Archives Page

Born to Run
Monday, July 16, 2007

We must say that last Thursday we were pleasantly pleased to see the news regarding Oilsands Quest (BQI) a company we have been bullish on for over a year. The company released management's estimate for the Axe Lake Discovery Area as well as surrounding exploration areas. Management believes that the Axe Lake Discovery Area (Axe Lake) holds 1.4 to 1.5 billion barrels along with an estimate of 0.7 to 1.3 billion barrels as an additional resource. This will serve as our estimates going forward until the independent consultant's estimate comes out in Fall 2007. Regarding the company's other Saskatchewan permits (those to the south and northeast), management estimates that there is a potential 3.0 billion barrel resource present. In the new permits that the company obtained in Alberta (these permits being adjacent to BQI's Saskatchewan permits) the company estimates that on two townships the resource potential is approximately 4.5 billion barrels. So, if one were to take management's estimate for Axe Lake (2.5 billion-when rounded, as suggested by management through their press release) and add it with the estimated potential for the south and northeast areas (3.0 billion) with the Alberta estimates to-date (4.5 billion) we arrive at the potential for 10 billion barrels of oil! Personally, I believe that Oilsands Quest is worth $20 per share, as stated numerous times over the past year. With this resource estimate we could be on our way to that very number, however getting to $10 is going to be a very tough feat in itself.

My philosophy regarding investing is that sometimes you have to read between the lines, as well as have a long-term memory. Many people possess only a short-term outlook and do not believe in their research or ability to buy stocks based on future trends. These are the people who are going to make going through the $4, $5, and even $6 ranges much more difficult than should be. Many investing books (those from the great traders of times past) tend to portray stocks crossing $100 as uptrend stocks and on their way to $120. Well my bet is that this stock will have some tough times crossing the $5 barrier, but after $6 it should be on its way to $10. Once at $10, the stock should spend some time on its way to $20.

Now every time I make a prediction like this, my mailbox gets filled with emails saying how crazy I must be. But please hear me out. First, the company has mentioned in conference calls that they are looking for a Joint Venture partner for the Axe Lake area and I think that this partner may get a decent deal in return for a large cash buy-in. In other words, BQI will get some cash in return for a smaller portion of the project, but this first project is key. With this project, a plant will be built along with a pipeline to connect to the main lines in Alberta. This infrastructure for Axe Lake will lower the costs on further projects that the company can bring online through continued drilling (what the cash could pay for), thus making more areas of their exploration land economical. This is all hypothetical, because neither I nor the company has any idea of how a JV will or should be structured at this time, and will probably only know when the JV is finally put together.

When people finally begin to discover this stock, which currently sports a market cap of almost $1 billion, I think they will fall in love with it. Currently each of these barrels is worth only $.10, but for patient investors we could see this increase dramatically over the next few months. In any natural resource stock, resources are valued at their lowest level after first discovery. However, as those resources near production their value grows exponentially as investors have reason to believe that they will be extracted and thus monetized. Look no further than our uranium stocks, any company that has, or soon will be, bringing new mines into production saw their price skyrocket in anticipation of this. We shall be patient regarding BQI because we see some good news ahead. Here is what we see in the months ahead:

1.) Independent Consultant's estimate for Axe Lake
2.) Potential JV
3.) Further Drilling (keep in mind that all drilling to date has been over 70% successful!)

We have been nibbling at BQI over the past few months and increased our position by 10% over that time. Although these barrels are worth only $.10 at this point, I can take comfort in the fact that the company reported last year that they are adding each barrel at a cost of $.02/barrel. A final thought regarding BQI is that their reserves last year were worth much more than at current levels, and even if the stock were at its all-time high right now, it would still be undervalued based on previous valuations afforded it by investors within the past 18 months. Now one could argue those valuations were in the hope of huge bitumen reserves being discovered, but is that not what we have now done? Only time will tell, but from now until December will be a very telling time for the stock.

Another story that we have our eye on is in Japan. A recent earthquake caused a fire and water leak (the water contained radioactive material) which went into the Sea of Japan. This is the second fire at a nuclear power plant in roughly 2 months (the other being in Germany) with both resulting from acts of nature. In Germany the fire was a brush fire and quickly taken care of, and the German government (currently run by those who wanted to kill all the German nuke plants, before realizing that this was not a viable solution to solving the energy/greenhouse problems) deemed it to be of non-importance, as they have not really mentioned it at any news conferences or in interviews. In Japan however, we now have to take into account whether these plants have been nature-proofed, because we already know that they are human-proofed. We shall keep our eye on this and see how the environmentalists seize this opportunity to proclaim nuke plants unsafe. The water was within the legal limit (by a billionth) for release, so legally there is not a problem here, but once again this is quite important as to how the public perceives nuke plants and their environmental impact., LLC - read disclaimer