In the complex world of investing today, there is nothing like finding a bit of simplicity and fundamental quest for value. Virtus Oil and Gas Corporation (OTCBB: VOIL ) is a company with a very straightforward premise, one that an investor can either accept or not accept, but one that is unusually easy to evaluate.
Virtus, whose mission is to explore for and to develop oil and gas reserves in proven sites in the U.S., has a lot of advantages. It owns sites near proven oil production, and which research shows are likely to produce. It has a team of brilliant scientists, talented researchers, and muscled diggers. What it doesn’t have, yet, is any revenue or any production, but it’s gearing up fast for that.
"Within the past three months, our company has made significant progress evaluating and expanding our mineral rights focused on the Parowan Prospect in the Central Utah Overthrust (CUO) region of southwestern Utah,” points out Rupert Ireland, Chief Executive Officer at Virtus.
The biggest plus sign for Virtus is the recent arrival of COO Brett Murray, oil industry experts say. Murray has had his eye on financial as well as on oil deposits. He has worked in complex leasing deals, as well as on a number of multi-billion divestitures which means that he strongly believes there is crude to be had in those hills, assets that can be parleyed into sales.
Virtus is an oil exploration firm that works in the U.S., one that seeks oil not in the more expensive fracking sites that have become so prevalent in the industry, but in the classic oil wells of Beverley Hillbillies fame (I wanted to say Dallas, but the remake series is very ‘new energy’).
For those of you too young to recall this classic work of American television, the main character was ‘shootin’ at some food,’ and ‘up from the ground came a’ bubblin’ crude.’ The wildcats who exploted and drilled for oil were the stuff of myth, but oil exploration has had it somewhat more difficult in the U.S. since this mythical period, and costs have risen as the availability of sites to drill has become scarce.
Traditional drilling is a lot cheaper than fracking. The cost of drilling a horizontal shale well ranges from $3.5 million in the Mississippi lime to $9 million or more. That’s far more than the cost of a similar vertical well, which goes from $400,000 to $600,000, according to Drillinginfo. Costs matter, because the price of oil is volatile, and if it falls below $70 per barrel (as we saw happen in the financial crisis), oil exploration has a hard time justifying its cost.
So traditional oil exploration makes a lot of sense in terms of cost. This helps explain why a number of small independents are increasing their drilling of vertical wells, according to a survey by the American Oil & Gas Reporter. Those companies drilled about 25 percent more of such wells in 2013 than in the previous year. Respondents to the 2013 survey drilled an average of 7.6 wells in 2012, of which 80.5 percent targeted convention oil formations and 80.8 percent were vertical.
Meanwhile, exploration for oil has proven disappointing in recent years. “Today we consume 33 billion barrels of oil per year and are discovering 10-20 billion barrels at most. It appears that the biggest single oil discovery in 2013 was less than 1 billion barrels in size," asset management firm Investec said in a report.
Despite a tight capital diet, oil companies are set to spend a record $1 trillion to explore for new reserves by 2017, according to analysts at Barclays Capital.
Exploration and production spending has risen four-fold since 2000 to around $700 billion because of a rise in material and services prices, which in turn were driven to a large extent by a steep increase in global oil prices and inflation rates, Barclays analyst say.
Exploration is needed because the price of oil should not drop markedly in the near future, and supply is forecast to remain a close match for demand, according to the International Energy Agency. Global oil demand will average 92.8 million b/d this year, up from the 2013 average of 91.4 million b/d, the agency reports. Emerging-market countries are projected to lead oil demand growth this year. World oil demand averaged 91.4 million b/d in the first quarter of 2014 and will climb each successive quarter, IEA forecasts. Demand in the second half of 2014 is expected to increase by 1.5 million b/d over the same period last year to average 93.75 million b/d. In the fourth quarter worldwide oil demand will average 94 million b/d.
Supply from non-OPEC producers has been increasing and is projected to reach an average 56.2 million b/d in 2014, with the US being the main driver, the IEA reported. This compares with 54.7 million b/d in 2013 and 53.4 million b/d in 2012. In the second half of the year, non-OPEC producers are forecast to add 950,000 b/d vs. the same period a year ago to average 56.4 million b/d.At OPEC's regular ministerial meeting in Vienna on June 11, the group agreed to maintain its 30 million b/d production target for 2014. "Effective" spare capacity in OPEC, which takes into account capacity not immediately available to the market, is estimated at 3.31 million b/d in May, 80 percent in Saudi Arabia.
All of this fits the strategy of Virtus Oil and Gas perfectly. Launched in October 2013, the company is planning to drill wells in areas that have researched with high probability for oil in Utah. The prospect is comprised of a 55,477 acre tract in the Central Utah Overthrust (CUO) region of southwestern Utah, in Iron County.
The prospect is located approximately 80 miles south of Wolverine Gas and Oil’s Covenant Oil Field, also located in the CUO region in Utah from structures and reservoir horizons.
The Covenant Oil Field exhibits closure over approximately 11,000 acres with about 400 feet of pay in the Navajo, thus allowing a projection of nearly one billion barrels of oil within that field. A similar structure lies on the Parowan Prospect Iron County leases, with a potential for an oilfield of similar order of magnitude, particularly when multiple prospective horizons are considered.
The company is currently focused on its ‘Parowan Project.’ This consists of drilling a single well where it owns 100 percent of the mineral rights. The well is located approximately 110 miles south of Wolverine Gas and Oil's Covenant Oil Field, which has already produced 3.1 million barrels of oil.
Virtus has solid research showing that its Parowan Prospect "may hold as many as one billion barrels of producible reserves of oil." In 2008, Delta Petroleum drilled a test well about 8 miles east of the Parowan Prospect, and favorable indications for oil were obtained. Nearby, Anadarko E &P Onshore, LLC plans to drill 3,675 new natural gas wells in Utah’s Uintah basin.
In mid 2012, Anadarko announced plans to spend $10 billion drilling the wells over the next decade, doubling its natural gas production in the area to 1 billion cubic feet a day.
Virtus purchased the mineral rights to drill for oil in the Parowan Prospect in October 2013. The final payment for its total 36,787 net acre acquisition in Iron County, Utah, will be paid on August 3, 2014. Upon completion, this will satisfy the total agreed purchase price with a final payment of $100,000. (The subsequent additional 18,690 net acre agreement signed on May 6, 2014 has a final payment due on October 8(th) 2014).
Since then, researcher Gustavson Associates conducted a probabilistic resource analysis for the prospect site, in order to evaluate the potential resources of the area. This approach yields an expected probability distribution for potential resources.
According to the report, the hydrocarbon type that would most likely occur in the prospect site reservoirs is oil, with some associated gas. It is expected that the oil will have an API gravity ranging from 26 to 40 degrees. The determination is:
Low Estimate = 266 Million Barrels of Oil
Best Estimate = 759 Million Barrels of Oil
High Estimate = 1,669 Billion Barrels of Oil
Virtus Oil and Gas has agreed to drill a 12,000 foot deep test well to evaluate the Navajo, Kaibab, and Permian Queantoweap Sandstone. Test well drilling is tentatively scheduled to commence by September 2015 at an estimated cost of $2.5 million. Virtus Oil & Gas will pay the estimated $2.5 million cost of drilling a 12,000-foot vertical test well in the Parowan Project by September 1, 2015.
On July 1, Virtus acquired 2D seismic data from SEI covering the Utah territory it has the rights to, at a cost of $2,075 per square mile for a total cost of $98,434. The acquired seismic data will provide the Company a greater understanding of the sub-surface geology and aid its geologists to select the optimal location to drill its first well. As Dr. Robert Benson, exploration director at Virtus commented: “This is the first step toward defining the drillable locations that will optimize our prospects of success.”
Benson is a true oil industry veteran – more of the brain and the muscle in the team -- with nearly forty years of exploration, development and management experience in the energy industry. He has worked extensively in reservoir characterization, including as the co-director of the Reservoir Characterization Project at the Colorado School of Mines. A member of numerous professional societies, including the Society of Exploration Geophysicists and the American Association of Petroleum Geologists, Benson’s work has been published in a number of prestigious publications, including The American Oil & Gas Reporter.
Like Benson, CEO Ireland is an industry veteran, with ten years of working in the industry, largely in Europe and Asia. Like Murray, Ireland also has an extensive financial background, having come to the industry via trading oil and gas futures. His career began as a trader at City Index. After that he became a Sales Trader at OCM Capital Markets, and from there he moved to head of trading at CARAX, a brokerage firm that focuses on high volume execution in cash equities and derivatives trading. It was at CARAX that he focused on oil and gas futures trading and that led him to join Virtus in 2014.
As CFO, Steven M. Plumb, CPA is also the product of long and prestigious experience, both as an entrepreneur and as an auditor. In the former capacity, Plumb ran his own company, Clear Financial Solutions, since 2001, a consulting firm that provides interim CFO services to small public companies. In this capacity he has prepared SEC filings, managed investor relations, raised capital, and conducted merger and acquisition activities. In the latter capacity, he worked as an auditor with Price Waterhouse Coopers and KPMG. Mr. Plumb has a Bachelor of Business Administration degree from the University of Texas at Austin. He joined Virtus after holding a senior management position at Hyperdynamics.
And oil industry muscle is provided by Jerry Walters, Vice President of Exploration. Walters will be responsible for exploration and exploitation activities in Virtus’ newly acquired lands in the Central Utah Overthrust. Walters has over 30 years of oil & gas industry experience in the areas of exploration, development, acquisitions and divestitures as well as strategic planning. Walters started his career as President and Founder of Tuscaloosa Trend Oilfield, Inc., which built production units and pipeline connections, as well as provided field services and personnel to independent energy companies.