CIBC values Talisman/Sasol deal at $25,000/acre

CIBC released research today for Progress Energy and calculated the value of the Talisman/Sasol deal at $25,000/acre. They discounted the $1.05 billion value to account for Talisman's sunk costs of approximately $260 million and also for Sasol's future carry commitments over 5 years at 9%/annum. Taking the $25,000/acre value over Canadian Spirit Resources Inc.'s (SPI) 19,200 net Montney acreage in Farrell Creek equals approximately $6.25/share. This does not account for SPI's cash on hand, value of existing infrastructure or any value for their Gething land. This is one more example of an analyst demonstrating that SPI's share price is significantly undervalued.

Dundee says Canadian Spirit is "Significantly Undervalued"

Dundee Securities issued research on Canadian Spirit Resources Inc. (SPI) today titled "Talisman Farrell Creek Joint Venture Provides Valuation Data Point." They state, "given that Canadian Spirit's Farrell Creek Montney play directly offsets Talisman's, we see this transaction as a direct data point and use it to provide investors with a sense of Canadian Spirit's current valuation."

Implied valuation metrics from the Talisman deal applied to SPI result in a per share value of up to $7.44 according to Dundee.

Montney Shale Land Map

This map shows the proximity of Talisman Energy's (TLM) Farrell Creek lands to Canadian Spirit Resources Inc.'s (SPI) land.

TLM's land is shown in purple and SPI's land is directly to the south and is shown in orange. Note that two sections of TLM's land are completely surrounded by SPI land.

RBC says TLM's deal places a firm value on its Montney shale acreage

RBC released research today that stated "Talisman Energy’s $1.05 billion farm-out deal with Sasol Limited places a firm value on its Montney shale acreage at Farrell Creek." Since Canadian Spirit Resources Inc. (SPI) has adjacent Montney shale acreage, that same firm value can be extrapolated to SPI's land. Taking TLM's existing production out of the value, SPI's Montney land is valued at $575 million or $7.67/share using the same valuation metrics.

TD Securities comments on Talisman Farrell Creek deal

TD Securities released a research note today on the Talisman/Sasol deal. They stated that "Farrell Creek is considered largely de-risked." Since TLM's land is adjacent to Canadian Spirit Resources Inc.'s (SPI) land, one can project that at least a portion, if not most of SPI's upper Montney land could be considered de-risked. Should one consider SPI's Farrell Creek land to be similar to TLM's Farrell Creek land, similar valuation metrics place a value of $7.67/share for SPI. Even at a 50% discount, SPI has significant upside potential!

Of additional interest is Sasol's GTL (methane to liquid products) technology. They currently run the largest GTL plant in the world and this could be a viable alternative for North American natural gas.

Talisman announces $1.05 billion joint venture with Sasol for Farrell Creek Montney property

Talisman announced today that it has entered into a joint venture with Sasol. Sasol is paying $1.05 billion for a 50% interest in TLM's Farrell Creek Montney project. TLM's Montney project includes 51,365 acres and is estimated to have 9.6 tcf of gross contingent resources.

This transaction implies a valuation of approximately $0.21/mcf and $0.16/mcf on an adjusted basis taking into account current production according to a research note issued by CIBC. The transaction also equates to $41,000/acre ($26.2 million/section) unadjusted and $30,500/acre ($19.5 million/section) on an adjusted basis.

It is of great interest to note that Canadian Spirit Resources Inc. (SPI) has 29.5 net sections of Montney lands. SPI's west block and east block of Montney lands are both directly adjacent to Talisman's Farrell Creek Montney project. Using TLM/Sasol valuation metrics implies a value of $575 million for SPI's net Montney lands. On a per share basis, SPI's value equals $7.67/share ($575 M / 75 million shares).

As Wellington analyst Kim Page noted back in August, SPI could be "the next Monterey" and "using Monterey take-out valuation metrics points to a potential $8+/share." Both the TLM/Sasol deal and Monterey deal demonstrate that SPI is clearly undervalued!

Could these recent deals mean that there are other parties that are looking into Montney assets in the Farrell Creek area that did not prevail in those negotiations?

SPI announces closing of bought deal

Canadian Spirit Resources Inc. (SPI) announced that it has closed their public offering. As their were bets made by the market that their previous offering would not close, closing of this deal is significant and provides SPI with necessary capital to fund the exploration and development of their Montney shale gas project.

Bloomberg says that natural gas prices may climb in 2011

An aricle published by Bloomberg today stated that natural gas prices will climb in 2011. Natural gas prices may rebound as producers cut output for the first time in six years. The Energy Department said on Dec. 7 that there will be a decline in drilling and output will average 62.01 bcf/d in 2011, down from 62.09 bcf/d this year.

Jonathan Wolff of Credit Suisse Group AG is predicting an average price of $5.25 in 2011. "Production will flatten out in the next several months and then potentially start to decline after that, probably in the second half of the year," he said.

Jason Schenker, president of Prestige Economics, stated "Industrial demand is coming back already, storage withdrawals have been a bit larger than historical numbers even though new supplies are coming to market, which implies that demand is going up."

SPI announces another success in the Lower Montney

Canadian Spirit Resources Inc. (SPI) announced today that they have achieved their second successful test of the Lower Montney Formation. Their b-17 well flowed in excess of 3.5 mmcf/d and stabilized at 2.5 mmcf/d from five fractures over a short horizontal leg. The release states that the well "exceeded the Corporation's expectations and confirms the Corporation's conviction that the lower Montney zones can add significantly to the total productivity and reserve potential of the Montney Formation as a whole".

This is great news and shows that SPI is on their way to proving up their Montney lands.

SPI announces bought deal

Canadian Spirit Resources Inc. (SPI) announced that it has filed an amended public ofering of 16.7M shares at a bought deal price of $1.50/share. This deal will provide the company with the necessary capital to fund their share of the Montney project for 2011. This offering basically commits the underwriters to place the 16.7M shares at their risk as opposed to the previous offering which placed the risk with SPI. This deal demonstrates the confidence that the underwriters have in the company and their ability to place the shares. It is also significant that this offering does not include the incentive of warrants. It will be a positive sign for SPI should this offering now close as scheduled.

The placement will be led by Wellington West and will include Casimir Capital, Byron Securities and Acumen Capital. It's worth noting that Salman Partners is not included in this placement. Recent trading indicates that Wellington West and Byron Securities have been active supporters while Salman Partners has not shown much participation. It's possible that this is a factor.

Calgary Herald article states "Relief could be on horizon for small gas producers"

An article in today's Calgary Herald says that "Relief could be on horizon for small gas producers." The article says that junior natural gas producers might not have to wait too much longer for relief from low prices.

"Gas prices have bottomed and a meaningful recovery could become apparent as early as this winter," Josef Schachter, president of Schachter Asset Management said. "Natural gas prices have bottomed, the new cycle is starting so the commodity of choice right now is natural gas ... we're bullish," he continued.

China's natural gas demand to exceed supply by 35 percent

China's demand for natural gas will exceed its supply by 35 percent in 2011, Yin Jianping, a professor under the China University of Petroleum, said at the China Energy Forum. Yin said the China's demand for natural gas will maintain rapid growth in the coming decade.

A Wall Street Journal article a few weeks back stated that "China's insatiable thirst for fossil fuels to power its surging economy could put pressure on global energy supplies and drive up oil prices to much higher levels over the next 25 years, according to the International Energy Agency." The IEA predicts that China's demand for electricity will triple by 2035 and that their energy demand will rise by 75% between 2008 and 2035.

Kogas already has agreements with Kitimat LNG and Encana to ship natural gas to growing Asian markets. It's possible that Canada will be exporting more gas outside of North America in the near future.

Canadian Spirit Resources Inc. announces public offering

Canadian Spirit Resources Inc. (SPI) announced today that they have filed a short form prospectus for a public offering at $1.70 per share. This offering does not include warrants and is incentivized by an approximate 5% discount to the current share price. This offering appears to show the company's confidence by the fact that they are not offering warrants. If the company can indeed sell this offering at this price, we may have seen a share price bottom and can expect future upside potential.

Newfield announces plans to purchase 50,000 acres

Newfield announced that it plans to buy 50,000 acres in the Marcellus Shale. They are purchasing the land from EOG Resources for $405 million. There is limited production of 7 mmcf/d on this land from 11 wells that have been drilled but not completed.

This deal equates to $8,100 per acre and $20,000 per hectare. This is viewed as a positive news item demonstrating continued strength in the natural gas market. Companies are continuing to make purchases and are paying high prices for unbooked resource potential.

Analyst Updates on SPI

Three analysts released updates on Canadian Spirit Resources Inc. (SPI) today. Indications are that all three analysts are still very bullish on SPI and believe in SPI's longterm upside potential.

Wellington West reiterates their strong buy rating and says that industry data substatiates their project valuation of +$3/share.

Dundee Capital Markets says long term story remains positive. They state that although the initial results are slightly below company expectations, they are not at all discouraged. They still believe in SPI's asset base and exposure to the Montney play over the long term and see a lot of activity coming down the pipe. They are maintaining their Buy rating and feel SPI offers significant exposure to the Montney play. They conclude saying this is a buying opportunity and "their is no disputing the evident upside potential from their Montney land base."

Salman Partners Morning Note maintains SPI as a Top Pick with a target price of $2.50.

SPI announces 4.7mmcf/day initial flow rate from Upper Montney Horizontal Well

Canadian Spirit Resources Inc. (SPI) announced today that they have achieved an intitial flow rate test of up to 4.7 mmcf/d from their c-18-I upper Montney horizontal well. Although the release states that the flow rates are inconsistent with expectations, conversations with management indicate that they are not discouraged at all. The well received an 8 stage frac and the fracture mapping indicates that there may have been issues with the 7th and 8th frac stages. These two fracs may have gone back into the 6th stage resulting in two understimulated stages and one overstimulated stage. With the possibility of issues from three fracs, the intial results were within industry expected rates. Talisman has been achieving between 600 mcf/d to 1 mmcf/d initial rates and 450 mcf/d to 700 mcf/d rates after 30 days of flow. It should be noted that this was SPI and Canbriam's first upper Montney well and results should improve with more experience in completing those zones.

Additional news contained in the release indicate that they will be fracture stimulating the b-17-I lower Montney horizontal well prior to the c-A18-I upper Montney horizontal well due to a casing issue. SPI indicates that they plan to stimulate the c-A18-I upper Montney horizontal well before year-end.

Lastly, consturuction of the gas processing facility has commenced and is expected to be completed in January. This slight delay is due to a delay in regulatory approvals. Because of this delay, year end reserve data may be affected.

We believe that the tone of the news release is not indicative of management's enthusiasm and see this as being a buying opportunity.

Chevron to Buy Shale-Gas Owner Atlas Energy

Chevron Corp. agreed to buy Atlas Energy for $4.3 billion giving it access to the Marcellus Shale formation. Including assumed debt, the deal is worth approximately $0.47/mcf as Chevron estimated that Atlas has 9 tcf of net natural gas resource.

This deal demonstrates the positive long term view of natural gas that the large oil companies have. Together with firming natural gas prices, we see believe there is long term potential in natural gas companies.

Wellington analyst calls SPI 'the next Monterey'!

Wellington has issued a trading note regarding Canadian Spirit Resources Inc. (SPI) with a strong buy recommendation and $3.00 target price. "Analyst Kim Page is calling this story 'the next Monterey'. They also state in the note, "as for 'the next Monterey'... using Monterey take-out valuation metrics point to a potential $8+/share."

Monterey's acquistion by Pengrowth, a good sign for SPI?

Pengrowth will by acquiring Monterey Exploration for $366 million. The prize of that deal is the 19.0 net sections that Monterey has in the Groundbirch Montney. This is a good sign for Canadian Spirit Resources Inc. (SPI) as they have over 29 net sections in the Montney. Could there be other companies that are candidates for acquisition?

NOAA predicts above average 2010 Atlantic Hurricane Season

NOAA’s 2010 Atlantic Hurricane Season Outlook calls for an 85% chance of an above normal season. They expect that conditions will produce a very active Atlantic hurricane season. "The 2010 hurricane season could see activity comparable to a number of extremely active seasons since 1995. If the 2010 activity reaches the upper end of our predicted ranges, it will be one of the most active seasons on record".

Sproule's estimate for Montney is 8.4 tcf using 3% limestone porosity

Sproule has also included an estimate of natural gas on SPI's lands to be 8.4 tcf based upon a 3% limestone porosity cutoff. SPI's 35% net interest equals 2.94 tcf. At a 20% recovery rate, SPI's net asset value is $7.00/share. With a 30% recovery rate, SPI's net asset value is $10.00/share. Net asset value calculation ranges for additional values per mcf will be shown soon.

Sproule releases estimate of gas in Montney Formation

Canadian Spirit Resources Inc. (SPI) announced today that Sproule has estimated the total gross discovered and undiscovered resource in the Montney Formation to be 3.6 tcf on SPI’s lands at Farrell Creek. SPI has a 35% net interest in the Montney equaling 1.26 tcf. With a recovery rate of 20% and $0.49/mcf value, SPI’s net asset value is $3.55/share. With a 30% recovery rate, SPI’s net asset value is $4.80/share. Clearly, SPI is an undervalued company with a lot of upside potential that will be realized once the market sentiment for E&P natural gas companies improves.

Shell sees natural gas demand increasing 2%/year and 50% by 2030

In a speech given by Malcom Brinded, Executive Director of Shell, he states that "global gas demand is likely to grow by around 2% per year." He adds, "by 2030, we’re looking at a rise of almost 50%."

Shell sees demand growth coming from the electricity sector. "Natural gas is the cleanest burning fossil fuel and has many other advantages that make it a highly attractive fuel for the electricity sector."

M&A Activity Leads to GS Attractive Coverage View on E&P Stocks

Goldman Sachs (GS) says that the “potential for M&A activity via corporate acquisitions and joint ventures adds another leg to our Attractive coverage view on E&P stocks.” They see a bottom and rise in natural gas prices. They reiterate their Attractive coverage view on E&P stocks based upon higher natural gas prices and the potential for additional corporate M&A.

With recent corporate acquisitions, GS says that “valuations of recent transactions suggest buyers are looking through weak North American natural gas prices and are willing to assume mid-cycle commodity prices while still paying for unbooked resource potential.” Three recent acquisition announcements involving Encore, XTO and Mariner Energy were all close to GS’s mid-cycle net asset valuations assuming $6.50/MMBtu long term natural gas prices. The values include unbooked resource potential as well. The recent M&A activity supports valuation floors even if natural gas remains low.

GS believes that natural gas prices are bottoming and that they are at a cyclical bottom. They believe that natural gas prices will move towards the high end of their $4.00 to $6.50/MMBtu trading range in the next 6 to 9 months. Although Street sentiment is negative, GS believes that small improvements in data points can be a positive catalyst for E&P equities.

With Canadian Spirit Resources Inc. (SPI) in a period of lower acitivity due to road bans in northeast British Columbia, now may be a time start buying at these prices. Furthermore, SPI has initiated a buy back of their stock because they believe that recent trading does not accurately reflect the value of their company. As Dundee Capital Markets says about SPI, “It’s only a matter of time!”

Goldman Sachs upgrades E&P Sector to Attractive

Goldman Sachs upgraded the E&P sector to Attractive and said that natural gas prices are near a bottom. They believe that prices could hit $6/mmbtu before the end of the year. They say that E&P stocks reflect low long term natural gas prices and see a 28% upside to their target prices. Reasons for their optimism include:

1) More coal to gas substitutions,
2) Broader demand appears to be improving,
3) A potential 100 to 140 rig count reduction that is unlikely to reverse until gas prices significantly improve, and
4) More moderate storage builds.

Goldman Sachs says "the Street is too bearish" and "E&P stocks are attractively valued after pullback." The Street is overestimating summer storage builds and prices will rise. They are upgrading E&P stocks to Attractive from Neutral because natural gas prices are near bottom and likely to rise in the coming months and they see limited downside to natural gas prices.

Canadian Spirit Resources Inc. (SPI) is one the companies that we expect to see improved share prices as gas prices and sentiment improve. We should see a reversal of recent weakness with:

1) The upcoming Sproule Resource Report to be released shortly,
2) The completion of the c-A48-I horizontal well into the lower Montney, and
3) The spudding of the c-18-I horizontal well into the upper Montney in June.

The risk/reward of SPI is still very attractive due to its exposure to some of the best Montney land available and a well funded JV partner in Canbriam. Analysts are saying that SPI's story is among the best out there and several have recently issued very upbeat research.

2010 Atlantic Hurricane Season Predicted to be Above Normal

The 2010 Atlantic Hurricane Season is predicted to pose an above normal threat to the Gulf and East Coast. Accuweather forecasts 16 to 18 named storms forming in the Atlantic with five becoming hurricanes. "This year has a chance to be an extreme season," said Joe Bastardi, chief long-range and hurricane forecaster. This prediction follows above average predictions by Colorado State University, WSI Inc. and Commodity Weather Group.

27% of U.S. oil and 15% of U.S. natural gas production is located in the Gulf of Mexico.

Dundee Capital Markets Releases Energy Watch Update: "Only a Matter of Time!"

Dundee Capital Markets has issued an update to their Energy Watch List (click here for the update). They conclude that it's "Only a matter of time!" before Canadian Spirit Resources Inc. (SPI) achieves full commercialization of its joint venture Montney program.

- "The company has also announced the engineering of the planned 20 mmcf/day compression and dehydration facility has begun and is expeceted to be completed and in operation during the fourth quarter of 2010." This demonstrates the confidence that SPI and Canbriam Energy Inc. have in the potential commercialization of their Montney land.

- "Canadian Spirit is an up and coming Montney player with plenty of potential production and reserve growth to look forward to."

- Talisman Energy has land adjacent to SPI and has achieved significant success in the Montney and expects to be producing 40-60 mmcf/day by the end of 2010.

- Dundee concludes that the "planning and engineering of a 20 mmcf/day porcessing facility is a positive sign for things to come," and with the significant success by Talisman on adjacent lands, SPI is an emerging Montney player with plenty of upside.

Terra Energy Announces Strategic Push into the Montney Fairway in the Farrell Creek Area

Terra Energy announced today that they will be making a "strategic push into the Montney Fairway in Northeast British Columbia." They own 17 net sections of land in the Farrell Creek area and will be targeting the Montney and Doig formations. The land is adjacent to and in close proximity to Taliman Energy's land and very near Canadian Spirit Resources Inc.'s (SPI) land. Terra's lands are "in close proximity to several high rate Montney horizontal tests." Terra hopes to advance the project to the commercial development stage. "The Company is now conducting preliminary engineering work to construct a 30 MMCF/day gas processing plant in the Farrell Creek/Altares area."

Terra's activity is more evidence that the Montney Fairway in the Farrell Creek area is a hotbed for exploration activity and another sign that SPI is located in the middle of one of North America's hottest natural gas plays.

Salman Partners Research Report released with a $2.50 target

Salman Partners has released a new Research Report on Canadian Spirit Resources Inc. (SPI) with a Speculative Buy recommendation and a $2.50 target price based upon "modest assumptions about recovery rates and the value of reserves in the ground." "That represents a 50% discount to our estimate of Net Asset Value, simply because of the early stage of development."

- "Land sale activity in 2008 and 2009, together with drilling activity conducted by Talisman Energy, Progress Energy and Crew Energy on adjacent properties has validated the prospectivity of Canadian Spirit's acreage."

- Salman Partners says Phil Geiger, President of SPI, was a pioneer in unconventional gas and was on to "unconventional gas long before the phrase crept into the lexicon." He and SPI surveyed all of western Canada in 2002 looking for gas in unconventional formations and chose the Farrell Creek area at a time when it was a "blank spot on the map" and when there was very little competition for land. "Today, NE B.C. is a hotbed of exploration activity driven by large quantities of gas that have been found in the Montney formation." "By being early on the play and establishing a significant toe-hold before the rest of the petroleum industry got really excited about the Montney, Canadian Spirit has been able to attract farm-in partners and is benefitting from drilling activity conducted by competitors on surrounding acreage." Because Geiger and SPI were able to lease land when there was very little interest in the area, SPI has been able to lease the best land that is suitable for development with a high gas resource potential.

- Talisman Energy has "drilled a number of very productive vertical wells" and is satisfied with the results. They estimate that recoveries will be 5 bcf/well able to produce at a stabalized rate of 4.5mcf/day after 30 days of production. Talisman "built a 23 mmcf/day gas plant, which is alread full and is being expanded to 60 mmcf/day." Talisman's success has significantly de-risked SPI's Montney play because the two companies' land is adjacent to one another.

- "Canadian Spirit and its partner, Canbriam Energy, are beneficiaries of Talisman's activity in the Farrell Creek area. They are able to look at the results of Talisman's wells that are more than a year old, and some of Talisman's 2010 wells will be on a little 'island' of Talisman acreage, which is completely surrounded by Canadian Spirit land holdings."

- "Canbriam and Canadian Spirit could have three wells on-stream and producing from the Montney by year-end, at a combined rate of 20.0 mmcf/day or approximately 6.0 mmcf/day net to CSRI. Assuming an Aeco gas price of $6.50/mcf, we estimate the company could generate $13.2 million in cash flow in 2011."

- "Assuming modest recovery rates and production volumes, the stock could be worth $5.00/share based on the Montney alone."

Highlights from the Byron Capital Markets Research Report

- The Montney has been the focus of increased attention as international companies seek new sources of reserves.

- Canadian Spirit Resources Inc. (SPI) has a strong cash position of $14.0 M and their joint ventures are proceeding at no cost to the company.

- The upper Montney has been the target of other companies in the area and their success has significantly derisked the upper Montney play in the Farrell Creek area.

- The b-17-I well completed in Q4 '09 targeted the lower Montney and the test "exceeded expectations and should lead to further exploitation of the lower Montney in the Farrell Creek area." This is significant because SPI now has an additional zone capable of adding greatly to their prospective resource and eventually adding to their reserves and production.

- The Montney recovery factor can range from 20% to 50%. Byron 's share value of $3.00 is based upon 100 bcf/section and a 15% recovery factor. Given that the Montney could contain up to 350 bcf/section (some estimates are as high as 700 bcf/section) and recovery rates could be as high as 50%, Byron notes that there is significant upside under the best case scenarios which can also be seen from our calculations and summary. Higher recovery rates and higher gas prices would have a substantial impact on share prices

- SPI has set a goal of meaningful productivity, revenue and reserves from its Montney play by the end of the year.

- Talisman has been very active on its lands adjacent to SPI and has moved their Farrell Creek project into commercial development. Talisman's exploration success has significantly derisked the Montney play in this area.

- Sproule will be releasing a resource report on SPI's Montney lands in April.

- SPI has a highly prospective land position in the Montney and Byron has initiated coverage with a BUY recommendation and a $3.00 initial price target.

Byron Capital Markets Issues Research Report on SPI

Byron Capital Markets issued a Research Report on Canadian Spirit Resources (SPI)today. They have set a target price of $3.00. More to come from the report shortly.

Canada Energy Partners to Frac Horizontal Well

Canada Energy Partners (CE), Canadian Spirit Resources Inc.'s (SPI) neighbor to the south, announced today that it will frac its first horizontal well. From the news release, "the completion will test 1000 meters of consistent Montney resevoir encountered in the lateral section which exhibited encouraging natural gas responses throughout."

Neighboring companies like CE completing Montney wells and exploration success by Talisman Energy significantly derisks SPI's Montney shale lands.

Dundee Capital's Updated Energy Watch List

Dundee Capital updated their Energy Watch List and included very positive comments in regard to Canadian Spirit Resources Inc. (SPI). Their summary states that "asset acquisitions and Talisman Montney update provides further support for the expansion of Montney activity in Northeast British Columbia."

From the update, "the future for Canadian Spirit continues to burn bright and is further supported with the recent asset and land acquisition by Progress Energy." They also state that "these events speak to the excitement surrounding the expansion of the Montney fairway further to the west in British Columbia and more specifically in the vicinity to Canada Spirit."

Dundee concludes "as a result of the asset and land acquisitions along with the recently announced Montney production guidance from Talisman Energy, it provides further support to the potential commerciality and the extenstion of the Montney play in northeast British Columbia... We believe Canadian Spirit continues to provide investors with a great opportunity to gain acess to an up and coming Montney player with plenty of potential production and reserve growth to look forward to."

Anadarko announces JV agreement with Mitsui E&P

Anadarko Petroleum announced on February 16 that it entered into a JV agreement with Mitsui E&P. Mitsui paid $14,000/acre to participate in Anadarko's Marcellus shale development project. Goldman Sachs comments "for the sector, another US shale gas JV supports our view that JV's, spinoffs and M&A will be a key 2010 theme for the E&P's, which can drive premium stock valuations despite low gas prices."

The $14,000/acre lends further credibility to the prices paid for acreage adjacent to Canadian Spirit Resources Inc. (SPI) at the October '09 BC land sale and demonstrates that SPI is clearly undervalued at its current stock price.

Mitsui must believe that there is a significant future for North American natural gas and this deal is a positive statement about gas in general.

GMP Securities sees upside in Canada Energy Partners deep rights

GMP Securities issued a report on Canada Energy Partners Inc. (CE) on February 12. They see significant value in CE's Montney lands. "The bigger upside potential in this story in our opinion comes from CE's deeper rights in the area that are in the heart of some of the most highly watched Montney drilling activity in north eastern British Columbia."

Another nice example of an analyst seeing upside potential of a company developing the Montney shale in NE BC. CE is Canadian Spirit Resources Inc.'s (SPI) neighbor to the south.

It's also worth noting that GMP sees value for CE's CBM project. They state the CE is "encouraged by the initial gas flow rates." GMP also stated that "management expects the gas volumes to increase for several years before peaking and rolling over into a long shallow decline."

Raymond James report on Montney includes comment on the Montney shale

Raymond James released a report on Progress Energy Resources Corp. on February 11. They calculate a $1.05/mcf unrisked value for the company's Montney land. RJ risks the lands at 75% for a value of $0.79/mcf. This far exceeds the current valuation of Canadian Spirit Resources Inc.'s (SPI) Montney land which is between $0.04/mcf and $0.12/mcf. RJ's report clearly demonstrates significant upside potential for SPI's stock price.

Additionally, Progress has announced a "more aggressive 2010 capital program which includes further development of its prospective Montney land." Announcements like this continue to highlight the Montney shale and bring attention to companies in Northeast BC.

Craig Stanley of Pinetree Capital Recommends SPI on Business News Network

Craig Stanley of Pinetree Capital recommends Canadian Spirit Resources Inc. (SPI) on Business News Network. He says that the Montney is really hot and one of the juniors, SPI, "has room to run with big partners to do their heavy lifting and spending big bucks." He also acknowledged that there's always the takeover game in the Montney and Talisman is all over that play.

Watch this clip at the 5:48 mark:
http://watch.bnn.ca/#clip263986

Forecast of colder temperatures across the nation send gas futures up $0.28/mmbtu

Natural gas futures are up $0.28/mmbtu on forecasts for below normal temperatures across most of the nation. Both the 6-10 day forecast and 8-14 day forecast predict cooler temperatures.

SPI is a stock to own at these levels!

The net asset values for Canadian Spirit Resources Inc. (SPI) calculated in previous posts range up to $15.99/share and could possibly be even higher. This is a stock that can return multiples. If/when SPI proves up their prospective resource and graduates their listing to the Toronto Stock Exchange, the stock price will clearly be trading at a much higher price.

The calculated net asset values demonstrate that SPI is significantly undervalued. They are one of the most undervalued companies with significant Montney shale holdings. This is a great stock to own and gives investors exposure to the highly sought after Montney shale. SPI is clearly a stock to buy at these values as their share price has plenty of upside!

The recent Dundee report (click here to see it) highlighting SPI introduces it to the broader market and adds much needed exposure for the company. As it says in that report, SPI is a “great opportunity for investors”!

Dundee Capital includes SPI in their "Energy Watch List"

Dundee Capital Markets has issued an "Energy Watch List" that contains New Ideas of Interest. They have highlighted Canadian Spirit Resources Inc. (SPI) as one of their companies to watch.

In the report, they state that SPI is a "Great opportunity for investors to gain access to an up and coming Montney resource player" with "plenty of potential production and reserve growth to look forward too."

They also stated "Adjacent drilling activity and current land sale values speak to the significant potential associated with the play."

Seeing Dundee include SPI in the Energy Watch List is a positive development. Broadening the shareholder base will bring more attention to the company and hopefully result in an increase in stock price and needed liquidity.

A link to the report will follow in a future post.

Calculating SPI's net asset value

Using the resource numbers and unbooked resource values from the previous posts, we can calculate the Net Asset Values of Canadian Spirit Resources Inc. (SPI) Since there is a range of the potential resource in place and potential recovery rates, several scenarios can be run. In addition, we can use the low, mid and high values for the unbooked resource from Goldman Sachs’ recent report.

Resource numbers range from 100 bcf/section to 350 bcf/section as publicly stated by Talisman Energy (TLM) for the Montney shale in the Farrell Creek area. TLM also stated that recovery rates range from 10% to 30% (it’s worth noting that SPI stated that recovery rates based upon public data are estimated at 30% to 50%). Goldman Sachs’ values for unbooked resource range from $0.30/mcf to $0.68/mcf.

We have calculated the net asset value using the following three scenarios (note that the highest recovery rate used in the valuation is 20%):

Low Range: 100 bcf/section, 10% recovery rate and $0.30/mcf
Mid Range: 225 bcf/section, 20% recovery rate and $0.49/mcf
High Range: 350 bcf/section, 20% recovery rate and $0.68/mcf

Assets included in the net asset value calculation include: $10.1M of cash, $15.0M of present value to SPI from Shell’s capital expenditures in the Gething coals, $10.2M of present value to SPI from Canbriam’s capital expenditures in the Montney shales, $6.5M of present value from $45.9M in SPI tax pools, and $4.0M of present value for infrastructure related to the Spectra tie-in. No value for the unbooked resource in the Gething coals has been included.

Note that there are higher range scenarios that have not been calculated. Recovery rates can be much higher than 20% and once SPI moves their prospective resource into reserves, much higher values can be assigned to the recoverable gas. This would translate into even higher net asset values than have been calculated!

Under the 350 bcf/setion and 20% recovery rate, NAV ranges from $7.58 to $15.99/share. Currently, Canadian oil and gas companies are trading at 1.7 times their net asset value.

Goldman Sachs' unbooked resource values

Goldman Sachs issued an updated report on Chesapeake Energy Corp. this month, see earlier post. Within that report, they calculate a net asset value for the company. They assign low, mid and high values for unbooked resources per mcf. The most comparable unbooked resource that they assign a value to is the Marcellus Shale. The low value for that shale is $0.30/mcf, the mid value is $0.49/mcf and the high value is $0.68/mcf.

Given the success that Talisman Energy is having with their Montney shale horizontal wells, the low, mid and high values are comparable. Canadian Spirit Resources Inc.’s (SPI) potential recoverable resource in the Montney shale is 0.46 to 1.62 tcf at a 30% recovery rate. Using these values for SPI’s unbooked resource clearly shows a much higher value than is reflected in the current stock price.

SPI's potential recoverable resource in the Montney Shale

Talisman Energy (TLM) made a presentation to the Town of Hudson Hope in December of 2008. During that presentation they commented on the Montney shale in the Farrell Creek area. They called it a “world class shale gas resource” and one of the top three plays in North America. They estimated 100 to 350 bcf per section at an expected recovery rate of 10 to 30% (it’s worth noting that SPI recently estimated a recovery rate of 30 to 50% based upon public data).

These are staggering numbers and very significant to Canadian Spirit Resources Inc. (SPI) because SPI’s Montney play is adjacent to TLM’s and both plays have similar topography and geology. TLM has spoken about their Montney lands with a lot of excitement. SPI has the same lands!

SPI currently has 44 sections of deep rights and a 35% net interest. This equals 15.4 net sections. At a 30% recovery rate, SPI has 0.46 to 1.62 tcf of recoverable resource. Clearly, SPI has an enormous resource!

The following is a table that shows SPI’s potential recoverable resource under the various scenarios and an excerpt from TLM’s Hudson Hope presentation.

Pinetree Capital acquires additional shares of SPI

Pinetree Capital announced on Friday that they have acquired additional shares of Canadian Spirit Resources Inc. (SPI). Pinetree and its joint actor collectively hold 6,714,000 shares of SPI. Pinetree has purchased 550,000 shares since October of 2009.

Pinetree's buying is a sign that SPI is continuing to improve its investor relations and their presentations to institutions are broadening the shareholder base.

Goldman Sachs research

Goldman Sachs recently released a company update on Chesapeake Energy Corp. Within that update, they place a value of $0.30/mcf to $0.68/mcf on their assumed unbooked resource in the Marcellus Shale.

Talisman Energy's (TLM) Hudson Hope presentation states that there could be as much as 350 bcf/section of gas in their Montney lands which are adjacent to Canadian Spirit Resources Inc. (SPI). TLM also states that they believe their recovery rates will be from 10% to 30%.

Interpolating TLM's numbers across SPI's Montney lands, one can determine SPI's assumed unbooked resource in the Montney Shale:

44 sections of deep rights x 35% net interest = 15.4 net sections
at up to 350 bcf/section = 5.4 tcf
10% to 30% recovery rate = 0.54 tcf to 1.6 tcf

SPI is currently trading at $1.60/share with 48.7 M shares outstanding = $77.9 M market cap.

SPI is currently valued at $0.05/mcf to $0.14/mcf or 16% to 21% of Goldman Sach's valuation of CHK's unbooked resource.

This valuation does not include any other SPI assets such as infrastructure, cash, tax pools or Gething rights.

Talisman announces 2010 budget including major increase in Montney shale

Talisman Energy Inc. (TLM) today announced its 2010 budget. Included in the budget is a major increase in North American shale drilling. "Our main priority in 2010 will be ramping up development of the Marcellus and Montney shale plays," says John Marzoni, President and CEO. "TLM expects to drill 35 to 40 horizontal wells, starting commercial development in the greater Cypress and Farrell areas," the release states.

The release also states, "In the Montney shale, Talisman is moving the Farrell Creek and Greater Cypress areas into commercial development, with approximately 25 horizontal development wells expected in 2010 (with plans to complete 17 of these during the year). In addition, it expects to drill 10 to 15 Montney shale pilot wells, including its first multilateral, as it continues to delineate this large play. The company will expand from three rigs to as many as nine by the end of the year, spending approximately $550-million."

"Talisman expects to exit the Montney shale in 2010 at between 40 to 60 million cubic feet per day, based on expected ultimate recoveries of around five billion cubic feet per well and 30-day initial production rates of 4.5 million cubic feet per day."

Canadian Spirit Resources Inc. (SPI) operates in the greater Farrell area adjacent to Talisman's Montney lands. Expect Canadian Spirit Resources Inc. (SPI) to announce its budget soon and hopefully an aggressive Montney shale drilling schedule is likewise included.

Chesapeake and Total to work on Canadian shale gas plays

From the Chronicle Herald:

Chesapeake said it would explore other potential joint venture opportunities, including working with Total on Canadian shale gas plays in which the French company has shown interest.

When asked by an analyst on a conference call which Canadian regions may be looked at, McClendon said: "The usual suspects is where we would tend to be focused."

Most of Canada’s shale gas activity has been focused on northeastern British Columbia’s Horn River Basin and Montney regions, though exploration is going on in Quebec as well

This is another example of a major oil company entering the unconventional natural gas field. When Chesapeake's CEO McClendon referred to the "usual suspects", the Montney shale play was likely one of the Canadian regions they would focus on. Deals like this continue to bring attention to the Montney and companies like Canadian Spirit Resouces Inc.

Canada Energy Partners to drill horizontal well in Montney

From Canada Energy Patners' release:

"Canada Energy Partners Inc.'s (CE) joint-venture operator of the Peace River deep prospect has made the decision to drill the Portage C-20-E/94-A-4 well horizontally in the Montney formation. This decision was based, in large part, upon significant gas shows that were encountered in the Doig and Montney formations during the recent drilling of the vertical portion of this well. Horizontal drilling operations will begin immediately."

In addition to Canadian Spirit Resources Inc. (SPI), CE, SPI's neighbor to the south, also has encountered siginificant gas in the Doig and Montney Formations. This lends further credence to SPI's belief that they will achieve success from both the lower and upper portions of the Montney and the lower Doig Formation.

CEO purchases shares

Don Gardner, CEO of Canadian Spirit Resources Inc., has made an insider purchase on December 31, 2009 as reported by canadianinsider.com. He purchased 3,700 shares at $1.50. Not a lot of shares but management purchasing shares in the market lends confidence to the stock.