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https://moneycentral.msn.com/content/P72145.asp
Canadian Superior Energy
Canadian Superior Energy (SNG, news, msgs) is typical of this high-risk/high-reward world. The company, which already owned leases to drill in Trinidad and western Canada, obtained four offshore exploration licenses totaling 933,000 acres in relatively shallow water off Nova Scotia a few years ago. In April last year, it announced it had teamed with gas pipeline giant El Paso (EP, news, msgs) to drill an extremely deep well -- about 18,000 feet -- in a property off Halifax known as Mariner Prospect. In June, Canadian Superior cleared a big hurdle by announcing that El Paso would provide half the project’s $30 million cost for half the profits, and in November it cleared further hurdles by completing a $14 million private placement, securing a drilling rig from Rowan (RDC, news, msgs) and started to drill. The stock over this period went from 80 cents to $3.03; it’s now around $2.65.
The largest institutional shareholder of the stock, at 6.5% of the outstanding shares, is Palo Alto Investors (PAI), a private, value-oriented hedge fund in Northern California. David Anderson, the analyst on the hook for the investment at PAI, says he believes the value of the company’s other properties in Western Canada provide the bedrock for the share price today, and the Nova Scotia project could add $5 to $8 if the company meets its goal of drilling into the middle of a formation with 1 trillion cubic feet of gas. “As a value player, we see a lot of optionality,” he said, meaning that the stock is like a call option on the Mariner project.
Two weeks ago, Anderson flew out to the rig on a helicopter in 60 mph winds and hung around for a while despite 30-foot seas. He said he learned Canadian had 4,000 more feet to drill, that the drilling personnel were “fantastic” and that there have been “gas shows” along the way. But he said that neither he, the crew bosses nor company executives had any idea yet whether the project would be successful. “It’s sort of like the swordsman who lives to fight another day,” he said. “Every day they drill without doing anything wrong removes a little uncertainty, but until they get to 18,000 feet and do some expensive tests there, it’s still just a speculation.”