By way of explanation, Pennant’s initial focus involves farming-in (buying into) on low-risk, shallow to mid-depth, multi-zone oil & natural gas targets — ones that are either supported by 3-D seismic geological evaluations or are step-out drill programs for existing producing wells. Most impressively, all of the Company’s growth to date is via the drill-bit, thereby providing investors maximum leverage from Pennant’s modest business development expenditures. In this regard, Pennant is committed to pursuing and implementing cost-effective farm-in opportunities in the Western Canadian Sedimentary Basin. At this time, the Company is active in the hydrocarbon-rich provinces of Alberta and Manitoba.

 

In turn, this approach is generating a growing oil & gas inventory base, as well as valuable cash flow — some of which will be eventually allocated to the drilling of high-impact “company maker” targets. If successful, this one-two punch formula for success promises to be a surefire catalyst to much higher share price multiples. It should also offer broad appeal to investors whose investment strategies are as shrewd as they are speculative.

Since becoming active about a year ago, the Company has embarked upon lower risk drilling opportunities by way of joint venture partnerships with other oil & gas juniors that are well-established project operators. Typically, such companies prefer to defray the risks involved in exploration by the drill-bit by farming-out working interests in their drill programs. If all goes well, it’s a win-win situation for both (or more) parties involved. So far so good for Pennant and its partners.

 

The Company’s growth philosophy was successfully initiated last year through participation in five well development drilling programs in the Daly Field in southwestern Manitoba. All five wells have now come on-stream with each producing on average approximately 30 barrels of oil per day.

Pennant also has the right to participate in the drilling of three additional wells in the Daly Field with the same joint venture partner, Rideau Petroleums Ltd. The partnership agreement pertains to all of the wells already completed, as well as at least three additional prospects. Pennant is contributing 25% of the costs to drill, complete and equip the wells to earn a 22.5% working interest before payout, reverting to 15% working interest after payout.

Pennant’s management believes that the remaining targets have such similar geological characteristics to the ones already drilled and that there is a strong likelihood of continued success in the Daly Field. Accordingly, the Company is evaluating these drill targets with a view to driving future production and reserve growth from this core area. The Daly Field lies along the northeastern flank of the Williston Basin (better known as an expansive oil field or reservoir) and produces medium-grade crude from the Lodgepole and Bakken formations.

Pennant’s good fortune has not been confined merely to the Daly Field. Indeed, this dynamic junior is giving plenty of credence to the motto: “success breeds success”. That’s because the Company also recently announced the successful completion of a mid-depth test well some 50 miles northeast of the town of Whitecourt in northern Alberta. The joint ventured Meekwap Project in which Pennant has a working interest is focused on a multi-horizon Nisku reef formation. Initial flow rates for this first test well are between 400 and 1,100 barrels of oil per day (boepd), as well as 350,000 cubic feet (mcf) of natural gas per day. Historically, this reef formation has yielded over 38 million barrels of oil since 1974 at the nearby Meekwap D-2A Unit No. 1 project area. Individual wells in this Unit have recovered in excess of two million barrels of oil with initial production rates exceeding 1,000 boepd.

The privately-owned Meekwap Project operator forecasts a reserve potential from the joint ventured land leases of five million barrels of oil or more with initial production rates in the range of 300 to 1,000 boepd. Pennant is also encouraged that a natural gas formation has also been intersected by the test drill. The joint venture agreement includes contiguous (adjoining) farm-out lands that initially involve three or four more similarly very prospective drill locations. This project, alone, could add considerable sizzle to Pennant’s share price if subsequent drill targets prove analogous to other wells in the area, which boast very impressive flow rates.

The terms of the farm-out agreement provide Pennant with a reversionary working interest of 8% before payout (BPO) reverting to 4% after payout (APO) in the initial test well and 160 acre spacing unit. (The Company has already contributed 8% of the drilling costs). This is subject to BPO gross overriding royalties payable to the farmor (operator). Subsequently, Pennant now holds a 3% working interest in the balance of the exploration leases.

Pennant also benefits from an inventory of compelling drill prospects at the Goose Creek Project area in west central Alberta. They all strategically target the Kaybob Field, which consists of a large, mature oil & gas producing pool located approximately 165 miles northwest of Edmonton. The region continues to be the focus of intense exploration and development drilling activity fueled by strong commodity prices. Notably, many recent drill successes have been attributed to the effective use of state-of-the-art geophysical, completion and production technology.

The area where Pennant has acquired a working interest is interpreted to be geologically similar to the prolific Notikewin “A” pool well which has produced a cumulative 25.4 billion cubic feet of gas (bcf) from 1970 to present. Meanwhile, the Triassic "B" pool — which is situated immediately south of the Notikewin well — is estimated to contain 22 million barrels of oil with recoverable reserves in the two million barrel range, according to the Alberta government.

All told, a number of large, prolific Notikewin reservoirs are found in this region where Pennant is involved. Individual well recoveries range from 3 to 12 bcf of gas. Moreover, initial production rates often exceed five million cubic feet of gas per day (mmcfd). And analogous (similar) wells in the region have produced upwards of 200 boepd.

Early indications suggest that the joint venture partnership’s first test well has strong potential to come on-stream. It has already been cased with the intention of testing flow rates. If proven successful, Pennant has the option to participate in several additional drill targets.

The terms of the farm-out agreement with the operator, Gulf Shores Resources Ltd., provide Pennant with a reversionary working interest of 18% in the well before payout (BPO) reverting to 10.8% after payout (APO) subject to BPO gross overriding royalties payable to the operator. (The Company has already contributed 18% of the drilling costs). 

On a corporate note, the analysts at SmallCapMedia have always found strong management to be the greatest value driver for junior exploration natural resource companies. To this end, Pennant’s shareholders are being well-served.

Company President Thomas Yingling is a seasoned venture capitalist who benefits from over 14 years experience in the running of natural resource public companies. During this time, he has also served for over a decade as President of Brahma Communications Corp., an investment consulting firm that specializes in corporate finance and strategic corporate planning for publicly traded companies.

The Company’s entrepreneurial flair also benefits from the involvement of Vice President Patrick Power. An adept financier, he is also a senior executive and director with a number of other natural resource companies. He also benefits from over 15 years of experience in venture capital markets, as well as many years previously in the financial securities industry. His resource industry savoir-faire is particularly underscored by his role as President of Montello Resources Ltd. (TSX.V-MEO) and Austin Developments Corp. (TSX.V–AUL), two emerging oil & gas exploration and development companies.

Meanwhile, the Company’s impressive geological acumen to date also has as much to do with the involvement of fellow director David Finn, Asc. T., a well-regarded petroleum consultant who has been active in the oil & gas business for over 30 years. During this time, he has served as a consultant to numerous companies, mainly in the U.S. and Canada. During the last decade, Mr. Finn has consulted primarily to Gilber Lausten Jung Associates Ltd. — one of Canada’s most respected oil & gas engineering firms. In this regard, he specialized in providing project evaluation services to oil & gas exploration and development companies, as well as major financial institutions. Not coincidentally, his area of expertise includes the Western Canadian sedimentary basin. He has also served as a director and officer of a number of publicly traded companies.

From a technical perspective, the Company has a tight share structure with approximately 8.3 million shares outstanding (about 11.4 million fully diluted). Such a situation, matched with positive news flow, typically acts as a springboard for an upward-trending share price. The Company is also in the enviable position of having positive cash flow and no debt.

In summary, it is important to appreciate that this is not a “buy and exploit” company. Rather, Pennant’s drill-bit driven strategy inherently increases operational risks but correspondingly increases the prospects for rewards. By capitalizing on a modest but growing opportunity base, Pennant is achieving success at a measured pace that is very low risk. And that’s particularly good news for value-oriented investors.

The merits of this shrewd business model are illustrated by a fast payout on invested capital in successful wells. Additionally, all of these projects are characterized as low to medium cost wells that can generate high deliverability per well and high cash flow per boepd. This is proving to be a powerful growth formula that gives investors ample exposure to historically high energy prices. The Company’s fundamentals are further reinforced by a very prospective portfolio of contingent drilling locations and a healthy balance sheet. Hence, all the right dynamics are in place to ensure Pennant Energy’s exponential growth for the foreseeable future.

Accordingly, SmallCapMedia is confident that the Company’s share price will readily outperform the broad markets during 2005 and will establish itself as a strong performer well beyond this time horizon.