Oil Drama in Guyana with TSX:OYL

The smell of money was in the air....the drill bit was turning. Beneath the drilling platform lay immense petroleum riches waiting to be tapped. But suddenly the world turned upside down. From out out of nowhere came the roar of jetboats. The distinct crackle of gunfire ripped through the air. The jetboats pulled alongside the drilling platform. Savage looking rebels with a thirst for blood wasted little time in making their intentions clear....

The latest best selling fiction thriller you ask? No, not quite. But a series of events not unlike these did unfold about 7 years ago offshore from the South American nation of Guyana. At the centre of events was a Canadian firm CGX Energy (TSX:OYL). At the heart of the matter was a dispute with neighboring Suriname over who owned the oil rights offshore. CGX was caught right in the middle and was forced to halt exploration efforts. For 7 years this feud simmered and for 7 years CGX continued to support Guyana. In fact, CGX paid nearly $9 million in legal fees to support the Guyanese Government's arguments that these offshore rights did belong to them. Finally a couple months ago, a U.N. tribunal made its binding ruling. The offshore oil rights do in fact belong to Guyana and CGX is the rightful license-holder of this offshore property.

Chat rooms of late have been filled with tantalizing propositions of immense riches. Some newsletter publishing firms were even asking for investors to pay big bucks just to get the name of the small Canadian firm at the center of this action. Here at The Market Traders, I say let's skip the needless hype and cut right to the chase.

The offshore area in question is what is called a Passive Margin Basin. It is geologically quite similar to what exists off the coast of Nigeria. In other words, it has the potential to be prolific. Back in the 1970's and 1980's, this area off the coast of Guyana saw considerable exploration activity. Good portions of the area have been investigated with seismics and the USGS (US Geological Survey) feels this geology has the potential to host 15 billion barrels of Oil and up to 42 TCF of gas. WOW !! - that's huge !! In 1974 Shell Oil drilled a test well down to 13,000 feet and encountered one "pay zone" that flowed 3360 barrels per day. Based on this experience and with the subsequent seismic data now in hand, it appears as though there are hydrocarbon bearing "pay zones" at various intervals down as deep at 20,000 feet.

Now, fast forward to today. Will CGX zoom all the way to the $50 range as has been implied in the chat rooms? Well, let's do the math. CGX is sitting with 105 Million shares outstanding and not enough working capital to drill one of these deep water "monster" wells. It is currently looking for a JV partner and I have no doubt it will find one in the form of an Exxon or a Repsol. So, let's say that a JV partner offers to cover the cost of drilling a well in exchange for an 80% working interest in the well. Let's say that the well is a success and ends up flowing 4000 barrels a day. At $90 Crude, lets say the net back on the well is $60 per barrel. This would work out to about $17 Million a year in cash flow to CGX. Taking these cash flows out 5 years and discounting back at 8% gives a NPV of about $67 Million.

CGX currently has a market cap of about $350 million and so the market is assuming it will find a JV partner and it will go on to drill a series of wells - all successful.

In our current jittery market environment, I say there is no rush to dive into CGX at current prices. Take a wait and see approach. Pay particular attention to the terms and conditions involved with a joint venture partner and then re-jig the above mathemtical calculations to reflect this. If you do choose to dive in now as you simply cannot resist the tempting words being bantered about in the chat rooms, I wish you well.

In any case, I will be paying close attention to TSX: OYL.u. Watch this blogspace for future updates.