Go East With CanWest for Canadian Oil Sands Riches

By Michael Brush
Exclusively for InvestorIdeas.com
August 17, 2006

Stretching through the western Canadian province of Alberta is a 105 million-year-old geological structure known as the McMurray formation that may likely grant President George W. Bush one of his biggest wishes: Reduced dependence on Middle Eastern oil in the coming decades.

The McMurray formation contains rich deposits of bitumen, a tar-like substance once used by indigenous Aboriginal people to water-proof canoes.

These days, bitumen can be extracted from oil sands, refined into crude oil and processed into gasoline and diesel fuels. It takes about two tons of oil sands to produce one barrel of oil. But with oil up in the $75-a-barrel range, it’s worth it.

Oddly, even though the McMurray formation stretches eastward into Alberta’s neighboring province of Saskatchewan, oil sands production stops abruptly at the border. This is strange because there is no reason to think oil sands don’t spread over into Saskatchewan. The question is: Are the deposits rich enough to be commercially viable?

No one knows for sure.

But a small, Canadian energy company named CanWest Petroleum (CWPC) is well on the way to finding out. It owns the rights to explore about a half million acres in Saskatchewan. And while initial tests can be described as “promising” at best, insiders at this tiny company seem to think they already know what’s in store.

Since July 5, CanWest insiders, including a director and chief executive Christopher Hawkins, have purchased $2.5 million worth of stock at an average price of $4.88 per share -- or just above recent prices of $4.40.

That’s a convincing wager. But before you plunk any money down on this unconventional Canadian oil sands play, just remember it’s a risky bet. After all, if it were a sure thing, the stock would not a bulletin board listing trading at $4.40. So don’t bet too much.

There are, however, several reasons to think CanWest will strike it rich and the wager will pay off.

• A good portion of CanWest’s holdings are right next door to several successful projects in northern Alberta, notably one called Firebag, developed by Suncor Energy (SU).



• Initial results from CanWest testing looks positive, says Murray Gingras, an associate professor at the Department of Earth and Atmospheric Sciences at the University of Alberta, who has been following the company and exploration in the region.

In the best sections of CanWest holdings drilled so far, the company has found bitumen saturation reaching as high as 18%. “Mineable grade is above 8%, and really good grade is 14% to 15%,” says Gingras. CanWest has also found bitumen spanning an average of 62 feet vertically, and as much as 91 feet in another hole.

“Those are very promising numbers,” says Gingras. “Firebag has numbers like that for thicknesses, and it is one of the sweeter spots in the McMurray formation. If I were the president of the company I would be excited, too. The chances that they have an exploitable resource are good.”

Next, however, the company has to determine how wide the deposits are. And that’s one of the wild cards, says Gingras. But CanWest has permission to drill 100 holes this winter, and that may put doubts to rest. “We will be pretty certain by this time this year,” Hopkins told me in an interview last week.

How big could this play be? CanWest estimates that several blocks in one area explored so far may contain 250 million barrels of oil – though not necessarily commercially viable. The area in question is less than a half a percent of the land CanWest has permits to prove up.

But here’s another way to look at it. Experts believe that Alberta’s oil sands region has enough bitumen to produce over 300 billion barrels of oil. The Saskatchewan land that Hopkins thinks could be exploitable make up about 20%-30% of the Alberta oil sands. So a simple analysis suggests Saskatchewan could have 60 billion barrels of oil in the form of tar sands.

These estimates sound far fetched, and they could be. But keep in mind that Hopkins has years of experience in the business with companies like Suncor and Synenco Energy (SYN.TO).

A few housekeeping notes: CanWest Petroleum recently combined with a subsidiary called Oilsands Quest, and it will probably soon take on that name. Next, CanWest is listed in Canada, but it will likely be listed on a major U.S. exchange soon.

Risks

CanWest Petroleum blew through $52.6 million in the fiscal year ending in April, and it will probably need to raise more capital. It says it has enough to fund the upcoming winter round of exploration. But that could change, and dilutive financing could be on the way.

If the price of oil tanks, that would make Canadian oil sands most valuable as a way to water-proof canoes, once again. But Raymond James analyst John Mawdsley doesn’t think oil prices will retreat much.

He cites a dearth of excess capacity, the lack of any big discoveries in recent years, a looming peak in global oil production, and increasing political instability in oil-producing regions. “We believe these factors will prevent oil prices from dropping, even in a recession,” he says. On top of that, growth in demand from developing economies should keep a bid under oil.

The bottom line: Of course the biggest risk is that Saskatchewan is a wash out, and CanWest goes bust. That’s a possible outcome, so don’t bet too much on this name. But insiders – who have the best look at the core samples – are betting the other way. So it makes sense to follow them and buy CanWest Petroleum right here in the pull back from $8 in early May.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.