec. 11, 2017, Chinook raised just short of C$2m through the placement of roughly 6.5 million flow-through shares at C$0.31 each. In its operational update of Jan. 17, 2018, Chinook signalled that this money was earmarked for the drilling of two exploratory wells in land that it owns the rights just north of Chinooks main Montney landblock. (See Operational Update.) 5. The first of these two wells is Chinook Martin B-B002-H/094-H-05 (BC Well Authorization no. 35333), which was spudded Jan. 3, with rig release Jan. 13. (This is marked above with a green 'A'.) The second Chinook Martin C-A094-D/094-H-06 (WA 34435) was spudded Jan. 13, with rig release of Jan. 26. (This is marked with a green 'B'.) (For the reports, see reports here and here.) 6. Chinook's drilling of these wells and the auction of the adjacent land packages discussed in 2 and 3 above are not coincidental, but applying a tactic common among Canadian producers. Because the results of Chinook's well are kept confidential for a year, Chinook knew better than anyone what, if anything, the land was worth. If their exploratory well showed promise, they would bid to acquire the rights to exploit it. If the drilling results were disappointing, they could choose not to bid. 7. The results for the February 2018 crown auction (at this link) have recently been announced, the winning bid for 66688, which is the green block in the map above, was $168,750, made by 'Scott Land and Lease'. The other package, 66787 (in the blue above) received no bid. 8. Scott is one of western Canadas largest land agent, a company that specializes in managing the auction process and negotiating mineral leases. In this case, they were acting on behalf of Chinook, as can be demonstrated by comparing the new map from Chinooks March 2018 Presentation (slide 10) with its original from November 2017. The newly acquired block 66688 is now included. Source: Adapted from Chinook Energy (Nov. 2017 and March 2018) 9. That Chinook went through with the bid should mean that the drilling results were positive for at least one of Chinooks exploratory wells (marked 'B' in the map above). Otherwise, there would be no point in paying c. $169k in a one-time payment and ongoing rent. 10. What does this mean for Chinooks valuation? Adding 1380 acres of prospective Montney rights will not move the needle much for a company with 53,200 gross acres leased. The implied value of the new acres, however, may also suggest how much development can be pursued in the entire northern block. This, in turn, will increase the proven and probable reserves estimates for the company. Any new development in this northern block will be taking place in lands where Chinook has legacy assets, including infrastructure for gathering and processing, as well as optionality in terms of delivery pipelines. 11. The implications of this, then, is good news for a company that has had its share of recent challenges that have included weak pricing and production that has been partially shut-in because of third-party issues. The financial results for 2017FY can only be described as disappointing, mostly through no fault of Chinooks. Looking forward, 2018Q1 should also be weak, owing especially to takeaway issues. In our final analysis, however, investors interested in a small-cap natural gas stock should continue to watch Chinook and accumulate on weakness. Disclosure: I am/we are long CNKEF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Disclaimer: This article written was emailed to me by Seeking Alpha