For investors looking to play this trend in the junior space, Mooncor Oil & Gas (TSXV:MOO) possesses one of the largest Duvernay land packages of any small-cap company and stands to benefit handsomely from the big increase in oil prices year to date.
One might wonder why oil prices would be thought to dictate the value of a natural gas play, and the Mooncor case provides a perfect example. The company’s test well, completed in 2009, yielded 92.5% gas and 7.5% liquids (condensate and others), yet the liquids account for approximately 60% of the value of what came out of the ground under current gas and liquid pricing.
Liquids are largely priced off of oil, which has rallied smartly this year, rather than natural gas, which has moved up more modestly.
Mooncor’s land package is in the Hamburg region of northwestern Alberta, on the northern side of the geological formation known as the Peace River Arch. Millions of years ago, sediments were deposited during a period of rapid sea level rise, creating favourable conditions for preserving the organic rich sediments of what is now the Muskwa/Duvernay Formation. Now, about 2,300 metres below the surface lies shale some 20 metres thick on average, and it is this shale that Mooncor is targeting.
The Hamburg area has been home to oil and gas development for decades, but it is only with recent advances in technology that the extraction of fossil fuels from the shale far beneath its surface has entered the realm of reality for oil and gas companies.
And the economic reality, in particular, is notable: one assessment based on January 2011 prices suggests an Internal Rate of Return (IRR; a measure used to determine project viability) of an eye-popping 142%. It should come as no surprise, then, that there has been outside interest in joint-venturing the project to put it into production.
“We have been speaking with various parties for some time now, but it is only since the beginning of the year that their interest has really piqued,” said Mooncor Oil & Gas President Darrell Brown, noting the substantial increase in oil prices that began in the fourth quarter of 2010. “Not only does the liquids content drive some really impressive economic runs, but the potential to be optioned in on a field for the time when natural gas prices begin to move back up holds some appeal as well.”
Mooncor seeks to be a pioneer in some ways, putting the Hamburg shale into production before the major companies virtually surrounding it do so themselves. And while there is a famous line about pioneers that might warn against this, Brown is confident that he is onto something.
“Our test well, petrophysics, core analysis and other work we have done all point to the gas and liquids being there,” he said. So do a pair of resource reports from respected Calgary consultant DeGolyer and MacNaughton outlining a prospective recoverable gas resource exceeding 2.5 trillion cubic feet.
With some 103,000 acres held 100% by the company (likely enough room for more than 300 wells) and extensive pipeline and other infrastructure in the area, Mooncor’s current market capitalization of just over $15 million would seem to provide an attractive risk/reward profile.