Oil has been a "hot" stock market sector for the last couple of years; we take a look at one energy company which could be a strong performer in the months ahead.
I'm a big fan of The Fool's Oil & Gas - Companies discussion board. I've learned a lot about the oil industry from the many knowledgeable Fools there, and I've also picked up some great stock ideas such as Soco International
, Dana Petroleum
So when I saw that several of the main "oilie" posters on our board were getting excited about a Canadian energy company, I wanted to find out more.
The company is called Falcon Oil & Gas - I haven't bought any shares in it yet but may do so in the next few months. Falcon's shares are traded on Toronto's TSX Venture Exchange, a junior exchange which is roughly akin to London's AIM.
Falcon's main assets, however, are on this side of the Atlantic in Hungary. Falcon has an exploration licence for an area in Southern Hungary known as the Mako Trough, and there may be a substantial gas field there. I've seen lots of different figures bandied about, but one analyst has suggested ultimate recoverable resources might be around 40 tcf (trillion cubic feet) of gas. That figure could prove to be very conservative or very optimistic.
Currently, the gas price is bobbing around the $7 per mcf (thousand cubic feet) mark, so there's lots of potential to make money. (Be careful though, any analyst would value gas reserves in the ground at far less than $7.) But there's still the nagging question, if there's so much gas there, why hasn't it been extracted already?
Hungary's old communist oil company did explore the area in the '60s and '70s but didn't find gas in commercial quantities. That was because the Mako Trough is a "tight gas reservoir", and the industry has traditionally not been able to exploit these kinds of fields.
However, technology advances in the last 15 years have meant that tight gas operations have taken off in the US, and Falcon is bringing this new expertise to Europe.
Falcon has already drilled three successful wells, but the really important news should come in September or October. That's when we'll learn the flow rates which will determine whether Falcon can make a go of its licence. Then, if the news is good, the company hopes to start production by the end of the year.
But what's it worth?
Shares in Falcon are currently trading at Can$3.95 (£1.88.) The market cap is around Can$1.8bn. However, current shareholders shouldn't expect to retain ownership of 100% of the asset. For starters, Falcon plans to float on AIM this year, and new shares may be issued at that time.
What's more, there's a good chance that Falcon will have to farm-out some of its assets to a bigger player that could help finance the development work. One of Falcon's Fool fans, djpreston, told me Falcon may need to drill 200 wells to fully exploit the area and each well could cost $10m, although the per well cost could fall as things progress. (In the "real world" djpreston is known as Darron Preston and works as a discretionary fund manager at Rickerbys.)
The farm-in company might get a 50% stake but that's little more than a guess on my part.
So who knows what the value might be? The most recent Canadian analyst report set a price target of Can$6.50, which was based on a risked recoverable resource estimate of 3.8tcf.
If you're feeling very bullish you could compare Falcon with a big player in the US tight gas sector, Ultra Petroleum
, which is valued at $8bn. It has net reserves of 12 Tcfe in its main asset, the Pinedale field in Wyoming, but is producing and is much less risky.
What's more, analysts are often wrong, and comparisons with other companies can mislead. The field has not been declared commercial and when it comes to oil exploration, you have to be prepared for unexpected problems or disasters.
But whatever way you cut it, Falcon has multi-bagger potential. Just be prepared to accept a fair bit of risk too. We've just opened a new discussion board for Falcon so pop in and let us know what you think about the company's prospects. You can also read more about the company in these three discussions from our Oil & Gas board: Will Falcon Flow? | Dundee On Falcon | Purchasing Falcon
Ed owns shares in Soco and Aminex.