During its very brief operating history in the Tennessee oil & gas business, Montello has already begun reactivating a dozen natural gas wells and connecting them to a major inter-state pipeline. As the first stage of an ambitious program to reactivate up to 100 past-producing wells within a year or so, these initial producers promise to provide the Company with near-term cash flow. At the same time, they are sure to build increasing intrinsic value into Montello’s share price. A strategic agreement with the owner of the nearby transmission pipeline will also allow the Company to bring its next twelve gas wells on-stream – and under similar terms that guarantee Montello “hub” (the best) prices for its gas. Connection of this next group of wells is expected to begin within a couple of months.

 

During the next couple of years, the Company also expects to drill as many as dozens of step-out wells to further bolster its growing portfolio of primarily natural gas producers, along with a much smaller percentage of oil wells. Thus, by adhering to a low-risk strategy of inexpensively re-drilling shallow oil & gas wells, Montello’s mission is to ramp-up production with a target of approximately two to three million cubic feet (mcf) of gas per year, as well as some modest oil production.

 

Some readers may already be quite familiar with the name, Montello Resources. A high-profile diamond exploration firm during the 1990s, Montello has only recently reinvented itself as an energy company. However, this is no opportunistic cosmetic makeover. On the contrary. This strategic shift in focus has resulted from the timely convergence of several once-in-a-lifetime opportunities that presented themselves in the early stages of the latest boom in the energy market. Montello was quick to seize the initiative. More on this later.

 

Even though the Company is now committed to finding and developing hydrocarbons, rather than crystallized carbon (a.k.a. diamonds), some things however haven’t changed. The Company’s entrepreneurial vision and pioneering spirit are as evident and resolute as they ever were.

 

By way of background, Montello was at the vanguard of the hunt for diamonds in the prairie province of Alberta during the 1990s.  Against long odds, Montello’s geological sleuthing was instrumental in proving the existence there of diamond-laced kimberlite pipes. But the quest for the small fraction of pipes in Canada that boast true economic potential is a long and prohibitively expensive endeavour. And this task has been left in Alberta to Ashton Mining of Canada, a well-funded spin-off of what was once one of the world’s most prolific diamond mining companies. The search continues today with Ashton methodically zeroing-in on the prospect of a multi-billion dollar discovery.

 

Now Montello’s long-held contrarian strategy of being among the first to search for buried wealth where others are seldom intrepid enough to venture is finally beginning to pay off. The Company has painstakingly amassed a much-envied land position spanning approximately 1,700 acres over the last couple of years in north-central Tennessee.

 

To date, it encompasses a total of 53 past-producing natural gas & oil wells (with six more to be imminently added to the tally). This geologically fertile patchwork of leases also offers the very realistic prospect for the drilling of many more wells. Additional contingent leases (some of which adjoin Montello’s existing land holdings) are also readily available for the drilling of considerably more re-entry and step-out wells.

 

Notably, another key competitive advantage concerns the fact that this economically underdeveloped U.S. oil & gas state has for many years been largely overlooked and underestimated. This is because no one has yet hit upon a reliable scientific way of predicting where new oil & gas fields will be found there, says Tennessee State Geologist Ronald Zurawski.

 

This is particularly the case in the Appalachian foothills where Montello is active. The situation hasn’t been helped by the fact that out-of-state oil companies have in the past been turned away by local land owners who are weary of being exploited by arrogant “big money” opportunists. On the plus side, drilling is shallow and cheap here, compared with places like Texas, Alberta or Oklahoma, Zurawski adds. But the biggest discoveries have topped out at 1,000 barrels a day – a payoff too meager these days to attract large companies.

 

This scenario, however, presents excellent opportunities for small, enterprising oil & gas companies like Montello that can thrive in this state without the need for major discoveries. Additionally, Montello now benefits from the advent of sophisticated exploration and well stimulation technologies that were not available when Montello’s wells were first drilled by their original owners in the 1980s. This therefore affords the Company a significant edge in the implementation of its development strategy.

 

In fact, most of these wells are no deeper than around 1,500 feet and can be characterized as lucrative, high-volume, low-pressure wells. Again, none of them have been stimulated by modern techniques such as acid “fracing” or secondary flooding. And a review of the drill logs show that analogous targets also exist within Montello’s land leases – ones that exhibit considerable potential for new oil & gas discoveries.

Above all, however, the greatest factor in Montello’s early success can be attributed to the involvement of a long-time Tennessee oil & gas man, Tom Owens. A few years into his semi-retirement, Owens became a little restless. Enter Montello.

The Vancouver-based junior had decided to play a wild card in late 2002 by drilling a test well in Owens’ neck of the woods just outside the small rural town of Rogersville.  Owens began spending some of his free time at the drill site getting to know the far-from-home Canucks funding the project. The well came up dry. But Owens had his own ideas as to where Montello would more likely strike paydirt in a region that he knows like the back of his hand. And he had the right kind of a rapport with local land owners to make it happen.

It had all the makings of a win-win situation. In particular, Owens saw in Montello an unassuming, reputable and hard-working company that could infuse some much needed exploration and development dollars into the local community. At the same time, the excitement and personal satisfaction of helping to make Montello a success story was a powerful lure. Likewise, Montello saw in Owens an honest, accomplished man who had stored away in the recesses of his mind a wealth of knowledge about the region’s oil & gas history. So began a very fruitful relationship.

Through Owens’ intimate knowledge of the location of at least a few dozen abandoned wells, Montello began the laborious process of tying-up the land where these long-forgotten wells were located. As an aside, it is worth noting that – unlike most oil & gas states and provinces – Tennessee has no central government database for abandoned, past-producing wells. This scenario is proving very advantageous for Montello as it means that the Company doesn’t have to enter into a bidding process with other companies to acquire these “lost” wells – ones that now have significant value in a new era of historic highs for oil and natural gas prices.

Montello’s growing stable of wholly-owned wells were shut-in during the mid 1980s due to low oil & gas prices. Moreover, the absence in those days of a major regional transmission pipeline for the majority that are natural gas wells was also a major stumbling block. This is no longer the case as the nearby presence of an inter-state transmission line now provides the necessary infrastructure to bring these gas wells back on-stream.

Many of Montello’s oil & gas wells have in fact had some previous production but were shut-in or “cased” during the industry slump. But they are now ready to cost-efficiently resume production. Typically, wells in this region are 1,150 to 1,600 feet deep. As was the situation when these wells were first drilled, most of them have only been cased from surface down to 800 feet with the remaining wells still “open” (continuous) from 800 feet to total depth. 

Furthermore, Montello intends to re-complete these wells with enhanced technology that was not readily available in the 1980s. Notably, the technique of re-entering past-producing wells and stimulating past-producing formations, as well as formations that have yet to be exploited, has proven highly successful in recent years in hydrocarbon basins all across the continent. The Company also intends to pursue a logical strategy of drilling nearby step-out (adjacent) wells in the vicinity of wells that were previously good producers.

Among Montello’s best prospects to date is the Knox oil well which was drilled to its present depth of approximately 3,600 feet in the late 1980s. After reviewing logs and the geologist's report, Montello has determined that there are several potential pay zones. In order to determine which formations have been continually producing oil – notwithstanding the fact that the well was only cased to 800 feet – the Company has demonstrated its flair for innovation by shooting video footage in the well, itself. This endoscopy-like observation was conducted from approximately 800 feet to the bottom of the well in both the Knox and nearby Bobby Brooks #6 wells.

 

This video footage (which is available for viewing on Montello’s web site at www.montello.com) has proven very successful in demonstrating the exact depth of the oil & gas pay zones. It also revealed that the zones are larger than the logs had originally indicated. Hence, a decision has recently been made to production-case both wells, as each offers the promise of significant production.

As an aside, environmentally-conscious investors will be happy to learn that natural gas, also known as methane, is a fuel that burns cleaner than other traditional fossil fuels. Increasingly, natural gas is being used in combination with other fuels to improve their environmental performance and to decrease pollution. This is in fact a global trend in that many industrialized nations seeking alternatives to imported “dirty” fuels are now turning to natural gas. Accordingly, the advent of the Kyoto Protocol's impact on reducing airborne pollutants will no doubt add to natural gas' desirability.

And from a pragmatic economic perspective, the reality of a dwindling oil reserve base among OPEC nations is shifting the onus onto North American oil & gas companies to help this continent become more energy self-sufficient.

 

Meanwhile, on a corporate note, the analysts at SmallCapMedia have always found strong management to be the greatest value driver for exploration and development companies. To this end, Montello’s shareholders are being well-served.

 

During its 14-year incarnation as a natural resources company, Montello has been presided over by Patrick Power. He is also a senior executive and director with a number of other natural resources companies. In particular, his adept talents as a financier benefit considerably from a solid background in the investment community. Also, as a personable workaholic, he has earned a long-standing reputation for his tireless drive and determination, as well as his unswerving commitment to Montello’s various projects. He is equally well-known for being a shrewd and savvy explorationist and deal-maker.

To date, the Company’s impressive geological acumen in the oil & gas business is of course also largely due to the involvement of Tom Owens, who serves as a consultant and shareholder. During his 46-year career in the energy industry, he has made a name for himself in all areas of the business, including prospecting, drilling, well completions and production. He has even worked in the big leagues, including the early-stage development of Canada’s Oil Sands territory – host to the world’s largest single oil reserve. For the last 25 years or so, he has acted primarily as a consultant and has been involved in some impressive discoveries. 

On a technical note, Montello is a debt-free company with approximately 83.26 million shares outstanding (about 109.76 million fully diluted) which is a scenario that makes for impressive daily trading liquidity. And the likelihood of a steady flow of positive news developments in the coming months should help propel the Company’s share price significantly higher.

The long-term prospect for a sustained upward-trending stock price should prove to be the just reward for the shrewd implementation of a sound company-building strategy. It involves offering investors a finely-calibrated balance of risk and reward, while also steadily building intrinsic value into the Company’s share price.

More specifically, Montello looks forward to the likelihood of generating an exponential stream of cash flow to build up a strong inventory base of producing wells. In this regard, the Company’s growth to date is via the drill bit, thereby providing investors maximum leverage from Montello’s modest business development expenditures.  

Furthermore, value-oriented investors should take note that all of Montello’s projects are characterized as shallow, low-cost wells that can generate high deliverability per well and high near-term cash flow (a fast payout). This is undoubtedly a powerful growth formula that gives investors ample exposure to historically high energy prices. This strategy should also offer broad appeal to investors whose investment strategies are as shrewd as they are speculative.

Accordingly, SmallCapMedia is confident that Montello Resources will outperform the broad markets during the balance of 2005 and through 2006. And the Company should also prove to be a “rising star” among the few remaining undervalued public companies in a fast-ascending oil & gas sector.