Keith Schaefer: Pushing the Boundaries
Source: Brian Sylvester of
Junior oil and gas companies are snatching up land surrounding
the Bakken formation, pushing its boundaries further and further
into Canada and the U.S. In this exclusive interview, Keith
Schaefer, publisher of the
Oil and Gas Investment Bulletin,
The Energy Report
which companies have the property and technology to profit from
this ever-expanding frontier.
The Energy Report:
Oil and Gas Investment Bulletin
primarily covers the Canadian oil and gas (O&G) industries.
What's newsworthy north of the border right now for our U.S.
The shale-oil revolution is still going full force, particularly
around the high-profile Bakken area. We're hearing that new areas
are opening up, expanding what were previously considered the
boundaries of the Bakken. The main area of the Bakken is in
southern Saskatchewan, but now it's been shown that it's productive
right down to the U.S. border. It's also going over as far as
Alberta. The Bakken is potentially very productive in Alberta.
There are new staking rushes that are happening. A lot of the
juniors are leading the way and they are getting some great land
positions. That's setting the average retail investor up for a lot
of new plays where they can make some money.
Why are companies exploring these areas now?
The shale-oil revolution started in the Bakken in about 2002 and
continued for five years, then the market crash hit. For two years,
none of these companies has done much exploration work. They only
drilled the land they already had that had no exploration risk.
Only very recently have companies started to venture out and do
some true exploration work. They are saying, "Let's just test the
limits of this Bakken formation. Where does it end? Is it still
productive here? Is it still productive there?" It wouldn't
surprise me to learn in a few years that the Bakken is a massive
formation that stretches for hundreds of miles. It's going to be
patchy. Some areas are going to be productive and some are not. But
right now, companies are making discoveries in areas progressively
further away from where the core was seven years ago.
Where are some of the productive patches?
The play that's really got Canadian and U.S. investors going is the
Alberta Bakken that stretches from just south of Lethbridge,
Alberta, to south Calgary and down through the U.S. border and
Glacier National Park into northern Montana. On the U.S. side,
there are some pretty big players that have bought some very large
land positions:Newfield Exploration (NFX:NYSE) ,Quicksilver
Resources Inc (
) andRosetta Resources Inc. (
) . These are all big, intermediate producers that are very well
followed by analysts. They have large enough land positions in the
area that their stocks could be impacted, even though they're
50,000-barrel-per-day (bpd) companies.
Newfield has said it has a producing horizontal well, so it has
proven the play. The company has said, "Yes, this is going to be
commercial." That has given all the juniors a very material lift in
the last month.
Are other large companies looking to acquire some of the juniors
with land positions in the Alberta Bakken?
Absolutely. The only way they're going to get in now is a joint
venture, by gobbling up these juniors or taking a risk of their own
by staking a huge land position even farther away from where the
core of this new play has been.
There's been a big staking rush.Crescent Point Energy Corp.
(TSX:CPG) bought 1 million acres on the Canadian side where the
Alberta Bakken is. Land that is known to be good has been quickly
snapped up. But the Bakken is continually being expanded.
Is there scientific evidence that this area is, in fact, still the
Yes, there's a lot of well data. Companies drilled right through it
looking for other formations.
What are some juniors with some sizeable positions in the Alberta
On the U.S. side, there'sPrimary Petroleum (TSX.V:PIE) . It has
about 235 sections and its stock has done very well. It could still
do quite well.
On the Canadian side, there'sBowood Energy Inc. (TSX:BWD)
andDeeThree Exploration Ltd. (TSX.V:DTX) .
Some smaller players would beCovenant Resources Ltd. (TSX:CPG)
in Canada andMountainview Energy Ltd. (TSX.V:MVW) in the U.S.
Some companies on the supply side have developed different
technologies that are aiding in the process. Are those technologies
being applied in these shale oil plays?
Yes, they are. A horizontal well costs twice as much as a vertical
well-maybe even a little more. Companies are always looking at ways
to reduce the cost of those wells. This is a very young industry.
The horizontal drilling has only been going for 12 years since the
Barnett Shale became commercial. All these companies are putting
their brainpower into how they can drill less expensively.
Canadian Energy Services and Technology Corp. (
) has drilled what's called "smart mud." When you drill a well, the
oil or gas will just immediately spout out because it's under
pressure deep underground. Companies put in mud that's heavy enough
to keep the oil and gas down in the well but light enough that it
doesn't totally pack it in. Canadian Energy sells mud to the
O&G drilling sector. Canadian Energy's smart mud has shown
that, particularly in the Marcellus Shale, it can reduce drilling
by up to 10 days, which saves the producer a lot of money.
How much could that save a producer?
If it takes about 30 days to do a well, it's $100,000-$150,000 a
What are some companies on the Bakken's Canadian side that are
starting to see a little more play?
One of the areas that I'm really intrigued by is right along the
U.S. border. The main Bakken area is probably about 40-50 miles
north of the border called Viewfield. This new area is down
southwest of the Viewfield crater right along the Canadian
border-it's starting to get a lot of attention.
Bigger companies likeEnerplus Resources Fund (
) are starting to drill there. The juniorTorquay Oil Corp.
(TSX.V:TOC.A; TSX.V:TOC.B) andPainted Pony Petroleum Ltd.
(TSX.V:PPY.A) have joint ventured into some land there.
Have you heard any merger chatter?
Merger and acquisition (M&A) activity seems to have slowed
down. There hasn't been a big Bakken buyout for a while despite the
fact that oil prices have made these plays a lot more attractive.
However, there were three Cardium Formation buyouts early in the
year byPetroBakken Energy Ltd. (TSX:PBN) : Result Energy Inc.,
Berens Energy and the Pembina oil assets of a private company.
Could another bump in the oil price launch another round of
Absolutely. I think the whole market has been surprised by the
price of oil and a disbeliever in the higher prices. That's why
there hasn't been as much M&A activity-because nobody wants to
buy at the top.
The reason we're not seeing much M&A on the gas side,
despite these companies being in pretty dire straits, is that these
management teams are going to lose their jobs. Before they get
bought out, they go out and start another company, fund it, and
then roll it. That's not going to happen this time. There's a very
strong argument that there are too many management teams in
Calgary. This is a great little weeding-out time.
So, will there be some initial public offerings (IPOs)?
Yes, there will be some IPOs. There will also be what's called
'recaps,' where new management comes into a vehicle and raises a
cheap private placement, brings in a new land package to go with
it, and then the public pays a substantially higher price for their
round of stock. These new oil plays are being found right under our
noses. There is a huge resurgence of homegrown plays. Only three
years ago, everybody thought western Canada was a mature basin with
no more discoveries.
What kind of oil is in the Alberta Bakken?
It's medium to light oil.
Is there a premium for that because there's less refining
It will be pretty standard Western Canadian Select (WCS) crude.
Based on early indications, it's not going to be any better or
worse. That's because no one has said what they've got yet in this
play. It's very nebulous.
The big three in the U.S., Newfield, Rosetta and Quicksilver,
don't talk about this play yet because they're all still buying
land. They are keeping the pump primed by saying, "Hey, we've got
another big play coming. We can't tell you about it yet because
we're still buying land." We know they've got one producing well
but they haven't told us the production level or the type of crude.
Regular Bakken oil is 37 API, which is pretty light oil. I'm
expecting this to be fairly close to that.
Are there any oil sands plays that interest you?
Yes and no. The oil sands game is a big man's game. It's very
unusual to see junior oil players in heavy oil, but usually that's
what's called 'cold-flow heavy oil.' In ourlast interview in
August, we talked about how that's the most profitable oil in the
world because the heavy oil discount has shrunk from 35%-20% as
U.S. refineries in the Gulf of Mexico (GOM) are experiencing
difficulties getting Mexican and Venezuelan crude due to the
declines and politics. This has caused Canadian heavy oil to become
a lot more profitable. Plus, it's very shallow oil. Costs are low
and it's almost the same price right now as regular light oil.
The margins have narrowed.
The cash flow and the profit has increased quite a bit. If West
Texas Intermediate (WTI) crude was about $80 five years ago, heavy
oil would've been only $40. But now it's about $55-$60. The heavy
oil differential has gotten smaller. What that means is great
profits for a lot of these junior producers on the heavy oil side.
Companies likeBlackPearl Resources Inc. (TSX:PXX) ,Emerge Oil &
Gas Inc. (
) andRock Energy Inc. (RE) are getting fantastic profits off these
heavy oil plays. It's very close to the surface, very cheap to get
out. They're getting a great price for it. It is the most
profitable oil in North America.
Rock Energy is run by Allen Bey and John Van de Pol-two very
bright guys in the oil patch. The company has a large inventory of
prospects. It's using a really neat technology called 'radial
drilling.' Currently, when a company drills a heavy oil well, it
gets a certain radius of drainage into the well. Radial drilling
sticks an arm out deep into the formation to create a wormhole and
all the oil from around there goes into the well. It's improving
the economics even more. That's a fantastic use of that technology
and the company is able to increase reserves a lot.
Rock also has a big gas play that it's going to be drilling very
shortly, if it's not already. That has the ability to triple the
reserves of the company. The reality is the market value is,
basically, zero, which is crazy because there are some very valid
resources there. For the patient investor, Rock's a gift. But you
might have to be very patient.
I'm going to say three years. The reality is that these things have
a way of turning out exactly the opposite way of what you might
think. Right now, everybody is as bearish as they can get on gas
and every statistic seems to bear that out. At the same time, the
world is full of stories that just turn out different. It could get
very cold very quickly. That could make a difference.
At these prices, there's been quite a bit of movement in the U.S.
toward coal plants switching to natural gas because it burns
cleaner and is more cost effective. Do you see that happening in
Ontario Hydro in Canada says it's going to get off coal and just do
gas. That's very big-that's eight million people. The trend is
starting to move around the globe and the environmental benefits in
the first world are obvious.
I recently read a presentation that said the gas price is not going
to go up for about five years, and that could be a threat to
Natural gas bulls have two hopes: 1) That companies will stop
drilling so intensely to hold on to their leases; and 2)That
declines at Marcellus or Haynesville are so intense that they may
as well shut-in the well after four or five years. That's not
happening yet and I'm not holding my breath for that. But for the
bulls, that's really their only hope. But anything is possible, and
there is really only one shale play-the Barnett-that has had a long
enough life to have a very definitive data set.
I know you follow the Montney Shale in Alberta. What's going on up
Celtic Exploration Ltd. (TSX:CLT) just announced a big new
discovery that extends the Montney to the southeast. It put
together a monstrous land package there. Its first well was
announced last week at 2,235 bpd of oil equivalent. It's mostly gas
with a nice strong wet-gas kicker. That has helped a couple of the
juniors out in that area.Donnybrook Energy Inc. (DEI) has been a
huge beneficiary with about 40 cross-sections in this new
area.Cequence Energy Ltd. (TSX:CQE) is drilling its first well in
the next two weeks in a new area called 'Resthaven.'
The Montney is the lowest cost gas because of its high wet-gas
content. It's continuing to boom like mad, which is opposite of the
dry-gas play in Horn River in northeast BC. Even though there's
been billions of dollars spent up there already, I think the
players are apprehensive-the economics to feed the North American
market aren't good. They need to export that gas through the
Kitimat, BC-based export facility to Asia.
That facility hasn't been developed yet.
Exactly. I think there's a good possibility we could see that play
stall for a bit until the companies get very firm contracts with
Asian gas buyers.
Is the Montney the only profitable gas play in Canada?
It's definitely one with the lowest cost plays; I can't think of a
play that is lower cost. Conventional gas is dying off pretty fast
right now. The rig count in Canada has just fallen off a cliff,
which should be good, right? That's what you want to see. You want
to see them stop drilling so Canadian production can continue to
fall off a cliff, which should be good for prices. The balance on
that is U.S. gas. Does the U.S. need any of our gas? That's the
Right now, it doesn't. In fact, we can't get there even if we
wanted to give it away to them.
Exports have been declining pretty steadily, and they're going to
continue to decline. The big concern is that the U.S. might not
need any of our gas in a couple of years. It will be interesting to
see how that situation plays out.
Is there enough domestic demand in Canada to sustain those small
gas companies, or could a lot of them go out of business?
I'm not very hopeful for the junior gas producers in Canada. The
oil sands use an increasing amount of gas, which is great. They are
actually starting to pay a lot more for their gas; so, that's
What message should investors take away from our discussion?
Investors need to understand that we are going to continue to find
new shale oil deposits in areas that we'd never thought of before.
There are lots of opportunities right under our noses that
companies haven't yet gone after in any significant way. Investors
are going to be very surprised by how much oil we end up finding
here in North America from these shale deposits. We haven't found
the limit, the edge of what is possible.
Also, we would like to extend a special offer to your
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Keith, this has been very informative, as usual. Thanks.
Keith Schaefer of theOil & Gas Investments Bulletin
writes on oil and natural gas markets. His newsletter outlines
which TSX-listed energy companies have the ability to grow and
bring shareholders prosperity. Keith has a degree in journalism
and has worked for several dailies in Canada but has spent the
last 15 years assisting public resource companies in raising
exploration and expansion capital.
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1) Brian Sylvester of
The Energy Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are sponsors
The Energy Report:
Primary Petroleum and Rock Energy.
3) Keith Schaefer: I personally and/or my family own shares of the
following companies mentioned in this interview: Primary Petroleum,
Bowood Energy, DeeThree Explorations, Torquay Oil, Painted Pony,
Petrobakken, Black Pearl and Donnybrook. I personally and/or my
family am paid by the following companies mentioned in this
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