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Big Picture Speculator - Junior Oil Sands Update

This excerpt is from the June 27, 2007 Big Picture Speculator Newsletter.

The Future is Now!
In 1973, OPEC’s actions caused the price of oil to quadruple to the lofty price of nearly US$12/bbl. In response, the the Canadian Society of Petroleum Geologists (CSPG) held an Oil Sands Fuel of the Future symposium. This led to the publication of CSPG Memoir 3 - “Oil Sands Fuel of the Future”. Back then Great Canadian Oil Sands was struggling with issues such as boiler malfunctions, excessive bucket wheel teeth wear, conveyer belt issues, slow tailings settling rates and sand disposal problems. We’ve come a long way since 1973. Those enormous oil reserves are drawing the attention from companies all over the globe.

The speculative backdrop for oil sands has never been better. There are multiple bidders going after the big fish like Western Oil Sands (WTO.TO), UTS and UTS Energy Corp (UTS.TO). UTS is up 47% since being added to our Big Picture Speculator Portfolio and we see it as a long term hold.

Why would an oil company be interested in mining or steaming out sticky goo when they could be drilling oil wells anywhere on the planet?

One good reason is that the finding costs for oil sands projects approximate zero. Another good reason is that the probability of having an Alberta oil sands project expropriated is also very close to zero. That is why there are multiple bidders from around the globe circling these companies and I don’t see acquisition metrics getting any lower. Against a backdrop of a healthy energy bull market, I wouldn’t be surprised to see acquisition price costs increase significantly over the next several years.

In Vancouver I talked about 3 junior oil sands companies that I’ve mentioned in previous editions of the Big Picture Speculator, Southern Pacific Petroleum (STP.V), North Peace Energy (NPE.V) and Patch International (PTCH OTCBB). I also drew attention to Platform Resources Inc. (PFM.V) which will soon be known as Alberta OIl Sands Inc. I am revisiting this group because I see a nice relatively low risk opportunity in them at the moment.

One “big picture” comparison can be made with Oilsands Quest Inc. (BQI - AMEX) which currently sports a market cap of ~US$500 million. They have a management estimated resource of 1.25-1.5+ billion barrels (bbls) of oil in the ground. This works out to US$0.30/bbl. The going rate for oil sands reserves is closer to $1.00/bbl of recoverable oil (reserves carry a higher degree of certainty than resource estimates hence they sell for a higher price). If Oilsands Quest can convince an evaluation firm that they really have a billion and a half barrels of oil in the ground (through drilling and seismic work) for a cost of less than a billion dollars there will be some money made. I think there is even more upside in the following companies:

Southern Pacific Resources (STP.V, STPJF)
Closing Price $3.70
O/S Shares 43,595,096
Market Cap $161,301,855

We like this company very much because it has increased nicely from when we first mentioned it at the low low price of $1.47. More importantly we like the company even more based on recent announcements. This is a junior resource stock that you can take home to mom!

The big news coming from Southern Pacific Resources is the recent acquisition of an 80% interest in 76 sections of oil sands land for $16 million. The proposed $20 million financing to complete the transaction rapidly morphed into a 32 million financing. Southern Pacific was being valued at $130 million with their original 25 section oil sands landholdings. The market is valuing them close to their 156 million bbls of probable and possible reserves based on an August 31, 2006 reserve report. A new reserve report that will incorporate winter drilling is expected soon. Management was expecting the report in June and Stampede Week is looming. I rarely pound the table on stocks (my desktop is made of frosted glass) but this stock is still undervalued after doubling. Although many people suggest selling half of a stock that doubles and enjoying a free ride on the rest, in this case the “free” could cost you a considerable sum.

North Peace Energy (NPE.V, NPCEF)
Closing Price $2.13
O/S Shares 26,156,400
Market Cap $55,713,132

North Peace announced the acquisition of the remaining 30% ownership of its landholdings in the Red Earth area of Alberta. They are paying $20 million for a 30% interest in 2-3.1 billion barrels of discovered resource or under $0.02/bbl!. A bought-deal equity financing of $20 million is scheduled to close on or about June 28, 2007.

Patch International (PTCH)
Closing Price US$1.99
O/S Shares 33,400,000 (FD)
Market Cap US$66,466,000

Patch International has a DeGolyer and MacNaughton resource appraisal of 1.5 billion bbls in place based on data from 3 core holes and having 25% of their land explored. This winter they drilled 22 wells and acquired 60 miles of seismic data. This information will be incorporated into a new resource estimate. Their reserve estimates should increase significantly when this new data is incorporated into the estimate.

While we don’t normally touch OTCBB stocks, I think this one will eventually move up the food chain and list on a more respectable exchange.

While the summer doldrums remain a fact of life for resource stock investors, I believe that there will be some summer excitement in the junior oils sands companies. Recent financings were in high demand and new reserve/resource reports are pending. These companies are unlikely to have had any of their existing oil sands allocations disappear over the last year. I’ll provide more information on a couple of other oil sands companies shortly.

I currently own STP.V, NPE.V and PTCH.