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If you are risk averse, today's idea is probably not for you. If you believe oil prices are going down for the next few years, today's idea is also not for you. If you believe the emerging markets are going to continue to keep pressure on natural resources, you might want to consider a high risk, high return situation that represents the future of America's move to energy independence.
We aren't likely to consume less than our current 20 million barrels a day for sometime, which represents about 25% of the world's daily use. We only produce about 1/2 of what we need, leaving us dependent on foreign imports for the remainder of our needs. While our consumption remains flat, oil consumption is growing in other parts of the world.
China has moved up this year to the world's #2 energy consumer- ahead of Japan. China currently consumes about 8.2 million barrels per day (up 5% in the last 6 months), and has also surpassed the US this year as the world's biggest buyer of new automobiles. Consumption is climbing in China, there's no end in sight, and China's not the only emerging market with increasing demand.
Over the longer term, global growth is likely to continue to fuel increasing energy demand. No one can call where oil will be at the end of this year, but it seems likely oil prices will be higher 2 to 5 years from now. The consensus amongst major brokerage firms is $77 per barrel by the end of the year, but who knows.
This rather complex map you see is the Eagle Ford Shale Formation. The formation is one of North America's great oil shale formations- it's located in Texas, running from the Mexican border northeast through Austin and San Antonio areas. Most of the information on this map is a complete mystery to me. I'm no resource expert. Here's what I do know- there's a lot of oil lease activity on this map, and the players include Anadarko, ConocoPhillips, Chesapeake, Chevron, El Paso, EnCana, EOG Resources, ExxonMobil, and Murphy Oil.
Here's another factoid I can share. Chesapeake Energy has completed 7 wells on its acreage in the Eagle Ford Shale. According to a press release from the aforementioned company, 3 have recently been completed.
Chesapeake's PGE Browne well, located in Webb County, produced at a peak 24-hour production rate of 11.2 million cubic feet equivalent per day, composed of 4 million cubic feet per day of natural gas and 1200 barrels per day of oil.
Yes- one well alone, which cost $5 million to drill, is currently producing 1200 barrels of oil per day. That's about $84,000 in daily revenues, or just over $30 million in annual revenues assuming the well continues to produce at this clip. Most wells like this deliver more oil in the early going, so even if the number is cut in half as the well matures, the cash flow is still over $15 million annually.
Their Traylor North in Zavala County is delivering 930 barrels per day, which equates to $65,000 per day, or $23 million per year. This well cost about $5 million to drill as well.
Today's new idea, Eagleford Energy Inc (OTC BB: EFRDF), has acquired two leases in the Eagle Ford Shale smack dab in the land of the giants, close to properties being developed by Chesapeake Energy and Petrohawk.
There are two leases to remember with the Eagleford story- the first is the Murphy Lease, of which EFRDF owns a 97% working interest. The Matthews lease is the 2nd, and EFRDF is dialed up for an 85% working interest on that property. Jointly, the two properties represent 5,266 acres. and potentially 40 wells in total.
I'm not smart enough, experienced enough, or knowledgeable enough to put a reasonable future value on these assets. So, I'll leave it to the pros.
In a highly unusual move, CFA William Gregozeski- an analyst at boutique investment banking firm Garwood Securities of Chicago, has issued a formal research report on EFRDF with a buy recommendation and a $2.50 price target. It's unusual, because you rarely see research report on early stage companies like this from a legitimate brokerage firm. Bill's report is the reason I'm willing to share this idea with you.
Gregozeski estimates the value of EFRDF's current leases at $8 million in market value, and goes on to anticipate each site to have about 4 million barrels of recoverable oil.
EFRDF plans to drill next month, drilling down to a level known as the "Edwards" formation on each site. Once initial drilling is completed, EFRDF will have much better insight as to method of extraction, which will play a major role in the profit potential on the sites.
If the waterflooding method can be used, the properties have a NPV (Net Present Value) of $227.7 million. However, other methods might require significant capital injection, and thereby lower the NPV of the properties.
EFRDF is going to focus its initial efforts on the Matthews Lease- which is directly adjacent to Petrohawk's Red Hawk Area. Recently Red Hawk delivered initial results of 350 barrels per day at two sites. Wells were drilled to a depth of 5800 ft, at a cost of about $5 million per well.
Again- let's look at the numbers. 350 barrels per day at $70 per barrel is $24,500: about $9 million annually. Payback in about 7 months, then gravy from there.
So, how do we make money on this idea? The stock is likely to start garnering an audience over the next couple of months- why? Because everyone's watching development in the Eagleford Shale, and EFRDF is scheduled to start drilling in September- yes, the summer is about gone, and September is already knocking on the door.
It's unlikely EFRDF is ever going simply raise capital and go into production as a stand alone. For the juniors, it rarely happens that way. More likely, as they gather data on their 5266 acres, they will either do a joint deal with one of the major names, or simply be bought out by one of the majors.
Hence- David in the land of the Goliaths. Goliath is going to come after David, instead of firing a rock from a sling shot, David is going to make Goliath pay up as it adds value to its favorable position in the Eagle Ford land grab.
$1.25 is the level at which to own this stock. Within one year, if they can develop two wells, each producing 350 barrels per day (a reasonable estimate relative to the success of their neighbors), the properties will cash flow about $50,000 per day based on today's oil prices. That's $18 million per year, for upfront costs of about $10 million.
Hence Gregozeski's $2.50 price target, which would represent 100% return from today's levels. However, if you are a trader, this stock is not for you. It hasn't developed enough volume or the kind of following you need to trade.
It's just getting off the ground as a public company, and there will be lots more investors learning about this one over the next several months, so I want to get you on board ahead of the crowd.
Don't forget to go to www.pinksheets.com for an accurate quote on this stock. Click on the link to get the accurate quote. As I wrap this up, the stock is trading at $1.15 bid, $1.25 offer. You might not be getting an accurate quote anywhere else.
The next edition on this one- I should be able to post the Garwood Securities Research Report, which provides far more detail.
Disclosure: I'm long a small amount, and haven't been compensated for coverage.