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James Burgess

James Burgess

James Burgess studied Business Management at the University of Nottingham. He has worked in property development, chartered surveying, marketing, law, and accounts. He has also…

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Investing In The Permian Of The North – The Most Economic Basin In Canada

Investors don’t make money by investing with the herd and, historically, great wealth has been generated through proper forecasting and investing counter-cyclically. Rather than look at oil and gas majors to invest in (complete with an at-risk dividend), smaller companies with huge upsides tend to make investors real winners.

One company in particular, which had some good news yesterday, stands out. Blackbird Energy Inc. (TSXV:BBI), a small junior oil and gas company exploring the prolific Montney shale located in Western Canada (the “Permian of the North”), has been laying out ambitious expansion plans and so far has been achieving them. Blackbird is a great counter-cyclical investment opportunity with immense torque, as it capitalizes on its large land base and strong working capital in a prolific sweet spot in the Montney.

Here are there the top 11 reasons why investors should keep an eye on this company, especially with oil around the US$ 40 mark:

1. Innovation: In today’s highly competitive oil and gas landscape, if a producer is not innovating, they will fall behind and not attract attention, capital or achieve the results they desire. Yesterday morning (September 14, 2015) Blackbird press released that they are drilling their third well at Elmworth. With their next well, Blackbird is challenging the conventional thoughts on completions for their area by doing something highly innovative while also reducing risk. A 71 stage completion using sliding sleeve technology has never been implemented before in the Elmworth / Gold Creek Montney corridor (in fact, it’s the most individual stages ever done in this corridor). The technology will allow for a clearer picture of the formation’s productivity at an earlier point in testing. This type of innovation is what is needed as a company moves forward. Arc Resources (TSX: ARC) implemented a similar completion design at its nearby Tower property, ultimately changing the area’s type curve from 200 boe/d to over 800 boe/d. Blackbird appears to be pushing for a comparable step change in productivity that Arc experienced at Tower. As the saying goes – go big or go home.

2. Low Cost of Entry with Substantial Upside: Blackbird is a small-cap emerging producer with a market capitalization of approximately $50 million, with ~$23 million in working capital. But nothing else about this company is small. The company has amassed a large 78 section land block in the heart of the most economic oil and gas corridor in Canada. Blackbird’s current market cap means that investors are being asked to pay only ~$346,153 per section (based on its enterprise value net of working capital), compared to near proximity transactions that have seen sections of Montney rights going for ~$2.9 million (NuVista Energy paid $35.5 million for 12 sections in August 2014). Extrapolating this $2.9 million per section benchmark across Blackbird’s acreage would see a valuation of ~$226 million plus $23 million in working capital. If we look at valuations using the well NPVs which are estimated at between $4.0 - $4.5 million (based on C$70 per barrel), the 25 sections of land that will be “de-risked” would show a value of $800 million.

3. Great land Position that is only Getting Bigger: At the beginning of the year Blackbird had 47 sections compared to 78 sections today (an increase of over 65%). This large land position amongst the majors was assembled quietly over the past 2.5 years without risking Blackbird’s balance sheet strength, which is a tall task given that so many industry leaders are paying top dollar for highly prospective acreage. To date, Blackbird has spent ~$6.9 million on acquiring its acreage and with industry leaders drilling up to Blackbird’s land, the value will only continue to increase in good commodity times or bad.

4. Impressive Resource: Blackbird has a 200 meter (666 feet) thick resource that is in a liquids-rich sweet spot (“Permian of the North”). Natural gas alone doesn’t pay the bills (just look at Nymex gas) but when it is combined with greater than 100 bbls/mmcf of free condensate plus additional natural gas liquids (NGLs) the resource shows true potential. There is a reason the majors such as Encana (NYSE: ECA), NuVista (TSE: NVA), Apache (NYSE: APA), Paramount (TSE: POU), ConocoPhillips (NYSE: COP), Sinopec and Shell (NYSE: RDS.A), just to name a few, are drilling and producing in this area – it’s because of this resource and its economic returns at US$40 per barrel.

5. Blackbird’s Lands are being De-Risked and Delineated: Several of Blackbird’s much larger competitors have drilled nearby and with each successive well, more and more detailed information about the geology has been compiled. As time has passed, this data has shown that Blackbird has hit a bull’s-eye with its acreage. Blackbird’s first two wells, the 5-26 and 6-26 confirmed this, with each well showing greater than 100 bbls/mmcf of liquids. What’s even more exciting is that new wells, such as the ECA 13-22, further confirm this liquids rich window, with public data suggesting liquids-gas ratios of ~350 bbls/mmcf, which is similar to the 5-26 well’s liquids-gas ratio. What you should really take away from this is that other people’s money is de-risking this play for Blackbird and valuing up its acreage.

6. Multiple Solutions for Infrastructure: Blackbird has announced that it has multiple solutions to get its production tied-in and producing by the first half of 2016, a crucial development. Blackbird moving to cash flow will present a massive step-change for how the company is valued and will allow it to begin to finance itself and grow organically. What’s even more exciting is that this tie-in can be achieved within Blackbird’s existing balance sheet meaning no need for dilution to achieve cash flow.

7. Cash, No Debt and Access to Capital: Blackbird is a unique small cap oil and gas company in that it has $23 million in working capital and no debt. This funding will provide it with the necessary strength to move forward with drilling its wells and to achieve cash flow without further dilution. Additionally, Garth Braun, Blackbird’s CEO, has shown a tremendous ability to access capital when it is needed, allowing for Blackbird to accelerate its capital deployment and grow shareholder value at an increasing rate when the right time presents itself. Investors should always put themselves in the same corner as a CEO like this, one that plays to win.

8. Line of Sight to Cash Flow: To reiterate, Blackbird’s recent operational update gave clear line of sight to cash flow without further dilution. What this means to investors is that their equity does not have to be diluted to reach cash flow. With approximately 1,200 boe/d behind pipe associated with the 5-26 and 6-26 wells, and with the drilling of its third well just getting started, Blackbird is in a position to add a significant amount of additional production just as it starts to produce and cash really begins to flow.

9. Near Term Catalysts: Blackbird just announced that they have received a license for their next well and are spudding it in the next few weeks. Blackbird is looking for this well to demonstrate commerciality of the reservoir and to show the market just how economic their acreage is at US$40 oil. The company has completely redesigned their drilling and completion program and is looking to improve on a number of factors with respect to drilling (time, cost etc.) as well as gain better understanding of the reservoir from the get-go. At US$40 oil companies have to make a statement to get noticed and this well should do just that.

10. Impressive Shareholder Support: This is a point that is often overlooked by investors but is something that should be followed closely for any investment. Blackbird has a very strong and supportive institutional shareholder base that is continually supporting the company. GMT Capital and Vertex One Asset Management are two highly respected hedge funds that both own >10 percent of Blackbird. This institutional support means that the smart money clearly likes what they see with Blackbird, and it is always wise to follow the “smart” money.

11. Management: As has been talked about before, this team has proven to be shrewd and aggressive, particularly with its land acquisition strategy. They had the foresight to assemble a world class Montney play. They showed excellent business acumen by selling non-core assets, such as Bigstone, to strengthen their balance sheet. The company also showed their capital raising abilities when they went to market twice last year in the midst of challenges experienced in the financial markets. The team has also shown an ability to solve impediments such as infrastructure. What is most impressive is the team’s constant ability to innovate despite its small size. This innovation is seen clearly with its proposed completion program.

By James Burgess of Oilprice.com

Legal Disclaimer/Disclosure: Blackbird Energy is an Oilprice.com client. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. No information in this Report should be construed as individualized investment advice. A licensed financial advisor should be consulted prior to making any investment decision. We make no guarantee, representation or warranty and accept no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Oilprice.com only and are subject to change without notice. Oilprice.com assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

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