High North Resources – The Most Obvious Energy Takeover Target For 2014

by Keith Schaefer on February 6, 2014

The Stock In The Sweetest Spot of the Market

Advertorial by Keith Schaefer

The sweet spot in junior energy stocks is investing in a company just after they discover a new play—and they have a big land position all around it. It sets them up for months or years of low cost growth.

It’s even better if nobody knows about the company—no analyst reports, no institutional buying has come in yet.

It’s even better if this play is proven all around their big land position, and the Market doesn’t have to wait to see if the discovery well holds up over time.

It’s even better if they’re surrounded by junior dividend payers—the only group in Canada doing take-overs right now.

That’s what I have with High North Resources (HN-TSXv).

The Street doesn’t know about this company yet, but I have been following it for a year—and now is the time for investors to be aware–the company’s first drill results came out yesterday, and they hit exactly what they wanted and then some–175 barrels of oil (all oil!) per day in each of two wells.

It’s the same results that neighbouring Long Run Explorations (LRE-TSX) started out with–and that results in very fast 12 month payouts in the wells of their Montney oil play in western Canada, called Giroux-Normandville. With fast payouts, juniors can recycle that money into new wells quicker, and not issue shares to grow.

High North has a market capitalization of only $25 million and 120,000 acres in one of Canada’s most economic light oil resource plays.

This huge land position is right in the heart of this Montney oil play–it isn’t sitting on a large speculative land position.

Before these wells, the company was unknown and under everyone’s radar–except mine. But that will change now.  I expect analyst reports in the near term.

 

Girouxville/Normandville Montney – The Perfect Oil Play For A Junior

I’ve looked at a lot of junior oil and gas companies, but I’ve never seen a company this small with this much acreage in established horizontal plays.

Sure I’ve come across some juniors with big land positions. But these land positions are always in early stage, speculative plays that have not yet been proven to be economic.

That is what has me excited about High North.

This little company controls 120,000 acres of prime Montney land.

Long Run has been drilling wells directly to the east and north of High North’s land–and now staked land to the south and west.  High North is surrounded, and that validates the next three years worth of drilling.

And of course, it has greatly increased the dollar value of High North’s land position.

The market has failed to notice, because it isn’t aware that High North exists. There is no analyst coverage and very little institutional following.

These first well results are so important.

Once those well results are out, people are going to start doing some valuation work on High North’s land, and some simple math will show the low risk and high potential here.

You just have to connect a couple of dots.

The first dot is to look at where High North’s land is.

You can see from the image above that the company next door is making Swiss cheese out of the offsetting land drilling wells.

The second dot: realizing that High North is rapidly drilling the offsetting wells of intermediate producer Long Run Exploration.From there an investor can dig into the results that Long Run is having drilling these Montney wells and see that the play is providing top tier economics.

The numbers tell the entire story: this Montney play is perfect for a small producer.

The $2 million per well costs are very reasonable, and the payout period of 12 months is terrific.

This play is affordable and recycles cash quickly.

This is exactly the type of play that works for a junior oil and gas company.

High North has 120,000 acres right in the middle of it that can support more than 150 drilling locations.

Find me another small company with this much land in a recognized play. You can’t.

Long Run hasn’t just drilled a few wells into this play, it has made the Montney the primary focus for the company. Since August 2011 Long Run has drilled almost 100 Montney wells.

On the back of this Montney play Long Run has transformed itself into a dividend paying company. That means that Long Run believes the Montney to be predictable, repeatable and able to provide significant excess cash flows.

The Montney is a company-maker for High North.

The production results from Long Run’s 100 plus wells provides us with the data to estimate how High North’s horizontal wells will develop.

High North’s wells matched Long Run’s initial 175 boe/d IP rates.   But Long Run’s most recent wells have had IP rates of 300 to 600 boe per day. “Best practices” spreads like wildfire in “The Patch”, and I expect that High North could see payouts go from 12 months to well under a year.

That’s what the Market pays for–low cost, fast payout wells.  They have a low risk drilling inventory of over 150 locations in the Montney.  In fact, that could double to 300 wells very quickly, because Long Run has permission to go to 16 wells per section, or per square mile, instead of 8.  That can have a big impact on the company’s take-out value.

An off-the-radar company going from zero to 1,000 barrels of fast-payback production will attract a lot more attention from institutional investors.

And believe it or not, the story actually gets better–for free.

The Duvernay – The Cherry On Top of High North

In the near term High North’s shallow Montney oil play is going to be the focus. But over time the deeper Duvernay formation might prove to be High North’s most valuable asset.

Big companies have been paying big dollars to get into the Duvernay. PetroChina paid almost $10,000 per acre in 2012 in a joint venture with Encana. Chevron paid up big time in 2013 by spending a billion dollars to acquire a private company and its 67,900 Duvernay acres–that’s $14,727 per acre.

Since then all the Duvernay has only got better. In September of last year Trilogy Energy (TET-TSX) issued its first set of Duvernay well results. The stock soared 15% on the day with analysts suggesting that Trilogy’s wells would pay out in less than a year.

Following on that, mega-producer Chevron announced the completion of a 12 well Duvernay program that provided even better than anticipated results. In Chevron’s opinion the results were good enough to merit the full time deployment of two rigs to drill Duvernay wells.

While the industry heavyweights and large independents perfect the Duvernay, little High North can sit back with its 120,000 acres and watch.

With a market capitalization of $25 million and 120,000 acres High North is being valued by the market at $208 per acre for the Duvernay.

That isn’t even in the same galaxy as the prices paid by PetroChina and Chevron which was before the important well results from Trilogy and Chevron.

But for now the Duvernay is on the back burner.

The Montney is going to be the zone that provides the near term catalysts for High North’s stock price and the cash flow for the company.

It Isn’t Hard To See How This One Is Going To Play Out

I’ve told you that High North has a big land position with lots of running room in a Montney oil play that sets up perfectly for a small producer.

On top of that I mentioned the big exposure that the company also has to the Duvernay.

High North is set up for a great long term run. Or is it? Because High North might not be around for the Long Run–pardon the pun.

What is likely to happen here is obvious.

The point is, High North has exactly what the new dividend paying junior producers want—a deep inventory of low-cost, fast-payout wells. And that group of companies—of which Long Run is just one—are the only teams buying assets right now. That puts High North in a very sweet position.

Industry players looking at High North’s low valuation and quick ramp up in production will understand that waiting just makes for a more expensive acquisition price.

I wouldn’t be surprised if High North is gone before the end of 2014.

In the meantime, shareholders are set for one of the fastest and cheapest organic growth stories in North America. The leverage in the Markets is at the bottom, and that’s where I think High North is as they develop a large land position around a proven discovery–the sweetest spot in the market.

 

This story has been sponsored and reviewed by High North management

 

DISCLAIMER: The information in this newsletter does not constitute an offer to sell or a solicitation of an offer to buy any securities of a corporation or entity, including U.S. Traded Securities or U.S. Quoted Securities, in the United States or to U.S. Persons.  Securities may not be offered or sold in the United States except in compliance with the registration requirements of the Securities Act and applicable U.S. state securities laws or pursuant to an exemption therefrom.  Any public offering of securities in the United States may only be made by means of a prospectus containing detailed information about the corporation or entity and its management as well as financial statements.  No securities regulatory authority in the United States has either approved or disapproved of the contents of any newsletter.

Keith Schaefer is not registered with the United States Securities and Exchange Commission (the “SEC”): as a “broker-dealer” under the Exchange Act, as an “investment adviser” under the Investment Advisers Act of 1940, or in any other capacity.  He is also not registered with any state securities commission or authority as a broker-dealer or investment advisor or in any other capacity.

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