Investors in Junior Oil & Gas Producer Enjoy Cardium Success

Berens Energy (BEN-TSX) was up 23%, or 37 cents, on Monday Nov 30,  to $1.95 on much greater than average volume as it reported the highest Initial Production (IP) rate I have ever seen out of the new high profile Cardium oil play in Alberta – 1250 bopd (barrels of oil per day).

I have followed Berens, a 4000 boe producer, since the spring of 2009, but did not include it in my newsletter portfolio because of its high debt and high natural gas weighting.  My bad; the stock has tripled as its large Cardium land position become more widely known, and they had some drilling success.

Despite the debt and the natural gas, I was intrigued with in the spring of 2009 because the team of President Dan Botterill and CFO Dell Chapman had (and have) done a great job at becoming one of the lowest cost gas producers in the Canadian oil patch.  They had to; they hit their debt ceiling two years before everybody else; they could only spend cash flow.

Usually at the end of each reporting quarter, it’s Berens, Storm Exploration (SEO-TSX) and Peyto (PEY.UN-TSX) as the lowest cost producers – and Berens is much smaller than the other two, so keeping costs low on that economies of scale is difficult.

Chapman explained to me that they keep their costs so low for two reasons – one is that their 3D seismic shows their producing gas zone (the Notikewan) and they have drilled into it with 100% success for more than two years.  The other is that they actually have their own in house staff drill the wells, compared to most juniors who outsource that.  Their employees get bonuses on success at low costs, so they have a high incentive.

The stock started to move up through the summer as the Cardium play became better known.  Their gas plays were in the Pembina area of central Alberta, where several other junior producers are actively exploiting the Cardium formation. 

I can’t use the word exploring, because there is basically no exploration risk in the Cardium.  It’s one of Canada’s largest oil formations stretching from the US border up into NorthEast B.C.  One of the Cardium formations is tight oil, meaning the oil is held up in rock, not loose sands.  It has been drilled through like Swiss cheese for 30-40 years, but only now has the dynamic duo technologies of horizontal drilling and multi-stage fracing been able to open this large and relatively prolific formation.

Chapman’s explanation of how they developed their Cardium play is a textbook example of how technology has opened up many new fields in North America (the Bakken, Viking, Dodsland, Lower Shaunavon—all in Saskatchewan).

“We’ve been monitoring the Cardium for 3 years and have drilled through it over 50 times,” he said. “It had never proved to be economic on a vertical basis so we never tried a vertical completion even though we saw some nice looking Cardium in our wells.  The other factor was that we were virtually 100% successful drilling the lower gas zones so never had a dry gas well to go “up hole” and complete a Cardium as a bailout.”

Most analysts have the Cardium as being the second most profitable play in Canada, right behind the Bakken oil formation in Saskatchewan.

With some initial oil success in the Cardium, Berens attracted a whole new set of shareholders, and as gas prices improved from $2.50 – $4.50 per mcf this fall, the stock has created a double whammy success for shareholders – as it’s the low cost gas producers like Berens that get the most leverage off this first move up in natural gas prices.

It’s important to note that this 1250 bopd press release was the average of the last 12 hours at the end of the first 3 day test; most companies report a 30 day rate, so this number is not what is usually reported. 

(Actually, the lack of standards and consistency of reporting IP rates is something the industry should seriously get together and act on for transparency to investors.)

There are 93 million shares out on Berens.  At $2/share, with $65 million debt they trade at roughly $62,750 per flowing barrel, average for their peer group.   They have 170 gross locations, 100 net to them, in the Cardium formation.

Keith Schaefer
Oil & Gas Investments Bulletin

DISCLOSURE: I own 5000 shares of Berens