Canadian heavy oil production is centered in the greater Lloyminster region covering both sides of the Alberta-Saskatchewan border where companies enjoy year round access. The oil is extracted from multiple-zone formations at shallow drill depth of 400-700 meters. To date, only 6.5% has been recovered from the 32 billion barrels of initial petroleum in place.
Oil produced from the greater Lloydminster fields falls in the heavy oil category as it has API gravity between 10° and 22°. It’s called heavy because it does not flow easily; it’s a gooey type of crude. The API gravity measures how heavy or light petroleum liquid is compared to water. Anywhere above 10° floats on water and vice versa. Heavy crude oil producers suffer from a price differential of about 20% to WTI (West Texas Intermediate) prices because it results in less higher end products when refined (refining costs are thus higher). Producers believe the price differential should narrow with increased refining capacity and pipeline takeaway.
Even though heavy crude oil production lacks the “sex appeal” of tight oil extracted from shale, it remains a low risk high reward operation as the shallow drill depth translates into lower drilling costs and completion costs since mostly conventional vertical wells are drilled.
This article will cover 3 junior stock picks that are weighted to heavy oil holding a large contiguous land base with a high working interest.
Gear Energy gxe.to $0.73 [-0.01]
Undeveloped land: >89,000 net acres
GXE is a pure play on heavy oil as its production is expected to average more than 6,000 boe/d in 2015 with a 98% weighted to heavy oil. The company assembled an inventory of more than 400 drilling locations. Management is highly capable on delivering on growth and with a fully diluted share count of only 71 million shares success should reflect positively on the share price if strong oil prices cooperate.
Rock Energy RE.to $N/A [+0]
Undeveloped land: 119,000 net acres
Rock Energy, another heavy oil focused company, is guiding for production to average between 4,600-5,000 boepd in 2015 with a 97% oil weighting of which >80% heavy oil. The company assembled a drilling inventory of over 600 locations not counting the re-completion candidates. Rock is not your typical high-cost high-decline player thanks to its low-cost low-decline Mantario heavy oil play. The company can keep its production flat at sub $50 WTI prices via organic cash flow.
Rock also provides a call on light oil thanks to its Onward assets in South West Saskatchewan. It currently produces more than 800 bopd from its shallow Viking horizontal wells. The company believes its acreage may yield up to 600 drilling locations, a huge prize for the size of this company. A fully diluted float of 50.0 million shares will translate growth per share easily into a higher price. Rock Energy plans to grow the company to up to 10,000 boe/d with a strong focus on oil.
Twin Butte Energy tbe.to $N/A [+0]
Undeveloped land: 367,000 net acres
Twin Butte expects its 2015 production to average more than 19,000 boepd weighted 43% to heavy oil and 46% to medium oil. The company is focused on development of heavy oil in the Lloydminster fairway and medium oil in the Provost region in AB and SK . Twin Butte is repositioning towards a horizontal medium oil focus in Provost, away from legacy vertical heavy oil in Lloydminster. The end result is a more predictable, longer life, higher netback production base.
TBE is the only one among its peers that pays a dividend, $0.01 monthly per share, with a total payout ratio < 100% at $50/bbl WCS pricing. The company maintains an active hedging strategy to protect cash flow targeting moderate production growth of 2-5% and the dividend.
If you are looking to invest in heavy oil companies, the 3 junior oil stocks covered above will provide you with varying degrees of exposure. You can select a pure player such as Gear Energy, a heavy oil weighted producer with a massive light oil growth platform with Rock Energy or a low growth yield play with Twin Butte Energy. It will be up to you in the end to fulfill your due diligence on each stock and choose what you deem the best stock to buy.
Disclaimer: the information presented above is only for informative purposes; it’s meant to serve as a starting point to carry your own due diligence. It is in no way an encouragement to buy or sell the aforementioned securities. If you find any errors in the data please do not hesitate to contact us using the appropriate form or by leaving a comment.