Petro One Energy

Getting to know the Junior Oil Game – Petro One Energy Case Study (TSX-V: POP)

Today’s news features excellent developments that I expect the retail market will soon grasp. By the most conservative estimates, the company has added another $3.3M net of all risk and cost to the bottom line.

The oil game is very different than the mining game. With junior mining, companies labor long and hard through numerous work programs until finally some type of report is commissioned, based on 43-101 metrics. Numbers that come out of these types of reports represent years of cumulative work, and are typically the best a company has to offer for a given mineral deposit.

Oil ain’t like that at all!

There’s two approaches: Run and Gun, or Transparent and Methodical.

The Run and Gun method is pretty straightforward, and is surprisingly common: Many small exploration companies simply shoot seismic and then drill. This quick and dirty approach can lead to splashy numbers and quick payoffs if it works. If they hit dry holes…well…the company has no real geological thesis or data set to fall back on. Worst of all, they’ve got no numbers to shore up fundamental value. They just simply have to tell their investors “hey, we missed!” and ask them to politely stick around while they do more drilling out of desperation.

The Transparent and Methodical approach is what we see exhibited here by Petro One Energy, and for that matter, any company with serious aspirations to become a significant producer (or any existing serious producer!). They are building up a serious base of fundamental, easy-access, pre-production numbers, which add real value to a company’s bottom line.

Following this method, a company does detailed work, most of which is independently confirmed, on each tract of land it holds or has influence over. Work is done methodically and in sequential order, and reserves and resources are continually added to, reclassified, and upgraded over time. Datasets on existing sections within inventory are built up to the point where numbers are of the highest quality where a number of payzones have reserves and are production ready.

Furthermore, all new ground acquired undergoes this fundamental process, sequentially and scientifically. This is what we see here with Petro One’s J11, J12, & J13 results. The barrels reported in this release are new and additional to those reported in all prior press releases.

The best estimate unrisked barrels were 314K. Multiplying that by net-of-production cost of $70 BBL, we arrive at a figure of $21M dollars value. Bear in mind that this is in addition to what Petro One has already reported, and that Petro One has a market cap of about $15M dollars. Going by those numbers the deal is undervalued to the point of silliness. Those numbers look good, but let’s consider them a gross figure.

What we really need to do is look at the risked numbers that have been added to the table today. Risked numbers are essentially numbers that have all the costs and risks factored into them. Really, they represent an ultimate conservative number.

Production costs in Southeast Saskatchewan and Southwest Manitoba are about $5-$10 BBL. So take that risked number of 47K BBL and multiply it by $70BBL just to be ultra conservative. We arrive at new added value of $3.3M dollars. This is new value to the company’s bottom line, net of risk, net of cost, producible in the short term.

Remember, in junior mining, hard numbers usually come after many years of highly expensive work, with about 90%+ of 43-101s describing an asset that is not economically feasible to put into production.

With Petro One it is entirely different: 51-101 numbers are done very early in the exploration process, typically focused on what can be immediately, economically producible in the short term. These new sections were added only a few months ago, and just scratching the surface, they have added $3.3M net to the table.

Unlike what is typical with a 43-101, these numbers do NOT indicate or suggest the total potential of the area. This is just what net value can be found there right off the top (!).

Junior oil companies do not drill for and try to define total aggregate economic potential, and then sit on the sidelines, waiting for a buyout, like junior mining companies.

Well-run junior oil companies START exploration and development with scientific numbers that give clear indication of economic, immediately-producible assets and cashflow through further exploration and reserve-building development. In other words, the tens of millions of oil Petro One has already defined will provide the cashflow further work.

Numbers so far are not the potential, but the starting point, and only for a few payzones on a few sections.

Petro One will need to seriously explore through all payzones, surface-to-basement on these new sections to get a grasp of this area’s magnitude. That will take some time, although it will happen much faster and with lower risk and quicker cashflow than in mining. But a starting point of net $3.3M dollars, before any real exploration is absolutely outstanding and highly suggestive of much greater underlying potential.

It’s a guess when they will press these new sections into production, but they are doing things the right way: Methodically, following industry best practices. The aggregate net of production dollar value of all their assets is drastically higher than their market cap.

In that light these numbers are excellent and it is obvious that a number of the company’s sections will go into production soon.