Oilsands Quest, Inc. (BQI)

1
EIS Capital Partners, LLC
Carlton Kanner, Managing Partner
Eric Schleien, Managing Partner

Overview:
Oil Sands Quest is an Oil Exploration Company headquartered in Calgary, Canada. BQI has 276.2 million shares, fully diluted, and it trades on the AMEX. Management currently owns 18% of the company. Oil Sands Quest’s assets are all located in Western Canada and consist of heavy oil and oil shale. BQI has 508,026 acres of permits, 109,918 acres of licensed land located in Saskatchewan and an additional 67,053 acres of permits and 22,773 acres of leases in Alberta. This totals 707,770 acres of potentially bitumen filled land. BQI also posses 489,640 acres of permits in Saskatchewan’s eastern oil shale region, which for the sake of this write up, will be considered a free option.

BQI has been actively drilling its land leases in an attempt to sure up its reserves. It has also been actively seeking new land leases for additional sources of oil. Its recent share issue has fully funded its entire 2007/2008 exploration program. While BQI currently owns 100% of its lands and operations, it is seeking partners to help develop its crown jewel, “The Axe Lake Discovery.”
The Axe Lake Discovery represents the largest continuous oil sands holding in Canada and likely the world. Over the last year BQI has shot miles of 2D and 3D seismic and has drilled core samples in an attempt to prove that the reserves are actually there according to management beliefs. Management believes that the total Axe Lake holding could have nearly 10 billion barrels of recoverable oil. If this is the case, its 900 million dollar market cap is a shadow of it potential value. Management’s short and long term goals are to continue to add new land prospects, fire more seismic and begin a test well that will produce 10,000 barrels a day.

Unfortunately BQI’s lack of cash flows mean that all of these endeavors will need to be funded by future share or debt offerings. Like most exploration companies, BQI’s ability to fund operations via long-term debt will be significantly hampered by its inherent risk and lack of positive income. This, unfortunately, makes future evaluations of BQI difficult and thus a significant margin of safety should be used.
The SEC regulates how reserves are measured using the 3P system. They are defined as the following:

P90 Proven reserves: Reverse that are “‘Reasonably certain’ to be produced using current technology at current prices, with current commercial terms and government consent” (Wikipedia). In other words, a 90% probability of being produced

P50 Proven plus probable: reserves “‘Reasonably Probable’ of being produced using current or likely technology at current prices, with current commercial terms and government consent” (Wikipedia). Or, there is a 50% probability this amount of oil can be produced.

P10 Proven plus probable plus possible: “having a chance of being developed under favorable circumstances” (Wikipedia). There is a 10% chance this quantity will be produced.


The SEC is currently in the process of evaluating what it considers reserves. The way the system is set up now, oil sands companies are prohibited from claiming their bitumen as proven crude reserves, a technicality which places oil sands companies at a significant disadvantage to conventional oil providers. Energy analysts who commonly view companies based solely on metrics of reserves, miss oil sands companies. This change will act as a catalyst for BQI and will instantly add massive value to the company’s balance sheet. Regardless of this change, the company is massively undervalued.


The following calculations of BQI’s value will be based on the 3P’s and only on the independently audited bitumen findings. These explored and audited findings only represent a fraction of the total Axe Lake Discovery.

BQI has the following reserves P90 1.117 billion barrels of in place bitumen P50 1.340 billion barrels of in place bitumen P10 1.547 billion barrels of in place bitumen.

Western Oil Sands, an Alberta located oil sands company was bought out by Marathon for $5.56 billion and it had 2.6 billion barrels of proven reserves. Thus, they paid $2.14 per barrel of in place bitumen ($5.56billion/2.6billion bbls.) So we can then extrapolate that BQI should be worth: ($2.14 per bbl*P90 reserves)
P90 = $2,388,661,538.46
P50 = $2,865,538,461.54
P10 = $3,308,200,000.00

We know that BQI has about 276,200,000 shares fully diluted, thus the share prices should be P90 = $8.65 P50 = $10.37 P10 = $11.98 (Total value of reserves/shares outstanding.)

When Western Oil Sands was bought out on July 31st of 2007, the WTI spot price was $75 per bbl. Oil is trading in the 100’s today, which is a 33% increase from the $75 price that Western Oil Sands was purchased at. So if we calculate a 33% increase from 2.14 per bbl, we get a per bbl price of $2.85 per bbl. Doing the same math as before we get a share price of:

P90 = $11.53
P50 = $13.83
P10 = $15.97

Being more conservative, if we assume each of BQI’s proven reserves are worth $1 than BQI is undervalued on a fully diluted per share basis as follows:

P90= $4.04
P50=4.85
P10=5.60

In addition, Alberta’s new royalty tax makes BQI’s Saskatchewan based reserves more valuable than Alberta’s.
BQI is now in the process of creating a new subsidiary to explore new oil sands extraction methods. They are focusing on the In-Situ method. This method uses one pipe to inject steam into the reservoir to heat the viscous bitumen and a second pipe running below this one to extract the now flowing bitumen. Petrobank, another Canadian oil sands company, has been developing a new process called THAI, Toe-to-Heel Air Injections which will reportedly increase the ultimately recoverable oil from about 60% utilizing current best in class SAGD, Steam Assisted Gravity Drainage, to 70-80%. BQI’s new entity will be developing new technologies similar to Petrobank’s. However, for the sake of this write up, we will value this segment as if it were worth zero dollars and consider it a free option.
Management’s effort to sure up reserves and add new holdings has demonstrated that they are competent and will continue to add stake holder value.

T. Murray Wilson, the Executive Chairman and Member of Resources & Reserves Committee for BQI, has a 25-year history in investment banking focusing in the areas of Oil & Gas M&A. He has worked at several high profile banks, including the Royal Bank of Canada. Before entering into the banking industry, Mr. Wilson was a reservoir engineer, production engineer, project manager and economic advisor for various petroleum projects. In addition, while Mr. Wilson worked in the Investment Banking industry, he acted as an advisor to several oil sands projects. Mr. Wilson appears competent and his decisions, thus far, have led the company to create massive value in a short time. His 25-year experience in M&A will be a valuable asset when BQI moves to sell of its leases.

Chris Hopkins has 28 years under his belt in Canadian mining and energy. Right before joining CanWest (the predecessor to Oil Sands Quest), he worked as executive Vice President at Synenco Energy Inc., another oil sands exploration/ production company. Before that, he worked in executive positions in corporate planning and business development with Suncor Inc.'s Oil Sands Group, Pembina Corporation and Amoco Canada and has additional management experience in environmental control and regulatory affairs in the mining industry.”* Like Mr. Wilson, Mr. Hopkins’ past experience in the oil sands gives him a high level of competence to push BQI in a positive direction to increase shareholder value.

The long term story of oil is very bullish and even the most conservative estimates show the world peaking. In addition, we are relying more and more on hostile nations to provide us with our energy. The oil sands are one of the few safe havens where we can increase energy production.


BQI Share Price

WTI Price ($/bbl) | 50 | 60 | 70 | 80 | 90 | 100 | 110 | 120 |
Per bbl/price | 1.43 | 1.71 | 2.00 | 2.28 | 2.57 | 2.85 | 3.14 | 3.32 |
BQI Share Price@p10 | 5.77 | 6.92 | 8.07 | 9.22 | 10.38 | 11.53 | 12.68| 13.84 |


*(http://investing.businessweek.com/businessweek/research/stocks/people/person.asp?personId=24081835&capId=2184236&previousCapId=2184236&previousTitle=Oilsands%20Quest%2C%20Inc.)