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Investors Guru Small Cap Stock Observer

Raymond James likes Petromanas Energy

It's very rare for oil majors to find targets that can host multi-BILLION barrels of oil, or TRILLIONS of cubic feet of gas (and I thought trillions was reserved for US budget deficits).

It's even more rare for a junior oil company to get access to this kind of target. But recent research reports by Canadian firms Raymond James Ltd. Canada and GMP Securities have profiled Petromanas Energy (TSXV:PMI) as a well funded junior who could outdo the majors in finding a huge oil resource in 2011.

What's more, they're finding it in onshore Europe - where there is little political risk, in a proven oil basin.

In a research report dated May 28, 2010, Raymond James initiated coverage on Petromanas Energy (TSXV:PMI) with an Outperform 2 rating and a $1.33 target. GMP released their coverage on June 1st 2010 with a similar buy rating and a $0.80 target.

Part of the story is that Petromanas has a large land package - about 6500 square kilometres. So if they are successful in finding commercial oil, they could, in theory, replicate those discoveries in many development wells over a large area.

But part of the story is also the sheer size of the prize. An independent technical report has estimated that one, shallow $5 million well could find a resource of 150 million barrels of oil. Wells in Canada and the US by contrast that cost $5 million, in say, the highly prolific Bakken formation of North Dakota, might be 1 million barrels.

So just how big is the prize? Raymond James uses a resource estimate of 6.1 billion barrels, which they risk at just 2% for an NAV of C$1,137 million, or C$1.33 per share which they use for their target price. GMP uses a bit of a different approach but with the same result, they use a total risked exploration resources of 224 million barrels of oil equivalent which they use for a base estimated Risked NAV of C$0.79 share.

What makes this story even more interesting is that a prize this big is found in Albania, onshore and in a stable European country. Raymond James compares the size of the fields in Albania to the politically unstable Kurdistan region of Iraq and fields in Saudi Arabia.

Excitement is building around Petromanas due to the close proximity of Bankers Petroleum which pioneered modern oil and gas activities in Albania with a huge discovery in 2007. Petromanas has a massive land position on the doorstep to Bankers.

Lastly, Raymond James has an interesting way of valuing these plays. They look at the size of prospective resource, in barrels of oil, the company is chasing, as outlined by an independent
engineering company. Then they divide that into the enterprise value - so if a company has a $100 million enterprise value (market cap- cash) and the target is 100 million barrels, then it has a value of $1 per prospective barrel in the ground. RJ values Petromanas at 3 cents per prospective barrel, compared to peers Vast Exploration and Longford at 79 and 36 cents respectively.

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PIE Primary Petroleum $0.375 +.005 .8m

Investors Guru Small Cap Stock Observer

Global Potash Market Heats Up

Producers’ Stocks are Moving – Will Juniors Be Next?

Potash CEO’s often appear to have a Zen-like calm – and who can blame them? Like cats who own a mouse farm, they know the whole world is tilted in their favour.

Potash, the key ingredient in fertiliser, is a monster story. Every year there are 75 million new people on the planet. The majority of this population growth occurs in the developing nations. As their middle class develops (by the tens of millions each year) workers require more protein, which means they eat more meat. This has an amplifying effect on the demand for fertilizer, because it takes about 10 kilograms of grain to produce one pound of meat. More people, less farmable land, requiring more fertiliser.

Demand destruction? The eating business is about as solid as it gets. And this is why institutional investors love potash in a volatile market.

The potash producers are seeing their stock prices rise, and this will follow through to the few juniors left – like Encanto Potash (TSXV:EPO) and Potash One (TSX:KCL).

This last week has seen a number of significant developments which have caused the price of potash producers like, PotashCorp (TSX:POT), Mosaic (TSX:MOS) and Uralkali (LSE:URKA) to go up.

Saskatchewan’s potash producers have announced combined investments of $8 billion to increase their total production capacity by 15.44 million tonnes by 2020. This will raise their total production capacity to 36 million tonnes.

PotashCorp is investing about $4.8 billion in its Lanigan, Rocanville, Allan, Cory and Patience Lake facilities, while Mosaic is spending about $3.2 billion at its Esterhazy, Belle Plaine and Colonsay locations. They are anticipating strong long term demand for their potash.

PotashCorp recorded a 46-per-cent hike in earnings per share in the first quarter of 2010 compared to the same quarter last year.

Potash Corp, the world's largest fertilizer maker, is confident that the price of potash will begin a steady rise, as the demand-supply balance tightens over the next few months.

"I think you are going to see a number of price increases in 2011,” says PotashCorp President and CEO Bill Doyle, “You are also going to see a couple of price increases between now and the end of 2010. If you look at what we did in 2008, that's just an indicator of our performance. Will we break that record in the next five years? I have no doubt about it.”

The second piece of news is that Canpotex, the export arm of POT has agreed to sell 70,000 tonnes of potash to Sinochem Macao for $370 a tonne – a hefty 6% increase from the price they agreed on only last month.

Analysts believe the new agreement signals that pricing momentum for potash is building.

Inevitably, this bullish activity will ripple out to the juniors – of which few remain.

Encanto Potash, Western Potash and Potash One are the only Saskatchewan focused junior potash players still developing deposits.

Encanto’s first drill hole at its Muskowekwan potash property in Saskatchewan returned values of 25.2% K2O (39.9% KCl) over 3.6 metres in the Patience Lake potash bed, and 25.5% K2O (40.4% KCl) over 2.4 metres in the Belle Plaine potash bed. This is the highest grade potash the industry has seen in years. Their potential mineable resource is worth about $200 billion at today’s potash prices.

Encanto’s twist is that their potash is on First Nations ground –Encanto has 100% potash mineral title to all of the properties and the First Nations have a 3% GORR (Gross Over Riding Royalty) upon production. They say this will help speed development of their asset.

There could be another cat in the mouse farm.

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.

Please note that nothing in this report should be taken as a recommendation in any way, and that everything from InvestorsGuru.com is subject to the terms of our Privacy Policy and Disclaimer.