Simply stated, these enterprising, closely-associated companies (which share some key senior management personnel) have teamed up to capitalize on at least two unprecedented world-class drilling opportunities. Ones that boast multi-billion dollar potential – and which have attracted the past and present participation of two big league North American oil & gas companies.

 

Indeed, Shell Canada’s recent involvement in one of these emerging exploration plays in northeastern British Columbia (BC) has already generated considerable intrigue. Much of which set in motion a roller coaster ride for Flying A’s share price early last year. But we intend to get to the bottom of this unfolding saga later on in this article.

 

Flying A and Bighorn are also mindful of the need to protect shareholders’ interests by mitigating risk and by building intrinsic value into their respective share prices. Hence, the joint venture partners have implemented a rearguard safety net strategy of participating in a series of shallow-depth, low-risk natural gas drill prospects.

 

This is aimed at generating a meaningful and exponential cash flow. And with two wells drilled and completed to date, all indications point to a successful start to what may involve up to a dozen or so additional contingent step-out wells over the next two to three years. Again, we’re talking about the same underdeveloped, natural-gas-rich Peace River region of BC where the partners’ other projects are situated.

In essence, this low-risk multi-well drill program promises to underpin the two companies’ share price valuations with very solid fundamentals. Indeed, this project, alone, is almost assured to pave the way for a very bright future. More on this later.

An ‘Elephant-Sized’ Natural Gas Discovery in the Offing as Early as this Summer?
First, let’s discuss what amounts to the near-term sizzle in the steak by way of the scheduled early June drilling of the Prophet River drill project in BC’s Peace River region. This ambitious Cdn. $8.6 million dollar project is targeting an ‘elephant-sized’ discovery. One that has the potential for multiple pay zones. But the ultimate pay zone prize will be the hardest to reach at more than a mile beneath the earth’s surface.

It consists of a Slave Point formation or reef structure that is expected to be encountered at a maximum target depth of around 3,100 metres. Huge multi-billion dollar natural gas columns that are known to exist at the Slave Point horizon are rare and elusive quarry in this part of the Western Canada Sedimentary Basin. But they do exist. And ordinarily only major oil & gas companies have the deep pockets and geological expertise, as well as the necessary experience, to hunt them down.

 

Yet, an unlikely series of unprecedented but fortuitous events have given Flying A and Bighorn a shot at the big time. That and the fact that a thriving oil & gas investment climate has now made it possible for such micro-cap companies to raise millions of exploration dollars.

 

However, the duo is shrewd enough not to try to go it alone. Most importantly, this bold drill program has attracted the participation of one of North America’s leading independent natural gas producers. Unfortunately, we cannot mention its name for reasons related to the rather secretive and highly competitive nature of wildcat oil & gas exploration. So let’s just refer to this power player as Corporation X.

 

Corporation X has agreed to act as the contracting project operator. But of course it also wants a sizeable piece of the action if the drilling goes according to plan. That’s an important incentive as this energy sector hotshot boasts an impressive track record for bringing big discoveries on-stream.

 

How did Bighorn, Flying A and a third Vancouver-based junior joint venture partner, Wyn Developments (TSX.V-WL), get to earn-in on a majority interest on this high-impact drill project? Especially since this is the type of opportunity that most other oil & gas juniors can only dream of. Well, let’s just say that the trio is well-connected in the oil & gas business (see Strong Management is the Key to Success). Also, the tenacious Vancouver trio has already earned a reputation for being ‘stand-up’ players.

 

Additionally, operators of such one-shot multi-million dollar drill projects as Prophet River typically prefer to defray the risks involved. So they farm-out joint venture working interests to other participants. If there’s a discovery, then it’s a win-win situation for everyone involved.

 

In this particular situation, the Vancouver trio will be in the unusual but thankful position of controlling the project news flow. In stark contrast, Flying A and Wyn were muzzled by their past senior partner during the $7.5 million drill program at the Bougie/Trutch well in early 2005.

 

Corporation X has a 35% working interest in the project and can elect to convert this interest into a 12.5% gross overriding royalty on the project. This must occur within 30 days of receiving test information from the well.

 

Renowned Large Cap Energy Industry Partner Estimates Up to 225 Billion Cubic Feet of Gas May be Recoverable 

Corporation X is obviously very enthusiastic about this project. In fact, out of approximately 20 Slave Point prospects it has studied, this one appear to have the best chance of success, according to a Corporation X senior geophysicist. Since Ladyfern, Corporation X has spent considerable time and resources trying to find the next one, and Prophet River represents its best chance of a comparable discovery.

By way of explanation, the Ladyfern natural gas reservoir is a Slave Point reef that was discovered as recently as 2000. Since then, Corporation X has been among a number of major players that have congregated in northeastern BC to capitalize on this huge find. Ladyfern has estimated recoverable reserves of between 750 billion cubic feet of gas (BCF) and one trillion cubic feet of gas.  Moreover, a single Ladyfern well can flow as much as 100 million cubic feet of gas per day. 

The same Corporation X senior geophysicist referred to the preliminary exploration findings at the Prophet River Project as follows:

 

“…the large aerial extent, together with the abundant dolomite, make Prophet River the best chance of success for a large discovery.”

 

SmallCapMedia has since followed up on this statement. And in essence we’ve determined that it means that a prolific geological structure has been identified by way of 3-D seismic interpretation. And it measures no less than approximately 7.5 square miles in size.

 

Also a crucial component of its appeal is the fact that the abundance of dolomite provides excellent porosity and permeability in the reef formation that hosts the natural gas. In turn, this significantly increases the likelihood that the extraction of the natural gas will be economically viable.

 

The best part of the overall picture is that it translates into a projected in-situ resource at the Slave Point and shallower ‘halfway’ zones (where at least several prospective pay zones exist) of between 100 and 225 BCF. By comparison, a base case scenario for this reservoir to become a money-maker would be a minimum of 25 BCF.

 

Meanwhile, Bighorn, Flying A and Wyn each have the right to earn up to a 21 2/3% interest in the project area (which includes 21 sections or square miles). As part of their earn-in obligations, the trio has already funded the cost of the 3-D seismic survey (covering 9.5 square miles) that has been instrumental in identifying the ideal bottom hole location.

 

The Prophet River well location is about 10 kilometres west of the Alaska Highway in an area with excellent infrastructure, including the close proximity of pipelines. This all makes the economics of this exciting drill project all the more robust.

 

Additionally, the project is situated at the northern margins of a well-established geological trend that encompasses a number of other major producing hydrocarbon formations in the region. They include the Clark Lake reservoir – another huge Slave Point discovery – that has been a prolific natural gas producer since 1957.

 

Readers, stay tuned as the Prophet River well is expected to be ‘spudded’ (a drilling commencement date) as soon as early to mid June with a completion date set for the end of August. And if the results come up trumps, Flying A and Bighorn shareholders will be set for the ride of their lives.

 

Shallow Developmental Gas Wells Offer a Rich Source of Exponential Cash Flow

Meanwhile, shareholders of the Vancouver trio are primed to benefit from the legacy of the first major drill program that Wyn, Northern Hemisphere Development (TSX.V: NHD) and Flying A embarked upon in the Peace River area in early 2005. Bighorn was not involved at that time but has since acquired a 2.5% gross overriding royalty in the project.

 

Situated only a few kilometers to the southwest of the Prophet River prospect, the Bougie/Trutch project was managed by Shell Canada at the time. This multi-million dollar well also targeted a deep Slave Point formation. However, it was abandoned by Shell in March of 2005 due to technical problems that have never been fully explained due to the ‘tight hole’ status (high level of operational secrecy) of the drill program.

 

Though this proved to be a major disappointment to Flying A and its partners, it did provide invaluable well log data for the various geological horizons encountered within the 3,300-metre well. It also allowed Flying A, Northern Hemisphere Development and Wyn Developments to each earn-in on their respective 17.5%, 17.5% and 15% interests in six shallow ‘halfway’ zones or horizons. (Six additional sections have since been earned). This is where a gas-rich formation is known to exist. The partners also earned-in on 26 sections of the deep zones from the top of the Slave Point to the basement.

 

Enter Focus Energy Trust

Indeed, the Vancouver trio of companies has landed on their feet by inheriting a working/participating relationship with the mid-sized Focus Energy Trust. This high-flying organization has in fact built an enviable reputation for developing a shallow conventional natural gas field in the Peace River region.

 

This relationship came into being when Focus opted to farm-in on Shell’s stake in the shallow target areas in return for future royalty payments. By way of explanation, Shell is not in the business of developing modestly-sized shallow gas formations and would rather collect royalties from a company that excels in this niche market.

 

This is all exceptionally good news for Flying A, Northern Hemisphere Development, Wyn and Bighorn as Focus has now assumed the responsibility of identifying shallow ‘halfway’ targets at around the 1,000 to 1,400 metre range within the Bougie/Trutch land sections. And Focus has a 100% success rate for the recent commercial development of about a dozen other wells in the neighbourhood of the Bougie/Trutch land holdings. Meanwhile, as previously stated Bighorn has a 2.5% gross overriding royalty on the ‘halfway’ target horizons which is equivalent to a 7.5% working interest with no cash calls.

 

Elsewhere, Focus has no less that about 124 producing wells situated a few kilometers to the southeast of the Bougie/Trutch lands. They all encompass the prolific Tommy Lakes natural gas field. This is where historic natural gas reserves totaling 600 BCF have been calculated.

 

Of equal importance, Focus is not accustomed to making mistakes in a region where it has been active for many years and where the Tommy Lakes field constitutes its largest single asset. That’s why it has a remarkably high percentage of success for the drilling of new wells (as previously mentioned). And Focus has plenty of infrastructure in place, including pipeline gathering systems into which any new wells can cost-efficiently be tied-in.

 

Focus’ expert understanding of the regional geology for ‘halfway’ natural gas columns is why the trust has been producing nearly 30 million cubic feet of gas per day and 569 barrels per day of natural gas liquids from the lucrative Tommy Lakes field.

 

Now this dynamic energy trust has embarked upon the next phase of its regional developmental program, which involves drilling up to a dozen or so wells within the Bougie/Trutch land sections over the next several years.

 

So Far So Good with the First Two Shallow Wells

Fortunately, Focus Energy Trust has made clear its committment to working closely in cooperation with the Vancouver triumvirate and Bighorn (the royalty holder) to fully developing the ‘halfway’ zones at the Bougie/Trutch project lands. 
 

On this note, the first two wells were recently cased and completed by Focus. But due to their ‘tight hole’ status there is no publicly available information on flow rates. Having said that, the mere fact that the wells have been production tested and ‘cased’ or shut-in to prevent gas from escaping clearly suggests that they will become producers. Then of course there is Focus’ impeccable track record of successes.

 

A particularly interesting aspect of this early-stage drill program is that these wells appear to represent the discovery of an entirely new natural gas pool or field. SmallCapMedia has surmised this fact after having studied a number of publicly disseminated documents related to the drilling.

 

Assuming that this new pool is analogous to the Tommy Lakes field, each new well represents approximately $3.7 million worth of annual profits over a 10-year life span to Flying A for its net 10.5% interest.

 

These pro forma projections assume that at least 10 wells will eventually come on-stream and that the pool hosts an estimated 50 BCF of conventional natural gas (based on prevailing natural gas prices). Likewise, Bighorn is also primed to enjoy a comparable payout but with the sweetener of royalty payments.

 

It is also worth noting that natural gas fields in the Peace River region have historically also generated high deliverability per well and high cash flow per barrel of oil equivalent per day (boepd).

 

Meanwhile, the initial two wells are not expected to be tied-in to Focus’ pipeline gathering system until next winter. An additional three to five low-risk, step-out wells are expected to be drilled at that time.

 

The fairly long timeline on the drilling and commercialization of these wells happens to be weather related. In other words, ideal work conditions prevail in the winter when the ground is frozen over. But at other times of the year much of this remote region consists of muskeg-covered bog, making it very difficult and expensive to move heavy drill rigs around.

 

The Elusive Bougie/Trutch Slave Point Prize May Yet be Within Reach

Now let’s discuss the Bougie/Trutch Slave Point project that so many investors have already written off as a lost cause. The facts suggest otherwise. After all, no-one in the oil & gas business would ever suggest that multi-billion dollar natural gas discoveries are easy to find. That’s why hunting for such world-class discoveries tends to be the exclusive domain of major energy companies.

 

In this particular instance, however, the trio of juniors in this ongoing project still have an unprecedented opportunity to provide investors with a ‘home run’ win. Hence, the drill logs from the original drill program and the 3-D seismic data are all being re-evaluated and re-interpreted with a view to re-drilling this huge target next winter.

 

If a decision is made to proceed with this project next winter, much of the cost will be farmed-out again, only this time around the Vancouver trio is in the driver’s seat. And they will be in control of the news flow. In which case, Shell would be offered the first right of refusal to participate. Meanwhile, a decision as to whether to proceed with further drilling will be made by mid July. The project area now benefits from an all-season road.

 

Strong Management is Always the Key to Success

On a corporate note, the analysts at SmallCapMedia have always found strong management to be the greatest value driver for junior exploration natural resource and energy companies. To this end, shareholders of both Flying A and Bighorn are being well-served.

 

For instance, the President and CEO of Bighorn, Darren Stevenson, is a seasoned veteran of the big league oil & gas business. He is also the corporate secretary of Flying A and brings to both companies the leadership skills required to achieve significant growth in this booming industry.  

 

Prior to joining Bighorn Petroleum Ltd., Mr. Stevenson worked with Royal Dutch Shell PLC consultancy business, Shell Global Solutions in Amsterdam. He served as a senior business development director and led a team in support of Shell business pursuits in Europe, Middle East and Russia. He has also worked for companies such as Syncrude Canada, Shell Canada and the University of British Columbia Industry Liaison Office.

 

The president of Flying A is Nash Meghji, with over 23 years in the brokerage industry. Nash brings the leadership and credibility for raising the necessary investment required to pursue the qualified exploration opportunities.

Bighorn’s VP, Farokh Elmieh, is a business executive, entrepreneur and engineer and brings to the Bighorn management team over 35 years of experience in oil and gas, engineering and mineral exploration sectors.  He holds a M.Phil in Mechanical Engineering (Fluid mechanics) from the University of Southampton, United Kingdom (1974).

Common to both companies is Mike Kurtanjek, Director of Flying A and Advisor to Bighorn. Mike has over 30 years experience and was employed by Credit Lyonnais, James Capel & Co. and Prudential Assurance Company as a Fund Manager and Investment Banker. Mr. Kurtanjek was the manager of the Natural Resources Group of The British Sulphur Corporation where he managed several World Bank sponsored projects focused on oil and gas in several North African and Middle Eastern countries.

On the advisory board of both companies is Thom Bainbridge,  BASc, P.Geol., with over 35 years of geological engineering experience. Thom has written numerous geological and engineering reports to be submitted to the Securities Commissions of British Columbia, Manitoba, Alberta and Ontario.  These companies have included Alberta Energy Company, Blue Range Resource Corp., Luscar Limited, Encal Energy Ltd., Agassiz Resources Limited, Dynamar Energy Limited, Westar Petroleum Limited, Ultramar Oil Limited, Mohawk Oil and Wintershall Oil Limited, to name a few.  

Investment Summary

The very real prospect of one or even two ‘home run’ natural gas discoveries over the next 12 months offers to catapult both companies’ share prices to much higher multiples. Indeed, this is a very rare phenomenon for oil & gas juniors, the majority of which never get the opportunity to participate in such high-impact drill projects.

 

It is therefore important to appreciate that both Flying A and Bighorn are not ‘buy and exploit’ companies, unlike so many of their peers. Instead, they believe that they can more cost-effectively leverage their investment dollars via a shared drill-bit driven growth strategy. One that has its inherent risks. But such risks are more than compensated for by a corresponding increase in the opportunities for very lucrative rewards.

 

The merits of this shrewd business model are further illustrated by the likelihood of a relatively fast payout on invested capital in successful wells. At least in terms of the joint ventured ‘halfway’ development wells (involving up to a dozen or so contingent drill prospects) that are part of Focus Energy Trust’s expansion into the Bougie/Trutch area. Notably, the prospect of a steady infusion of drill-bit-generated cash flow should provide the financial springboard to fund other future high-impact drill projects.

 

In closing, the duo benefit from an aggressively bold business model that offers investors considerable ‘blue sky’ or upside potential at very affordable share prices. This is particularly the case for Flying A which is about half the price of Bighorn as it has a far more diluted share structure (matrices that explains the price differentiations). Flying A has approximately 48.5 million shares outstanding (about 59 million fully diluted) whereas Bighorn has about 19.5 million shares outstanding (about 34.5 million fully diluted).

 

On this note, a tight share structure – matched with positive news flow – typically acts as a potent catalyst to sustained increases in share price valuations. Conversely, investors who prefer greater buying and selling leverage by way of greater share price liquidity are better served by Flying A’s share structure.

In terms of the big picture, both companies are charting an aggressive, expedited course to becoming mid-tier oil & gas companies. Accordingly, SmallCapMedia believes that speculative investors stand to benefit immeasurably from this scenario. And the companies’ involvement with Focus should also offer broad appeal to investors whose investment strategies are as shrewd as they are speculative.