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DemonDoug (98.84)

Oilsands Quest - BQI

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July 25, 2008 – Comments (12) | RELATED TICKERS: BQI

Ok fools, this isn't a pitch for or against BQI.  I'm soliciting opinions from anyone and everyone out there who might have a handle on this company.  For those of you who don't know, BQI is a company currently in the exploration phase of, not surprisingly, Canadian oil sands.  They have rights to extract a lot of acreage in known oil sands rich territories in Canada, and their exploration drilling seems to be yielding good results.

You can find their website and investor information here: http://www.oilsandsquest.com

The outlook for this company is extremely positive, if their production numbers can be achieved.  I've long felt that any oil company that is increasing output, especially over the next 5-10 years, is going to be a big, big winner (due to increasing global energy demands, falling dollar, and peak oil).

Based on their most recent presentation, BQI has anywhere from 2-7B barrels of oil in reserve (from low to high estimates, with a middle estimate in the 5B range).  They have started a test program construction which will be pulling up some oil, but it appears that large scale commercial production will be at a minimum 4 years down the road, and possibly 5 years or more.  According to their website:

June 2008: Announcement of initiation of preliminary engineering of a 30,000 barrel per day commercial project planned for the development of Axe Lake. Management assessing a "fast-track" approach to a first prospective project, which could result in completion in 2012 or 2013.

I can't find it on their website now, but previous projections had their test facilities pulling up 1k barrels a day starting next year, increasing to 7k until the fully commercial oil extraction program was up and running.

What this means is that there is a long, long wait for the payoff on a fundamental basis for BQI before it is cash-flow positive.  In many ways this company is like a biotech, although with greater odds for survival and eventual profits.  A company like this is so enticing to me, a HUGE potential payoff, but in the interim, how much more share dilution will we see, how much debt will they have to take, will BQI be able to last that long, will they get bought out by SU or ECA, and how reliable are management's predictions?  From all I can see, the management appears to be reputable and running the company well, but since I have no insider knowledge of the oil and gas industry (just my common sense), I have no idea if I can trust BQI's management, or their projections.

Another thing to note, regarding share price, is that in the short-term BQI's share price basically goes with the price of oil, although it is much more volatile, so anyone trading oil can trade BQI like a barrel of oil (either long or short).  However, I'm looking at this as a long-term investment.  The potential for BQI is 10-bagger (or more) if their projections pan out, and if they can get things up and running.  I will have to reassess my opinion of oil in 5 years, because I do believe that one way or another, we will be using less of it; the question is, how much demand destruction will there be, and what alternatives will be coming on line in 10 years?  My belief is that in 5-10 years, there won't be significant enough demand destruction to significantly bring down the price of oil, but after 10 years, there very well could be.  And if BQI isn't producing lots of oil before then, the fundamentals may not be as strong (especially in oil sands, where there is a significantly higher cost to extract oil).

So I've kind of layed out both the bull and the bear case.  Currently I own no shares of BQI, but am seriously considering it as a speculative swing-for-the-fences.  Any advice or opinions in either direction are welcome, but I'm hoping some of you guys who work in oil and energy can shed some light on this company.

Thanks.

12 Comments – Post Your Own

#1) On July 25, 2008 at 5:44 PM, PhillyDan (82.88) wrote:

DemonDoug:  I am certainly no expert on the oil and gas industry but I did read through their presentation on their website and here are my thoughts.  My concerns would be their cash on hand of $86 million dollars.  Based on only drilling 4.6% of their land holdings, BQI is going to need a large infusion of cash to continue their exploration of the 95% of their land holdings that has not been drilled or tested for the presence of oil sands.  

With 290 millions shares outstanding they are very diluted right now but to get the additional capital they will require is going to create more share dilution whether it be by an additional equity offering or investment partnership.

My guess is that they are hedging on their oil potential estimates and it wouldn't surprise me if they have closer to 10+B barrels of oil in their land holdings.  If you use a conservative number of $150 per barrel for oil sand oil (looking out 4 to 5 years) that will be priced lower than light sweet crude.  Of course the price could be much higher in that timeframe but being conservative you can see that the revenue projections would be 1.5 Trillion dollars if my math is right.  If you use your 5B estimate that projects out to 750B dollars.  

I was just up in Toronto visiting my Son and while I was there, there was a lot of talk about a shortage of construction workers in Ontario Province because they are all moving to Alberta to work for Oil Sands companies.

The bottom line is that I think it would be a good speculative investment.  Certainly worth one to three thousand shares.  I agree with you that this could be a ten bagger but might take 3 to 5 years to get there.  There certainly is a possibility of Encana buying them out but that would probably be at between 2x and 4x current share price.

I'm going to seriously consider making probably a one or two K share purchase.

 

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#2) On July 25, 2008 at 7:03 PM, nuf2bdangrus (< 20) wrote:

Doug,

 

As you always do your DD, there is nothing I can add.  I own BQI, and have owned it since last year, riding the stock up and down.  I wish I accumulated more when it was at 3.00, but it was a small position and a "spec play"

 

I sold into strength, regretted it, and bought back too high.  Note, there is some heavy options activity on the October 7.50 strike price.  Seeking alpha has covered the stock a few times as well.

 

The main thing that I think is missed, and I don't have the exact figures, is that they have significantly more land than any of the other oil sands companies.  I also think they are lowballing their axe lake (?) estimates.  That amount of land may allow them to parcel off interest in partnership or outright sale as they need. 

Some of the downside to BQI.  In a severe recession, where oil falls to 75 barrell, interest will dry up.  And as you know, they have to issue stock to raise capital.  Cash is always a problem.  Those are the biggest risks.  Also, there is a huge expenditure of water (steam) needed to extract oil from bitumen, I believe that means consumption of NG, and envionmental issues that go with extraction.

 

In my view, BQI is not a stock I worry about the price on any given day, I may add to my position on a serious pullback.  But you always want to own some BQI, because someday, somebodys going to wake up and either:  They have been bought out, they have made a huge find, the technology has greatly improved to extract oil from bitumen, or international tensions drive the price of oil.  Any of those is a good probabiluty. 

Yes, oil may pullback as substituion comes in but unless breakthrough technologies are made in batteries, nuclear, wind, solar, oil will be a stape of transportation.  Other than the oil sands, the only other reserves are off deepthe coast of Brazil and a mile underwater, and PBR or HES would be the play there. I would never complain of a buyout at even 2X the price, and would gladly hold Encana stock as the pay!

 

 

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#3) On July 25, 2008 at 7:36 PM, rudolphsteiner (< 20) wrote:

OK, this may be broader than what your looking for Doug (feel free to ignore), and this doesn't just apply to BQI, but does anyone know how the profitability of in situ production is affected by natural gas price, since I gather it is very energy intensive (even more so than mining)? Anyone know? I don't, but I wonder about it. Not sure what mix of mining and in situ BQI would be using, wasn't obvious on their website.

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#4) On July 25, 2008 at 8:14 PM, DemonDoug (98.84) wrote:

rudy, I'm fairly certain that Suncor at least uses it's own natural gas (like many oil extractors, they also extract and produce natural gas).  So the price of natural gas on the open market doesn't really factor into the cost.  CNQ and ECA also do a lot of natural gas, in fact they may be pulling up more nat gas than oil (nat gas seems to be in abundant supply much more so than oil in north america).

I'm unfamiliar with the process to produce natural gas, but wiki says that nat gas is produced from oil fields.  Since this is standard operating procedure for oil sands/shale extraction, I would guess that BQI's plan would be to follow this template; since they aren't extracting anything right now, it's really impossible to know the expense because the expenses for exploration and in situ operations don't seem to be clearly dileneated.  It looks very likely that another 200m shares may be issued, total shares have increased from about 90m in 2006 to almost 300m now.  The 10-K itself says the only way the company has to raise money is to either sell stock or to borrow against assets, and that it is highly speculative.  Of course I know this (it's highly speculative), because it's a huge risk/reward ratio.

I love potentially investing in small caps like this, where the payoff could easily be a 10-bagger if it even has moderate success.  Western Oil Sands, which I believe was earnings-negative at the time, was bought out by Marathon Oil for 6.6B in March of 2007 (that was the closing date of the deal).  They were producing oil revenues but hadn't become profitable at the time of the merger, IIRC.  That would be about a 6-bagger based on market cap if the same deal were done for BQI.

The buy point I'm thinking is under 4/share.  I've even considered doing some short term investing (for the first time in my life) because I feel like I've got a real good grip on the movement of oil and energy.

Rudy, I think the biggest expense these companies have are employee salaries.  They are in very remote places, there is a huge demand for workers, not a lot of housing, these cities are exploding with growth, things are very expensive (if you've read some of dwot's blogs she talks about how expensive things are in the NWT).  I think the thing I'm most wondering about is will they issue another 200-400m in shares, which may knock the stock price down to 2 or below.  At that point they wouldn't be able to raise much more equity through the stock markets, and would have to start borrowing.  The risk I fear mostly is a delay in production and extraction, because if the delay is another 5 years to 2018, then we are waiting a long, long time for the payoff, and then the risks go way up.  There is much less risk if McCain wins the presidency - if this happens, I'm going to go huge on oil companies.  If Obama wins, my feeling is that alternative energy programs will get a huge boost, and the timetables for diversifying away from oil will be sped up dramatically.  (This is why I'm afraid of the over 10-year timeframe.  I've seen many biotechs get delayed year after year, but if a drug works, it will still work in 10 years; with oil, the possibility is that we may be moving away from it if we get a truly progressive administration.  That may be a discussion for a different blog though.)

 

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#5) On July 25, 2008 at 8:41 PM, Donnernv (< 20) wrote:

Doug:

Long term view.  Oil sands are a ridiculous proposition.  Money can/will be made in short-term plays....but...the natural gas used is pushing Canada to the edge.  Under NAFTA, they are obliged to export NG to us.  And oil sands are sucking it up.  The crude equivalent of natural gas used is one barrel per three barrels of syncrude produced.

But if that weren't enough, we will be converting to NG for transportation to dampen crude's place if the Texas billionaire's (Boone Pickens) proposition takes hold.  But more than that, NG is too damned valuable to burn.  It is the basis for many industrial and consumer products.  The gas required for syncrude production is so great that a nuclear power plant to produce the steam required has been proposed.

The water demands are tremendous for oil sands crude.  About one barrel lost for every barrel of crude using the SAG-D process.

Bottom line...as NG prices rise, as the water usage increasingly impacts, as the enormous project and labor costs continue to escalate, as the possible substitution of NG and electricity (PHV) for gasoline and diesel...these provide a substantial headwind for this very expensive substitute for crude, long-term.

And we are talking about 1-2 mb/d, less than 5% of current US usage of crude.

 

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#6) On July 25, 2008 at 8:52 PM, rudolphsteiner (< 20) wrote:

Ya I think your right about employee costs Doug, I lived in Alberta briefly, things are getting crazy there with the scale of growth. My brother was living in Calgary and after his house price doubled in just a few years he sold and moved to Nova Scotia where he's living almost debt free. I think the oil patch really are going to have trouble getting enough workers as they try to scale up to the next level. I certainly see the appeal of BQI, but like you say it has a long way to go. BTW, have you looked at petrobank? Different game, but safer.

It's easy to dismiss him so far, but if Boone Pickens has his way with his idea of converting the US fleet to Nat Gas, the oil sands will definitely hurt. At that point I think the natural gas really will be more valuable piped south than melting bitumen out of the Alberta sands. I don't actually think Pickens will have much sway, but it's always possible one of the candidates will pick up parts of his plan.

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#7) On July 26, 2008 at 2:18 PM, httv (< 20) wrote:

Although Nat Gas is currently an issue, look at the technologies of companies like Ivanhoe energy and OPTI Canada.

They both have Heavy to Light upgraders that not only cover the price differential, but produce the steam and electricity needed for operations without the need to purchase nat gas.

 It looks like BQI is looking for a JV rather than raising capital.

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#8) On July 27, 2008 at 5:34 PM, leohaas (93.93) wrote:

Doug, I think you are answering your own question:

"The potential for BQI is 10-bagger (or more)..." 

"I (...) am seriously considering it as a speculative swing-for-the-fences."

If you see this potential, why not swing? The only question is: do you have any funds available you consider speculative? 

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#9) On July 27, 2008 at 9:18 PM, DemonDoug (98.84) wrote:

leo, there is always that potential with any developmental-stage stock.  I'm trying to gauge the risks and rewards and see how much of a gamble this really is.

If I feel there is a greater chance that BQI won't be profitable in a timely fasion, I'd rather just buy another 100-200 shares of DNDN which I am very confident about.

But if BQI's odds turn out to be about the same (in my view) as the same as DNDN's, then I'd rather spread my risk and buy some BQI.  I do have some speculative play money, enough for about 200-300 shares of BQI depending on stock price.

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#10) On August 03, 2008 at 10:05 PM, dexion10 (28.29) wrote:

hey its a $4 stock for a reason and it's not because of it's tremendous potential IMO.

Oil sands is the high cost source of oil - as oil prices fall the gross margins in the oil sands will fall the hardest -  we've got lots of time before anyone needs to get serious about oil sands stocks.

I fear that we'll soon find out that Asian and Indian demand is not as strong as expected nor is supply as tight as people think. 

We're going to have some commodity panics - even if we are in a long-term commodity bull market - I wouldn't put a dime in these oil sands names until one of those panics comes along.

There are easier things to speculate on that's for sure!

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#11) On August 04, 2008 at 2:05 AM, DemonDoug (98.84) wrote:

we've got lots of time before anyone needs to get serious about oil sands stocks.

Sorry to tell you dex, too late.  Suncor's market cap is about 50B - well into the large cap and a double away from being a mega-cap.

Oil sands is the high cost source of oil - as oil prices fall the gross margins in the oil sands will fall the hardest -  we've got lots of time before anyone needs to get serious about oil sands stocks.

Suncor's original models have them profitable at $20/bbl.  With inflation this cost has risen but not so much that it would be profit-prohibitive.  They sell every barrel they dig out of the ground.

 I fear that we'll soon find out that Asian and Indian demand is not as strong as expected nor is supply as tight as people think.

How about some stats to back that up?  The stat I saw (and researched myself) is that China is adding 100 miles of new road a day and 16,000 new cars are being sold per day on average.  None of these are electric green cars or running on biodiesel mind you.

 We're going to have some commodity panics - even if we are in a long-term commodity bull market - I wouldn't put a dime in these oil sands names until one of those panics comes along.

I've been waiting for years for that panic to come.  There have been some pullbacks, to be sure, but I would also love to see what evidence you are seeing that would lead you to that conclusion.

There are easier things to speculate on that's for sure!

Like what... biotech?  Internet tech? Nanotech? Solar?  The English teacher in me says: Be more specific! In big red letters!

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#12) On August 17, 2008 at 11:51 PM, wrote:

Demon--

I was looking at a different angle and google and caps keep forwarding me to your blogs.  What are the benefits of these stocks involved in tar pits for the developement of asphalt?

Would this be the cash cow these companies have to leverage themselves before your theory?

I'm looking for more difersification in my portfolio.  Concrete is one I already own (Rmix).  Asphalt is another i'm considering. Tobacco will prolly be another since it is not dependent on ethanol or corn prices.

 

andrew

 

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