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.