This morning I was skimming through the news flow relating to companies on my watch list and was a bit taken aback by this piece of news from a small company that I follow called Petro River Oil (PTRC):
HOUSTON, Dec. 16, 2013 (GLOBE NEWSWIRE) -- Petro River Oil Corp (PTRC) ("Petro River" or "the Company") announces that, on December 12, 2013, it closed a private placement of common stock at $0.08 per share for total gross proceeds of $6.5 million. In addition the Company issued a warrant to purchase additional common stock at a strike price of $0.1356 prior to December 12, 2015.
All of the offering was purchased by Petrol Lakes Holding Limited ("Petrol Lakes"), a newly formed investment group based in China with strategic ties to the country's oil and gas industry. The proceeds will be used to fund development of Petro River's extensive portfolio including over 115,000 net acres of oil and gas assets in Kansas, Missouri and Kentucky.
Petrol Lakes is working with Petro River towards a potential joint venture with a strategic partner in China in the Company's 85,000 net acres in the Mississippian Lime play in Kansas. The Company is also reviewing acquisition opportunities in the Mississippi Lime play in Kansas and Oklahoma. There can be no assurance that the Petro River will enter into any of these transactions.
Petro River has formed a wholly owned subsidiary named Petro Spring LLC to acquire and develop technologies with a focus on enhanced oil recovery. Petro Spring brings together a team of world class technologists with extensive experience applying technology to increase efficiency of oil production.
Petro River has a very low share price, but the market capitalization for the company is actually a decent size for investors focused on the micro cap space.
With the 80 million or so shares that will be issued to Petrol Lakes Holding Limited as detailed above, Petro River will have roughly 800 million shares outstanding. At the current share price that is a market capitalization of roughly $60 million.
The above news release took me by surprise because I had kind of given up this company for dead. Check out what has happened to the share price over the past several months:
The inflow of capital that is coming from Petrol Lakes is interesting. Even more interesting is the reference to the fact that the involvement of Petrol Lakes could result in Petro River securing a joint venture with a larger strategic partner in China.
That joint venture would be on Petro River’s 85,000 acres of Mississippi Lime land.
After seeing the news release I thought I’d revisit this company and try and make some sense of where it is at today.
Petro River Oil – Company History
While revisiting Petro River Oil (PTRC.OB) I came across an interview with Petro’s EVP Ruben Alba from 2012 when the company was still privately held. In the interview Alba shared his philosophy on how to develop a company in an emerging unconventional oil play:
"It's risky to be first, but it's even more risky to come in after everything is overvalued. There's always that risk in the oil business. But if they open the play and you don't play, you're going to be sitting on the sidelines and watching."
Petro River took a risk and got in early on what is now known as the Mississippi Lime Resource Play by purchasing 20,000 acres out of a bankruptcy process.
Not only did Petro River get in early, it also got in cheap. The price Petro River paid per acre ranged from $20 to $100, which is a fraction of the going rate.
With that core piece of property wrapped up, Petro River (still as a private company) went about doing the hard work of adding more acreage to get to a critical size. In total Petro River and its small team gained control of 85,000 net acres in the Mississippi Lime in Kansas.
This is the acreage that is apparently under discussion for a Joint Venture with some sort of Chinese entity.
With a core land position built, Petro River brought itself public through a merger with an existing company Gravis Oil and now trades as PTRC.OB.
The Properties - Mississippi Lime / Mississippian
The Mississippi Lime or Mississippian is Petro River’s core property. This play has produced hydrocarbons dating back to 1896 but has had a rebirth in recent years.
The Mississippian Lime play is a shallow carbonate oil play which covers some 17 million acres from Northern Oklahoma, extending into Kansas. The play targets the oil and liquids rich bearing Mississippian limestone formation.
This area has historically had a great deal of conventional oil and gas drilling activity dating back over 100 years. Thousands of vertical wells have been drilled through the upper “chat” section of the play.
Improvements in horizontal drilling, fracturing and in the ability to handle large volumes of water production have reinvented the area by making additional oil commercially recoverable from the lower less permeable carbonate reservoir.
Those thousands of vertical wells that have been drilled through the play provide the essential data for a company like Petro River from which it can sniff out the best acreage for development with modern techniques. In total 37,000 wells have been drilled around Petro River’s acreage.
Importantly for a smaller company like Petro River the Mississippian formation is at a relatively shallow depth (3,000 to 6,000 feet). This means wells are not expensive to drill ($650,000) and the high liquids content allows for a fast payout period (return of capital). This smaller amount of up-front capital outlay (a Bakken well for example costs $7 million) and fast payback period allow for cash to be recycled quickly and limits the need for external financing.
According to Global Hunter Securities the economics of the Mississippi Lime (Nemaha Ridge) rank near the top of American unconventional resource plays:
All acreage in the Mississippi Lime is not created equal, and the key part of Global Hunter Securities data to notice is that the highly economic portion of the Mississippi Lime is specifically the Nemaha Ridge area. The best economics are driven by higher oil content.
Confirming this, according to the slide below from Range Resources (RRC) its best wells (those with the highest oil content) come from the Nemaha Ridge area, specifically Kay, Cowley and Sumner counties.
Petro River’s acreage position meanwhile begins in the Cowley county and stretches up into Butler and Marion.
A map (below) of the Nemaha Ridge shows that it extends up and through Petro River’s acreage.
The main player in the Mississippi Lime is Sandridge Energy. In the slide below you can see that Sandridge has also focused its drilling in the Nemaha region where possible.
Petro River seems to have staked its claim in the better part of the Mississippi Lime which is the area of highest oil production. The proof of this won’t be known until some actual drilling results are in.
Petro River Other Assets
In addition to its Mississippi Lime acreage in Kansas, Petro River also has an acreage position in a developing heavy oil play in Missouri and a tar sand deposit in Kentucky.
These properties were acquired when then private company Petro River merged with the publicly traded Gravis Oil.
The last description of these legacy Gravis assets that I can find is as follows:
Gravis is an independent oil and gas company, specializing in non-conventional oil and gas projects with a focus on American heavy oil with current operational emphasis on the Deerfield area of western Missouri. The Company has two individual 320 acre steam injection projects in the Deerfield area with approximately 20 acres developed on each of the Marmaton and Grassy projects. In the Deerfield area, excluding the 40 acres of developed land, the Company has an operated 90% working interest in over 15,400 acres of undeveloped land prospective for heavy oil development and has identified a number of additional potential steam injection projects on this land base. In total, including the Deerfield Missouri acreage, the Company has an average of 70% working interest in 73,241 acres of undeveloped land prospective for heavy oil development and exploration in Missouri, Kansas, Kentucky, and Montana.
[/i]From its final SEC filing prior to the merger with Petro River, it appears that Gravis had suspended operations because of a lack of funding without having reached economic rates of production:
[i]The primary purpose of the Company’s activities to date has been to gather information related to the property so that a production plan can be put into place. To date production operations have achieved encouraging initial oil production rates of up to 300 bbls per day of clean sales oil; however, the Company has not yet achieved economic production levels. Gravis believes that greater efficiencies and potentials are achievable from its property with additional investment in technology, coupled with what we have learned from our initial production operations. It is anticipated that each of these projects could develop 250 to 300 acres of their respective 320 acres of leases over their 25 to 30 year project life. Additional drilling phases on each of these projects would be necessary to maintain the individual project 500 barrel per day target oil production rates. It is further anticipated that a number of additional projects of similar design and size may be drilled and constructed across Gravis’ Missouri lease holdings. However, given the Company’s financial position it has suspended its operations for the time being and is currently seeking funding and/or a joint venture partner before it renews its exploration activity on this project.
Both the Missouri and Kentucky assets appear to involve a large amount of oil resource in place, but perhaps no clear path to economic development at this point.
[/b]Petro River has a very small team comprised of only six businessmen with interesting backgrounds. The Petro River team includes a hedge fund manager, a few petroleum engineers and the former head of exploration and production for PDVSA (Venezuela’s national oil company).
The last name on that list should really raise a few eyebrows. PDVSA is a massive company that during Vierma’s tenure was producing somewhere around 3 million barrels of oil per day.
That isn’t much less than the entire country of Canada produces. It is a bit surprising that a man with this kind of background is involved with Petro River.
This is an entrepreneurial group focused on creating wealth through share price appreciation. As a group these aren’t ladder-climbing career oilmen who have spent their careers avoiding risk-taking and advancing only thanks to the passage of time.
[b]Petro River Valuation
The Petro River team purchased its Mississippi Lime acreage at $20 to $100 per acre. That seems very attractive today.
The key property for Petro River is obviously the Mississippi Lime acreage. As I documented earlier it appears that this acreage is in the Nemaha Ridge part of the play. This makes it much more heavily weighted to oil than Mississippi Lime acreage further to the west and North.
There are a bunch of asset sales and joint ventures that have been announced on the Mississippi Lime over the past couple of years as detailed in the slide below:
The difficulty is in determining which part of the Mississippi Lime these transactions involve.
Acreage in the more oil prone Nemaha Ridge where Petro River operates is going to be worth more than acreage in the west Kansas extension of the play.
The average of the two highest values per acre transactions (excluding the Sandridge Trust transactions) is $5,849 per acre.
Applying that valuation to Petro River’s core 85,000 acre position would result in a value estimate of $497 million which is many multiples of where Petro River trades.
The difficulty is of course knowing exactly what Petro River’s acreage is capable of. If the company does complete a Joint Venture with a Chinese company, a better view of the specific value of these acres will be gained.
I’ve assigned no value to the Missouri heavy oil or Kentucky tar sands assets. They might provide some optionality on the upside. Petro River obviously chose Gravis for a reason, so perhaps the company has some interesting plans for those assets.
I would also note the following paragraph from the recent press release:
“Petro River has formed a wholly owned subsidiary named Petro Spring LLC to acquire and develop technologies with a focus on enhanced oil recovery. Petro Spring brings together a team of world class technologists with extensive experience applying technology to increase efficiency of oil production.”
At this point it is impossible to speculate on what this might turn into, but it is something to keep our eye on. You have to wonder what the former head of PDSVA exploration and production might be adding to such an enhanced oil recovery venture.
Petro River – Catalysts
Noted in a couple of the earlier slides and in the press release, Petro River is actively pursuing a joint venture partner for the Mississippi Lime. The company views a joint venture arrangement as having the following benefits:
- Helps de-risk the property faster.
- Speeds up development.
- Enhances financial flexibility.
- Brings forward returns.
A joint venture completed at a price above how the market is currently valuing Petro River would obviously be a positive catalyst for the stock.
There could be a reverse stock split which would open up Petro River to more institutional investors.
Petro River - Risks
Petro River is a small company that has a large acreage position in an established play but little current production. I think there are several risks for investors here.
For Petro River those risks include:
- The future price of oil and natural gas.
- Developing almost 100,000 acres is a big operation, with only a small staff compliment Petro River needs to fill out an effective organization.
- Developing this acreage will take a lot of capital which means that access to financing either through joint ventures, debt or equity issuances must remain available.
- Despite appearing to be in a good part of the Mississippi Lime play, there is no guarantee Petro River’s acreage will be as productive as hoped for.