Bankers Pet BNK:TSE Undervalued

BANKERS PETROLEUM (T-BNK) $2.10 +0.09

We have been following Bankers Petroleum for a long time

and having been to Albania and seeing firsthand the heavy oil in the ditches, on the gravel roads, the old rigs from Chinese and Russian times—it makes you believe there is a lot of oil there. Some suggests there are simply billions of barrels.

Bankers Petroleum has had trouble over the last while and on Monday of this week, they had a show and tell for analysts on how they expect to rectify their problems.

Bankers Petroleum has sold off dramatically like so many others in the market crash of the last three months, but why don’t we go to Canaccord analyst Christopher Brown for his technical update and look at some of the solutions the people at Bankers Petroleum have provided in his just published report.

He writes on the technical update and proposed solutions: “Following a market update on Monday, Bankers Petroleum held a sell-side analyst presentation detailing the company’s most recent operational challenges. The main issues impact- ing production are currently wellbore construction and water influx. Approximately 1,220 b/d has been lost due to produc- tion failures at 16 of the company’s horizontal wells, which have suffered collapsed liners and sand bridges.” (See chart to the left)

 “The underlying problem is not entirely known, but the plan of attack is to place stronger liners down hole at future locations, at an incremental cost of approximately $20,000 per location. This improvement is expected to commence in Q4/12, but in the interim, the company has recommended that analysts and investors reduce the historical horizontal suc- cess rate of 83% by an additional 10%. The company does not expect this problem to persist on future locations, but stated that the possibility exists on older designs. However, it noted that existing wells could potentially be remedied through a $250,000 side-track or $50,000 lateral and liner.

Water intrusion continues to impact production, and the company has identified over 60 instances where water above the oil formation has corroded through old wellbore casing and intruded on primary productive zones. As a result, water cuts throughout Patos Marinza are high, at over 90% in some cases.

To re mediate the problem, Bankers has gathered information on old well bores and has implemented bridge plugs around primary zones of interest to reduce the water influx from secondary zones.

While the company provided several examples of the effectiveness of this technique, it also noted that the length of time required to “de-water” a well ranged signifi- cantly depending on the degree of water encroachment. Although this process appears to have solved some of the water influx problems, the company stated that it may not solve 100% of the water intrusion issues (for example, behind casing crossflow).”

Brown writes on the General Operations Update: “The company highlighted current water capacity of ~40,000 b/d with a projected disposal capacity of ~47,000 b/d by year- end 2012. Current production appears to be between 14,100 and 14,700 b/d, while May 2012 averaged 14,150 b/ d. This compares favourably to the May 14, 2012 QTD rate of 13,600 b/d. Drilling is still on schedule with 56 horizon- tal wells expected to have been drilled by Q2/12, leaving 46 locations remaining for H2/12. The company plans on focusing on high-production opportunities in the North- Central region for the remainder of the year.

Finally, the company indicated that it does not plan to adjust its capital program unless Brent falls to the $70/bbl range. As such, Bankers is committed (and is expected to be able to financially support) its current development program with all five rigs actively working in the field for 2012.”

On Valuation, Brown writes, “We use a DCF analysis to estimate a 2012E NAV of approximately C$6.40 per share relative to a 2P value of C$7.50 per share. As we expect the company to trade at a discount to both its 2P value and our NAV estimate, we have estimated a 12-month tar- get price of C$5.00 per share.

Overall, we believe this information provides clarity on Bankers’ operational issues. As we have already risked our NAV in establishing our C$5.00/share target, we main- tain our target and BUY rating. We share investor sentiment that the company has a lot of work ahead of it to re- store production and shareholder confidence, but that we believe the fundamental value of the company remains intact.”

Markets Poised To Rally

The Toronto stock market headed for a positive open Monday after Spain admitted it needed help in recapitalising its debt-laden banks and secured a bailout for the sector.

The Canadian dollar was higher as relief over the deal pushed the U.S. dollar lower and commodities higher, up 0.17 of a cent to 97.54 cents US.

Eurozone finance ministers said Saturday they would make up to €100 billion in loans available to the Spanish government to prop up banks stuck with billions of non-performing loans and other toxic assets after the collapse of a real estate bubble. Spain has yet to say how much of this money it will tap.

Prime Minister Mariano Rajoy is avoiding using the term "bailout" to describe the aid, calling it instead a credit line without the strict austerity conditions that have accompanied bailouts for Greece, Portugal and Ireland.

However, on Monday the EU made clear the money is more than just a loan. Besides being paid back with interest, there will be strings attached for the Spanish government.

The interest rate on Spanish 10-year bonds, an indicator of investor confidence of how well Spain can maintain its debts, was down as much as eight basis points to about 6.1 per cent.

U.S. futures were positive with the Dow Jones industrial futures up 55 points to 12,558, the Nasdaq futures gained 10.2 points to 2,567.2 and the S&P 500 futures advanced 4.5 points to 1,326.5.

Prices for oil and metals advanced with the July crude contract on the New York Mercantile Exchange ahead 70 cents to US$84.80 a barrel.

July copper was up six cents to US$3.35 a pound while August bullion in New York gained $2.20 to US$1,593.60 an ounce.

With Spain taken care of for the moment, investors will now turn their attention to Greece, where voters head to the polls this coming weekend in an election likely to determine whether the debt-mired country will stick with the common currency. If Greece leaves the euro, that will raise questions of whether other countries might, too.

Relief over the Spanish bank bailout helped take some of the sting out of data from China that came out over the weekend showing the world's second-biggest economy also suffering under the weight of a rapidly slowing European economy.

China’s statistics bureau said that industrial production grew 9.6 per cent in May from a year earlier, higher than the 9.3 per cent growth registered in April. But it was lower than the 9.9 per cent gain that analysts expected.

But exports rose 15.3 per cent from a year earlier, beating 4.9 per cent growth in April and higher than the 6.9 per cent rise forecast by economists.

On the inflation front, consumer and wholesale price gains eased more than expected with the May consumer price index rising by three per cent, down from 3.4 per cent in April.

The CPI reading along with "a more-than-expected 1.4 per cent year-over-year drop in producer prices, is a clear indication that officials can focus squarely on boosting domestic demand and spurring growth and worry less about inflation," said BMO Capital Markets senior economist Jennifer Lee.

There was relief on markets last week after China's central bank cut a key lending rate by 0.25 per cent, its first rate cut in about four years.

European bourses were positive with London's FTSE 100 index ahead 0.51 per cent, Frankfurt's DAX gained 1.46 per cent and the Paris CAC 40 was up 1.1 per cent.

Earlier in Asia, Japan’s Nikkei 225 index climbed two per cent, South Korea’s Kospi added 1.7 per cent and Hong Kong’s Hang Seng added 2.4 per cent. Benchmarks in Singapore, Taiwan, mainland China, Indonesia and New Zealand also rose.

In corporate news, convenience store chain Alimentation Couche-Tard (TSX: ATD.B) has issued another warning to shareholders of Statoil Fuel & Retail who may be waiting for a higher offer. The Montreal-area company that owns Mac’s and Couche-Tard convenience stores and Circle K gas bars says it won’t pay more for the Scandinavian company. Couche-Tard’s offer values Statoil Fuel at about $2.7 billion.

Kinross Gold Corp. (TSX: K) says production has resumed at its Tasiast mine in Mauritania following a labour dispute that was resolved Saturday. The Toronto-based company has said the work stoppage was illegal. It provided no details of how the dispute was resolved in Monday's announcement.