Benefitting From U.S. Oil Boom With Axiom Oil & Gas
The recent surge of U.S. oil and natural gas production has been nothing short of astonishing. In a few short years, the United States has become the largest hydrocarbon producer in the world, surpassing Russia and Saudi Arabia. So we searched for a company to benefit from this event.
Although we usually recommend more mature small cap companies, every now and then we come across a somewhat speculative investment opportunity that’s too good to pass up.
We have been keeping an eye on Axiom Oil and Gas Corp (AXIO – $0.22) for a few months now, and we believe that the risk/reward ratio is ideal at this moment.
In October 2014, Axiom acquired ~15,000 gross acres (6,170 net acres) in Toole County, northern Montana. The leases include a 23.1% working interest in two drilled, oil wells that are in the process of being completed and a 50% interest in two producing gas wells. It is a conventional drilling project with over 70 additional drilling targets identified that Axiom plans to participate in with a 50% working interest.
The leases are located in the huge Kevin- Sunburst Dome, which covers about 1,000 square miles. It lies along the eastern edge of the Southern Alberta Basin where billions of barrels of oil have been generated from the organic-rich Bakken Shale. Oil companies have been drilling in this region for over 90 years and more than 320 million barrels of Bakken generated oil has been produced.
Historically, wells in the area have initial production between 30 and 100 barrels of oil per day (BOPD) with an average production of 30 to 50 BOPD in the first year. Production history shows that the average well produces 50,000 barrels of oil over its life, most of it coming in the first 10 years. Drilling of wells here are inexpensive, there are no big ‘Frack’ expenses and production costs are minimized because the oil field does not produce water.
There are two main reasons why this is an ideal time to get on board. First, the Company announced a few days ago that it, and its joint venture partner, hired APEX Energy Consultants to bring the first two drilled wells online. APEX is set to carry out a nitrogen frack on the wells that targets the Nisku formation at a depth of about 3,100 feet, and which contains the Bakken oil (38° API).
Upon successful completion, these wells will provide Axiom operating cash flow as well as a proven viability sample upon which it can plan the further development of its leases. And this will most likely happen quickly, as the Company is already preparing to participate with a 50% working interest in the drilling of two additional wells. With four producing wells, it is estimated that net cash flow to Axiom will be approximately $60,000 per month with oil at $60 per barrel.
The second reason why we like the Company is because of its management team that is comprised of people with different areas of expertise and with an exceptional track record.
Mr. Robert Knight, for example, Axiom’s Chairman of the Board, started, or was involved in, many junior exploration and development companies that became large, successful entities. He has 25 years of international experience in capital formation and financing mainly in the resource sector. He was involved in raising over $100 million for various ventures.
Montana and the Kevin Sunburst Dome
Montana’s rich and diverse geological setting has long provided opportunities for successful exploration and development activities aided by advancements in science and technology.
The state shares common geological structures with the huge Bakken Shale formation. A recent report from the U.S. Geological Survey (USGS) states: “…the Bakken formation is the largest continuous oil accumulation is has ever assessed (…) as much as 500 billion barrels of oil sitting untapped beneath Montana, North Dakota (…) With a potential supply of oil four times as large as that held in Saudi Arabia’s massive Ghawar region.”
The traditional producing areas include the Montana portions of the Williston, Powder River in the southeastern part of the state, and Big Horn basins in the south central part of Montana. Montana’s Elm Coulee field has about 750 producing Bakken oil wells, during the process of development, only two dry holes were drilled. It is this level of success that has captured the attention of the U.S. oil industry.
In addition, the State has excellent infrastructure of oil and gas pipelines, and it’s close to world-class refining and storage facilities.
The Kevin-Sunburst Dome is a large geological structure located in Toole County, northern Montana, just a few miles from the Canadian border, where production has proven to be sustainable over the past decades. According to Montana state production records, the domal area has produced more than 320 million barrels of oil (MMBO) and 650 billion cubic feet of gas (BCFG) from the Devonian Nisku, Mississippian Madison, Jurassic Swift, Cretaceous Cutbank/Sunburst, and four other formations. With the drilling of every well to the Nisku formation, the Company will have a “free” look at these 9 upper zones for potential additional production.
The Nisku oil zone, where Axiom shortly plans to open up its first two wells, is a uniform layer ranging from 2,600 to 3,400 ft deep. Twenty wells in the Nisku zone from other companies have produced on average over 50,000 barrels of oil each. Vertical wells are very profitable at these shallow depths with completed well costs of about $400,000. It is believed that horizontal drilling and fracking could substantially increase per well recoveries but this technology hasn’t been tried yet in the Nisku Formation.
Experienced Management and Operations Team
Next to Mr. Knight, Axiom has several other executives that possess years of experience at successfully developing projects. The combined efforts of its management team have contributed to raising capital and launching many successful public and private companies.
Michael Altman, the Company’s President and CEO, is a senior executive with extensive oil and gas experience, having been in the resource business for over 20 years. He has been an executive officer and director of many junior resource companies involved in raising over $40 million for the various ventures.
The operational side is handled by APEX Energy Consultant Inc., based in Calgary, Alberta, Canada. They are a petroleum engineering organization with global experience and a strong presence in North America. They have a strong track record of providing innovative energy-related engineering services to their clients in over 40 countries on four continents and the Australian sub-continent. APEX was founded in 1984 and they have a proven ability to deliver value for their clientele.
The most proven strategy to minimize risk in a prospective venture is to drill in areas where there are known and producing oil and gas reserves such as the Kevin-Sunburst Dome. Existing wells in the area have been producing for nearly 30 years and have an average production of 50,000 barrels of oil.
Furthermore, production costs are minimized because the oil field does not produce water. The Company’s current projects would be financially attractive even if the price of oil fell to under $30 per barrel.
Axiom’s leases are delineated by 39 square miles of comprehensive 3D seismic data. Over 70 additional drill targets have been identified. The Company intends to drill additional oil and gas wells, which will generate additional shareholder value.
Assuming the drilling and completion of 70 development wells with an average of 50,000 barrels of oil recoverable that would give you an estimated reserve of about 3.5 million barrels of oil. At $60 oil, the oil in the ground has a value of about $70 million, net $35 million to Axiom.
In summary, we think that with expected recoveries in excess of 50,000 barrels of oil per vertical well and a 70 well drill program Axiom has exceptional potential. In addition, the application of horizontal and multistage fracking techniques should increase the play’s economics significantly.
With a strong management and operations team and low risk development drilling, the Company intends to build a solid base operation with stable cash flow.
This investment is somewhat riskier than most of our other recommendations. We feel however that the combination of the two wells being so close to production, the experienced management team, and the outstanding potential of the Kevin-Sunburst Dome justifies buying a first position in Axiom Oil & Gas.
There are about nineteen million shares outstanding and the stock’s 52-week range is $0.18 to $0.51.
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