On the Money: Vive le Québec libre!
Two junior energy companies and one giant oil play
Jody Chudley is the author of The Punchcard Portfolio, a value-oriented newsletter with a focus on Canadian oil and gas stocks
by Jody Chudley
Anticosti Island is part of the eastern St. Lawrence lowlands and the province of Quebec. It is one and a half times larger than Prince Edward Island but home to fewer than 300 people. Most of those people live in the village of Port-Menier, on the western tip of the island. With its 24 rivers and streams full of salmon and trout, the island’s primary economic purpose has been as a tourist destination for fishermen, hunters, hikers and bird watchers. That may be about to change, because it seems there is oil in those hills – a whole lot of oil.
A core sample taken from Anticosti’s Macasty shale formation three years ago confirmed that it contained a significant amount of oil. Exact estimates differ, but it is believed that there is between 30- to 50-billion barrels of oil in place on Anticosti. It remains to be seen how much (if any) of that oil can be recovered, but only a small percentage of it needs to be for this to be a significant horizontal oil play. For this reason, oil companies have long been interested in the potential of Anticosti.
What has complicated the process is that Anticosti is part of Quebec, which has not been overly welcoming to the oil and gas industry in the past. That’s why, when the Quebec government announced a $100 million plan to join with several oil and gas companies in drilling oil wells on Anticosti Island, in February of 2014, it was significant news. The door, it seems, is now open.
1-year total returns (C$): -20.0%
Petrolia refers to itself as the undisputed leader in oil exploration in Quebec. That provides some insight on the state of the industry in Quebec, considering that Petrolia doesn’t actually produce any oil or gas. What it does have is land. The company controls 70 to 80 per cent of the land that has oil potential in Quebec, or more than four million acres in total.
Prior to the recently announced Anticosti joint venture with the Quebec government, Petrolia had 640,000 acres on the island.
Now with the joint venture Petrolia has a 21.67 per cent interest in 1.5 million acres, with the first year of drilling fully funded. The size of the prize on Anticosti is massive relative to Petrolia’s market capitalization, which is well under $100 million.
Corridor Resources (TSX: CDH)
1-year total returns (C$): 191.7%
Unlike Petrolia, Corridor already has production and cash flow. Corridor’s production is from the McCully conventional natural gas field, in New Brunswick, which generates about $10 million in yearly cash flow for the company. But like Petrolia, the exciting part about Corridor for shareholders is its exploration portfolio, which features three giant oil and gas prospects.
The first prospect is on Anticosti, where Corridor also has a 21.67 per cent interest in the joint venture with the Quebec government.
The second prospect is an offshore exploration target in the Gulf of St. Lawrence called “Old Harry,” a large structure that could hold up to a billion barrels of oil and gas, while the third is the Frederick Brook shale, where Corridor’s acreage exposes it to 59 trillion cubic feet of gas in place. All three of these projects are massive and could be worth many times Corridor’s current share price. The flip side is that all three are also completely unproven and may never amount to anything.
The risk reward proposition is intriguing if you trust the Quebec government to allow these companies to execute. And therein lies the rub. This is a government with a history of unfriendliness to oil and gas companies, and one that recently placed a moratorium on hydraulic fracturing. But the province’s books are in shambles, with a $2.5 billion budget deficit this year adding to a public debt worth more than $250 billion. The allure of tax revenues and royalties related to oil and gas production may prove tempting for the province’s politicians.