Thursday, April 8, 2010

Investors Guru Small Cap Stock Observer

V.PMI - Petromanas Eyes 6 Billion Barrels of Light Crude

Petromanas (PMI-TSX) is a new oil exploration company that has acquired rights to a massive tract of land in the oil producing of country of Albania. With a current market cap of around $120 million, PMI is valued as an outside long shot. But an independent resource evaluation by Gustavson and Associates LLP, suggests that there is a 50% chance of recovering 6 billion barrels of light crude oil.

At current oil prices and production costs, this is like paying 12 cents for an opportunity to flip a coin and win a hundred bucks.

Petromanas' primary exploration targets are deep (4,000 meters) sub-thrust fractured, carbonate reservoirs. A 2005 well by Canadian Occidental hit light oil before well problems forced it to close. In layman's language, the oil is there, it's light and easy to refine, but it's a long way down.

Investors can look at Bankers Petroleum (BNK-TSX), another Canadian oil company operating in Albania, to understand the potential upside of PMI. BNK has proved reserves ("1P") of 92.8 million barrels, proved plus probable reserves ("2P") of 213.9 million barrels. Q4 2009 production averaged only 7,230 bopd from their Patos Marinza oil field, yet Bankers has a market cap of around $1.7 billion.

Bankers' high valuation is because the market believes that Patos Marinza - the largest onshore oilfield in Europe - contains billions of barrels of recoverable oil, i.e. the resource is real, and large, and low risk to produce.

What the analysts, investment bankers and institutional investors are looking for is steadily increasing booked reserves. An operating well that's pumping out more oil will increase CFPS (Cash Flow per Share) but if the company is not booking more reserves then it is cannibalising its own flesh.

Petromanas will soon be in a similar state of development that Bankers was in July 2009 when it went on its 480% run from $1.60 to the current price of $7.74.

If their first well into their Albanian property is as successful as they hope, the market will quickly start to price in this independent report of 6 billion barrels of recoverable oil. But there are still several months of seismic shooting and analyzing on these 6500 km2 blocks before that happens.

Petromanas has the backing of two heavy hitters: Endeavour Financial (EDV-TSX) advised by Frank Giustra and the private merchant bank, Peninsula, controlled by Sam Magid. These guys have teams of analysts who test the waters before they wade in. Both of them have a history of growing shareholder value.

Like all science, geology is prone to error. But with its proven geology and robust financing, Petromanas has an extremely attractive risk/reward profile for a junior. They have an ambitious 2010 drilling program. Large, new discoveries of light crude are increasingly rare. If those drills confirm the conclusions of the independent geology report, shareholders will be rewarded.

Investors Guru Small Cap Stock Observer publishes interesting articles by contributing writers, in addition to its own content. This article was written by Guy Bennett and we have not verified its details.

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