interesting write up

FEBRUARY 8, 2013
That’s right, you heard correctly – this junior company WILL NOT fail to find oil. A bold statement you say? Well read on to find out how this is possible…

Are you sick of oil exploration companies you are invested in spending millions of dollars drilling high risk holes that turn out to be empty? Tired of anticipating huge discoveries and massive share price returns, only to be slapped in the face with a dismal drilling result, while the share price plummets and your money disappears before your eyes?… AGAIN!

Wait until you hear about this company. How can they possibly guarantee oil? I thought all small cap oil investing was supposed to be high risk?

At The Next Oil Rush we are always on the lookout for the next big thing, or trying to uncover a hidden gem, and we think we have found a junior oil company that is going to rock the foundations of traditional small cap oil investing in Australia, by using a little known technique to extract EXISTING oil reserves from abandoned fields… oil that was previously considered un-extractable… you won’t believe how much oil is generally left in place after an oil field is abandoned.

It’s a well known fact that when an oil discovery is made, the “easy” oil is extracted using natural pressure in the oil field and maybe pumps. When the pressure drops and the pumps stop producing oil, the field is abandoned… right?

Take a guess at the percentage of oil that is usually left behind in an oil field because it cannot be extracted using traditional technology (natural pressure and pumps). Is it 15 percent? 30 percent? The answer will be revealed later in the article, and you won’t believe it.

This junior company we have found is snapping up abandoned oil fields in the good ol’ US of A, and they plan to use “Enhanced Oil Recovery” (EOR) technology (also known as tertiary recovery technology) to squeeze out almost as much oil as was originally extracted from the fields before they were abandoned!

I can just imagine the previous owners of the oil fields openly sobbing and rocking back and forth in the fetal position after they find out how much oil is being extracted from the “depleted” fields they gave away for peanuts.

On top of all this, this $40 million company has caught the attention of a $7 billion US goliath of Enhanced Oil Recovery. Our company has inked deals that will allow them to sit back while this EOR goliath uses all of its expertise and does all the work, but more on this later.

The junior company is called Elk Petroleum (ASX: ELK).

You say you don’t trade or invest on the ASX? You should still keep reading. I say this because part of the value proposition of Elk is the fact that it is listed on the ASX… let me explain:

Elk is the ONLY ASX listed company that currently employs Enhanced Oil Recovery. EOR is essentially unknown in Australia, so the Elk story is not currently well understood or appreciated by ASX investors, and hence ELK is trading at the lowly market cap of $40 million, on relatively low daily volume.

The team at The Next Oil Rush are very excited about Elk, because of the fact that Australian investors do not yet understand the amazing, low risk, value proposition of Elk and its US based EOR projects, which presents a golden opportunity to take a position BEFORE the crowd catches on to this story. Aussie investors are too busy chasing new oil discoveries, but I don’t think it will take long for them catch on though, especially when Elk starts seeing production from its EOR investments.

Regular readers will remember our “1000% Tip of the Decade” post from March 2012, which has been up over 600% and is still rising:



And more recently our call on Jacka Resources (ASX:JKA):



Elk Petroleum, remember, you heard it here first!

Just to give you an idea on the power of the EOR technology Elk will be using – here is a core sample that was taken from one of the abandoned oil fields that ELK acquired, you can see the residual oil left:



Now take a look at a core sample taken AFTER EOR and other processes were used to extract the leftover oil:



Where did the oil go? Into Elk’s storage tanks ready for sale into the oil hungry US market, that’s where. Amazing right? Let’s see these samples side by side (And no, these aren’t props from a tooth whitening commercial, but core material from one of Elk’s oil wells):



Too good to be true? Read on and you will learn about how EOR works, and you will be one step ahead of the Australian investment community, and can snatch this opportunity out from under their noses.

This article will explain why we like Elk, and why we believe the Elk stock price could be far north of where it is today by the end of 2013. We will start by providing a bit of information about the EOR process, and then discussing how ELK scores on our famous pre-investment checklist.

The pre-investment research checklist is outlined in our eBook, “How to Invest in Resource Stocks”.

Elk has some exciting news flow coming up over the next few months. However, to fully appreciate it you will need to understand the sector in which Elk operates. To help explain this for you we have prepared an introduction to Enhanced Oil Recovery (EOR 101).

You must graduate from EOR 101 before you can read the rest of this article.

For those new to this website, our pre-investment research checklist has been refined over many years of investing and working in a professional capacity with speculative resources stocks. It has helped us make some good investments, and avoid some very bad ones. It has also helped us set clear and realistic goals for any investment and have a clear and realistic exit strategy.

You can find out more about the pre-investment checklist in our book: “The Resource Stock Investor’s Guidebook”

But first, a bit about Elk Petroleum.

A quick synopsis of Elk:

Elk Petroleum is a $40m market cap oil and gas stock focused on Enhanced Oil Recovery (EOR), backed up by a JV with $7bn US listed major Denbury Resources, Inc. (NYSE:DNR). Elk is fully funded, has quality management, and is operating in and interesting, overlooked and underappreciated sector.

But to fully appreciate the opportunity presented by Elk, you must first understand EOR… remember that Elk is the ONLY company listed on the ASX currently employing this technology.

EOR University: EOR 101 – An Introduction to Enhanced Oil Recovery
EOR refers to technologies/processes employed to extend the life of a depleted oil reservoir.

This means that the oil is already there, so the traditional geological risk of having to find the oil is removed. What was your guess earlier about how much oil is left in an “abandoned” oil field after initial recovery? Well the answer is 62% of the oil remains after primary and secondary recovery!

Despite EOR being the third recovery process, it almost recovers as much production as primary or secondary recovery. The following diagram will put that in to perspective:



More than 250,000bopd are being produced by EOR projects in the US and this is expected to grow significantly over the coming years. See the below diagram showing the growth of CO2 EOR in the USA:





This video shows a very basic visual representation of the three phases of oil extraction:





The following video shows the application of CO2 flooding use in EOR



The next video illustrates how Denbury (Elk’s JV partner) is using CO2 Enhanced Oil Recovery (CO2 EOR) to increase domestic oil production in the U.S. Denbury’s CO2 operations and CO2 pipeline infrastructure also provide a promising method to safely sequester industrial CO2 emissions.


Another Denbury produced video giving a slightly more technical explanation of how the EOR process works, with some great visuals.


On May 15, 2012, San Antonio Mayor, Julian Castro, convened with regional energy leaders, hosting U.S. Department of Energy’s Charles McConnell, Assistant Secretary for Fossil Energy.

In this discussion, U.S. Department of Energy’s Charles McConnell, addresses the opportunities in EOR – Enhanced Oil Recovery technologies.


The next video comes from when the House Energy Resources Committee met on June 26, 2012 and began examining the economic impact of increasing Texas energy production from multiple sources. The most interesting panel showed the potential of CO2 enhanced oil recovery

This panel included Bob Cornelius, senior vice president of operations at Denbury Resources; Michael Young, associate director of the UT Bureau of Economic Geology; and Michael Godec, an expert in energy market and energy policy analysis.


Congratulations! You have graduated from EOR University



As promised, here is an assessment of Elk against a few of our pre-investment checklist criteria:



Assessment of Elk using our Pre-Investment Checklist Criteria
The Next Oil Rush Pre-Investment Checklist Criteria has been carefully considered and put together by a team of contributors that has been successfully investing and trading oil and gas stocks for many years.

The check list explains exactly what to look for prior to making any investment in a speculative oil & gas stock.

You can find out about the full checklist in our eBook here, but for now we will be assessing Elk against a select few of the checklist criteria:

Pre-Investment Checklist Criteria: Is the company operating in up and coming (or underappreciated) market sector?

Elk is focusing on using Enhanced Oil Recovery (EOR) at its flagship Grieve project and Ash Creek project in the USA Rockies.

As you would know from your time at EOR University – EOR is certainly exciting, up and coming sector, and Elk is well and truly an EOR play (and the ONLY EOR play currently listed on the ASX).

As discussed earlier in the article, Australian investors currently do not appreciate EOR, so this is another tick in the box when assessing Elk against this pre-investment particular criteria. We always like to invest in sectors BEFORE they become main stream and popular – staying ahead of the herd.



Pre-Investment Checklist Criteria: Is there take over potential? Does the company have a JV? Is there nearology? Who is operating in the surrounding area?

The holy grail of the The Next Oil Rush investment strategy is the takeover or acquisition. When looking at a potential investment, it is always important to identify if there is potential for a takeover by a bigger player, or even a Joint Venture (JV).

Denbury was one of the early movers in the EOR space and is now one of the leading EOR producers in the USA with a market cap of $7 billion. Denbury is currently the second largest EOR producer in the US after being fifth 2 years ago and is now expanding its EOR interests with investments in the Rockies region (where Elk’s projects are located)



The potential of EOR has recently been demonstrated by Denbury’s sale of its non-EOR Bakken assets to ExxonMobil for US$1.6bn – as part of the deal, Denbury also acquired from Exxon interests in two oil fields with EOR potential and access to 1/3 of ExxonMobil’s Wyoming CO2 reserves. See the following (click image for the full link):



This deal demonstrates Denbury’s confidence in EOR projects and its appetite for acquiring EOR assets. Interesting that Denbury had shown an interest in Elk in 2011 by entering into a JV for 65% of Elk’s Grieve project.

Almost as good as a takeover is teaming up with a bigger company in a joint venture. This will usually involve farming out a percentage of the project, and having a portion of future or past costs paid for by the partner. A good joint venture will involve an experienced operator, who takes over running the asset, and the small company can happily take a back seat and watch them do all the hard work and spend all the money.

Elk’s JV with Denbury was briefly mentioned earlier in the article, here are the exact JV terms from the company announcement:



I am sure you’ll agree that it’s a pretty sweet deal for Elk. This JV is a huge tick in the box for this pre-investment checklist item. Denbury is spending around $100m BEFORE Elk has to contribute a single dollar.

Denbury’s involvement provides a compelling endorsement of Elk’s Grieve EOR project, substantially reduces the execution risk of the project and implies possible takeover potential for Elk.

Pre-Investment Checklist Criteria; What is the long term company strategy? What are the long term prospects?

Elk is planning to become a 1,000 bopd producer within the next few years with an increase to 5,000 bopd in five years.

In revenue terms, this means that Elk will be bringing in (assuming an oil price of $100/bbl) somewhere in the range of $100,000/day with up to $500,000/day.

In annual numbers this equates to $36.5m in revenue (1000 bopd) with up to $182.5m (5000 bopd) each year!

Of course this is revenue, and we are ignoring costs. But I’m sure you will agree this is not bad for a fully funded $40m market cap company.

Elk’s latest presentation shows Elk’s growth plans over the next few years:



At 5,000 bopd this would put Elk near the range of traditional explorer\producers such as Aurora Oil (ASX: AUT). AUT produced an average of 8,600 bopd in 2012, and is capped at $1.6bn.

You will notice if you read through Elk’s presentation that Elk state they are “looking to emulate Denbury’s EOR growth model”:



These are some pretty ambitious plans, but it is definitely exciting if a $40m market cap company is aiming to become a $7bn company.

Regular readers probably will have noticed that The Next Oil Rush is very interested in companies that try to emulate and repeat business models and strategies of successful companies. The Next Oil Rush recently wrote about Jacka Resources, who is trying to emulate the past success of Hardman Resources.

Below gives a snapshot of the success of Denbury:



Pre-Investment Checklist Criteria: Is there upcoming stock price catalysts?

The key to any investment is the identification of an upcoming catalyst for share price appreciation. An example of a catalyst can be the approaching target depth when exploring for oil, or approaching the forecast date for a joint venture with another company.

The key near term catalysts for include:

1) Potential reserves upgrade (Q1 2013)

2) Grieve CO2 injection (Q1 2013)

3) Ash Creek chemical injection (Q1 2013),

4) Ash Creek first production response (Q3 2013),

5) Grieve first production from CO2 injection (H2 2014)

6) New asset acquisitions expected in early 2013 (and ongoing).

As esteemed alumni of EOR University, I am sure you can now appreciate why these upcoming news events will add significant value to Elk



Pre-Investment Checklist Criteria: What is management’s track record?

Neale Taylor (ELK Chairman) and Bob Cook (CEO) bring a wealth of industry experience to the table and have both based themselves in the US. They have a combined 80 years experience in the energy and petroleum industries. Both spent most of their early careers with Esso Australia; Neale is the former Chairman of Tap Oil and a former CEO of Nexus Energy. Bob also filled a number of senior management positions with Ampolex and provided consulting services to a number of major clients, including Roc Oil. Bob was instrumental in identifying Wyoming as an investment opportunity, acquiring the Grieve oil field and creating Elk Petroleum in 2005.



The chairman and CEO of Elk have recently moved away from their family homes and based themselves in east-central Wyoming in the USA, close to their EOR projects – Now that’s what I call commitment to the company! Elk is clearly not a ‘lifestyle company’, where directors squander shareholder money by flying around the world to glamorous cities and staying in 5 star hotels. The Elk directors being committed enough to move to regional mid west USA to be close to the company projects is a huge vote of confidence in our book .

Pre-Investment Checklist Criteria: Will the company need to raise capital imminently?

One thing you should always look at when analysing an investment is how long the company’s current funds will last.

Although capital raisings are part and parcel of junior resources companies, investors are generally shy and will avoid investing money until a company is funded as capital ‘raisings’ are generally done at a discount to market. Share prices are often suppressed if a capital raising can be predicted by the market.

Elk recently raised $5m concluding in December 2012 – so you are finding out about this company just as they have secured some cash.

The JV with Denbury has seen Elk fully funded for the Grieve project (Denbury is paying for EVERYTHING to get the project operational and looks like doing so until oil production kicks in!)

We went back and had a look at how ‘subscribed’ Elk’s last capital raising was. If a capital raising is oversubscribed, this is a reflection of the investor demand for that stock. The last raising for Elk was significantly oversubscribed which gives us confidence in investor demand for the stock.

Conclusion
Elk Petroleum is fully funded, has a free carried JV and funding from Denbury (in a $100 million project!), a strong management team and is operating in what could potentially be a huge expanding market – EOR.

We are looking forward to watching the rise of Elk in 2013 and EOR gaining a wider investment audience, particularly in Australia, where Elk is listed.

So, if you are sick of oil and gas companies you are invested in drilling expensive, dry holes with your hard earned cash, take a look at Elk and use your diploma from EOR university to assist with some further research on Enhanced Oil Recovery. Elk is planning to extract oil THAT IS ALREADY THERE! No more dry holes.

Remember to always seek professional advice and that this is just our opinion on Elk. Do not take this as investment advice. All information presented in this article is publicly available.

We would suggest a good starting point for your research is Elk’s website (www.elkpet.com.au) where you can subscribe for updates from directly from Elk:

http://www.elkpet.com/investor-centre/elk-updates/

Good luck in your investments.

The Next Oil Rush