I have noticed valuations in the junior oil sector creeping up, sometimes to the point where I have to blink. But it’s not just the increase in the price of oil this year that has driven up valuations. Technology is increasing how much oil or gas companies can produce from a well in a day, and in the overall amount of oil or gas they can recover from a given formation, essentially how fast and how much they produce. Technology is giving investors more leverage to the price of oil.
This is especially true of the hot new “tight” plays that are being developed in western Canada and the US, where I have been focusing the subscriber portfolio.
(“Tight” just means the oil is held in rocks like shale or sandstone, as opposed to the more conventional type of looser sands that hold hydrocarbons, and from which almost all the world’s production has come from in the last 100 years.
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As an example of valuations increasing, in August 2009 TriStar Oil and Gas merged with Petrobank’s Canadian operations, and was valued at about $109,000 per flowing barrel, which was almost double its average peer group valuation at the time. They were a 20,000+ bopd producer, and the larger the company, generally, the larger the valuation.
But now I am seeing junior producers one tenth that size, 2000 bopd or even 1000 bopd producers, get valuations in the $90,000 – $110,000 per flowing boe (barrels of oil equivalent) range. Most of these are in the 3 year old Bakken play in Saskatchewan, or the several months old Cardium play in Alberta. Several Canadian brokerage firms have issued reports saying these two oil plays have the best economics of any in Canada.....Read the entire article.
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