Since SmallCapMedia initiated coverage of this story in early 2003, Admiral Bay has made great strides towards its goal of becoming a successful mid-tier energy company within three short years. A key milestone was reached in late July of this year when Admiral Bay's natural gas production at one of its flagship properties in Kansas, the Shiloh Project, almost doubled to 938,000 cubic feet per day (as compared to the 5550,000 cubic feet figure reported earlier in the month). This development brings the Company's total U.S. production to the 1.2 million cubic feet per day mark -- an impressive statistic for such a small capitalized company. The advent of at least seven additional wells coming on-stream during the next several weeks should further bolster the pronounced uptrend in the Company's overall production curve. Accordingly, the investment community has rewarded the Company’s winning strategy with a buoyant stock price, a liquid market for its shares and a Cdn. $12 million equity financing earlier this year.
During the past year, Admiral Bay has aggressively established itself as an emerging force to be reckoned with in the natural gas business, particularly in the development of coalbed methane. This is illustrated by the Company’s purchase of six projects covering more than 108,000-plus acres in the United States.
All told, the Company has drilled, reactivated and completed more than 58 wells throughout its U.S. projects, laid 30 miles of pipeline and built compression systems and taps into major pipelines at its Swordfish, Devon and Shiloh projects in the Cherokee Basin in southeastern Kansas. Admiral Bay is currently producing gas at its Shiloh, Devon and Quest projects and expects oil & gas production from its Swordfish project shortly. In particular,
Admiral Bay has completed all pipelines, tap and compressor facilities necessary to flow gas into Southern Star's major pipeline, from 24 of Shiloh's 35 wells. Until this new tap was operational, Admiral Bay had only 13 wells producing approximately 290 thousand cubic feet per day (MCFGPD) flowing into independent producer Quest Petroleum's gathering system. Production from these 13 wells had been constrained due to high line pressure in the gathering system. With the completion of this new tap/compressor facility and a new water disposal well, Admiral Bay will now be selling gas directly into Southern Star's 400 million cubic feet per day main pipeline and will have no further water disposal or pipeline constraints.
Indeed, it is Admiral Bay’s coalbed methane (CBM) initiatives, in particular, that have galvanized so much investor enthusiasm while also paving the way to a bright future. In fact, total recoverable proven, probable and possible gas reserves of 142-plus billion cubic feet (BCF) was recently estimated for just three of the Company’s projects — Shiloh, Devon and Swordfish. These figures were calculated by the well-respected Colorado engineering firm, Questa Engineering Corporation, and are based on an independent evaluation.
By way of background, it has only become technically feasible to economically extract coalbed methane from coal seams since the mid to late 1980s. This breakthrough has proven so successful in the U.S. that a few intrepid exploration companies have made fortunes, while also lining the pockets of their investors. Now Admiral Bay is well on its way to duplicating such success stories both in the U.S.
Coalbed methane’s growing appeal is particularly underscored by the recent advent of sustained cyclically high oil prices — a major impediment to reinvigorating a sluggish U.S. industrial sector. Hence, Admiral Bay is well-positioned among a shrewd and versatile vanguard of energy companies focusing on finding ways to meet a burgeoning demand for this alternative fuel.
In the United States, almost 10% of all gas now comes from CBM while approximately 9.5% of proven gas reserves are now in the CBM category. Development of the Canada’s CBM industry is not far behind.
Nonetheless, coalbed methane remains a term most people are unfamiliar with — just like the Internet was once an abstraction to all but a few. However, coalbed methane is just as likely to become as equally well-known within the next decade. That’s because of its status as one of the world’s cleanest burning fuels. And equally importantly, it is in plentiful supply in North America.
Moreover, much of U.S. industry and power generation is being converted from coal to gas because of its environmentally-friendly nature. This is also a global trend in that many industrialized nations seeking alternatives to imported fuels or “dirty” fuels are also turning to coalbed methane gas. Accordingly, the advent of the Kyoto Protocol’s impact on reducing airborne pollutants will no doubt add to its desirability.
So what exactly is coalbed methane? All coal contains a gas called methane. Throughout the history of coal mining, methane has been a problem. It’s deadly for miners underground. For years, methane had to be vented out of coal mines and released at the surface, where it could disperse harmlessly in the atmosphere.
That all changed in the 1980s when the United States federal government offered tax credits for safely extracting methane from coal. In part, this was aimed at reducing coal-mining hazards. But it was also precipitated by the realization there could be a market for methane as an energy source. Soon thereafter, the energy industry rose to the occasion by innovating technical breakthroughs in the extraction of coalbed methane.
These days, as the automotive industry scrambles to adapt internal-combustion engines to run on fuels other than gasoline — electricity, natural gas, methane — previously overlooked energy sources are finding new markets. Methane — particularly coalbed methane — is one of the leading alternative fuels.
Methane levels in coalbeds vary, depending on the characteristics of each coalfield. Admiral Bay is therefore working to maximize its coalbed methane opportunities by targeting those with the greatest potential in Kansas and Pennsylvania. Already, the Company is well on its way towards its 2005 development target of drilling 100-plus wells and having 150+ wells on-stream by the year’s end.
With a primary focus on the United States, the Company is also committed this year to amassing approximately 150,000 acres involving six gas projects in the Cherokee Basin in the southeastern corner of Kansas and the Appalachian Basin, covering the western third of Pennsylvania. All of those projects are in areas with current production and existing pipeline infrastructure, meaning far lower costs and investment than a start-up venture would require.
Drilling new coalbed methane gas wells and the re-activation of existing natural gas wells began almost a year ago in Kansas — in March 2004. Now, 58 wells are either producing or in the final stages of being connected to pipelines.
Significantly, the seven Admiral Bay projects in the United States have a potential resource of as much as 267 billion cubic feet (BCF) of coalbed methane (142 BCF Proved, Probable and Possible reserves on the Shiloh, Devon and Swordfish projects as reported by Questa Engineering and 125 BCF potential gas resource as estimated by the Company on the remaining project.
Admiral Bay has drilled and/or reactivated an 53 wells at the Shiloh, Swordfish and Devon Projects in southeastern Kansas. Twenty-four of the wells at Shiloh and Devon are already selling gas. Additionally, the Company is obtaining permits for at least 60 new wells as part of its ambitious drill programs for both Kansas and Pennsylvania.
One of the most prospective of
Admiral Bay’s U.S. operations is its Shiloh Project, located in the Cherokee Basin, northwest of the town of Chanute, Kansas, in the state’s southeastern corner. The project targets unconventional coal deposits and shales, as well as conventional sandstone reservoirs.
Conventional oil and gas wells in the Shiloh Project area have historically produced as much as 400 thousand cubic feet of gas per day (MCFGPD) and produced up to 70 barrels of oil a day. In fact, they often contain a combination of oil and gas. Admiral Bay has a 100% working interest in the Shiloh project.
Also at its Kansas Shiloh Project, Admiral Bay is now producing nearly one million (MCFGPD) into Quest Petroleum’s gas gathering system. For much of the past year, production at Shiloh has been restricted by high discharge pressure, which is limiting sales. But that is changing dramatically for the better. Admiral Bay has an agreement with Southern Star to sell gas into its major pipeline which crosses the property.
The Company also intends to drill up to six wells a month, while also expanding its acreage position in the project area. Currently, the project covers more than 8,000 acres. Such a scenario promises to produce an exponential growth in the Company’s cash flow.
Admiral Bay has an additional 30 wells permitted for drilling at the Shiloh project. The Riverton Coal, which covers the entire project area, has an estimated gas inventory in place of more than 315 standard cubic feet (SCF) per ton. (“Gas-in-place” is an estimation of the amount of gas in the location. In this instance, Admiral Bay estimates the Riverton Coal holds approximately 315 standard cubic feet of gas in each ton of coal.) Other coals which also cover the entire project area have estimated gas-in-place of between 50 SCF per ton and more than 150 SCF per ton. The Excello Shale and Mulky Coal have an estimated 48 SCF per ton.
Like its Shiloh project, Admiral Bay’s Devon project is also in Kansas and also in the Cherokee Basin in the state’s southeastern corner. However, it’s in Bourbon County, immediately east of the Shiloh project. Bourbon County is on the state line, bordering with Missouri. Like Shiloh, Bourbon targets both unconventional Pennsylvanian coals and conventional sandstone reservoirs. Gas quality is impressive[not really impressive], at approximately 950 BTU. Coal testing on several different seams from new wells drilled at the project indicates gas content from 100 to 200 SCF per ton.
The Devon project presents its own special challenges, even for a determined and savvy company such as Admiral Bay. Other companies working in the Devon area have not pursued or realized their gas production potential for a couple of reasons: the lack of takeaway capacity (takeaway capacity is how much gas a pipeline can move) and pipeline infrastructure. But the dynamic has changed, thanks to depletion of existing reservoirs and tight supplies. Existing gas wells in the area have flow rates up to 160 MCFGPD and produce up to 25 barrels of oil per day.
To date, Admiral Bay has drilled and completed 20 coalbed methane wells on this project, which encompasses more than 24,000 acres. As with most coalbed methane wells, initial production will be small, but expected to grow rapidly. Presently, 15 wells are dewatering from the coals and flowing gas into the pipeline at rates in excess of 160 MCFGPD. The Company is presently refracing a number of the wells with water only, to solve the problem of coal fines in the well bores. As an example, the Schaff14-15 was recently fraced utilizing water only and gas production increased to 21 MCFGPD, from just a minimal amount. This same problem is being seen by other operators in the area and is being solved by utilizing similar measures.
Admiral Bay is also acquiring permits for 30 additional wells at the Devon project as part of its work to increase its exposure to this gas-rich territory. The Riverton Coal covers the entire project area and has an estimated gas-in-place of over 150 SCF per ton. Other coals, such as the Aw, Rowe and Drywood deposits also cover the entire project area and have an estimated gas-in-place of 50 to over 150 SCF per ton.
The third Admiral Bay project in Kansas’ Cherokee Basin is the Swordfish project. It covers 34,000 acres in Chautauqua County. The Company has recently completed a joint venture with Charter Capital of New York to drill twelve wells on the project, a rate of two per month. Under the agreement, Chater will pay 100% of the drilling and completion costs, to earn 50% after payback. All wells are in the process of being completed. However, Admiral Bay is presently waiting for the purchase of right of ways in order to lay pipelines and complete the first six wells drilled under the agreement with Charter Capital Corp of New York. Admiral Bay expects operations to resume in August or September.
In addition, there are two existing wells that are being re-activated on the property. The Lemert #1 is a conventional gas well that had an absolute open flow testing of 310 MCFGPD and estimated gas-in-place of 1.335 BCF with approximately 0.943 BCF of recoverable reserves. Noah #1 is also a natural gas well and has reported absolute open flow test results of 245 MCFGPD. Its reserves are currently unknown. Historically, wells in this area have produced up to 6,000 MCFGPD of gas and up to 200 barrels of oil per day.
Further east, in Pennsylvania, we find Admiral Bay’s highly promising Revloc project in Cambria County. The project lies on the eastern flank of the Appalachian Basin and targets coals of the Pennsylvania Alleghany and Pottsville groups. There are approximately five to seven coals, two to seven feet (0.6 to 2 meters) thick. Existing pipelines are already in place. They either pass through Admiral Bay’s acreage or run right next to it — either way, they’re easily accessible.
Notably, current gas prices for Pennsylvania coalbed methane are $1.00 to $1.50 above the New York Mercantile Exchange (NYMEX) spot price. The Company currently holds a 100% working interest in 6,900+ acres in the project area. Admiral Bay is also actively negotiating on additional acreage positions in the Revloc area. Meanwhile, the Company is starting out with three initial test wells for this project. Admiral Bay has been informed by the drilling contractor that drilling is expected to begin in late August. The initial test wells target Allegheny and Pottsville coals that are low volatile in rank and have an estimated gas content, based on State of Pennsylvania publications, 450 standard cubic feet per ton. Admiral Bay plans to core the coals for testing purposes and complete them as coal bed methane wells.
At Revloc, Admiral Bay plans to obtain permits for two natural gas test wells to be drilled in late March/early April. Those two wells are test wells, designed to collect data on gas-in-place and determine the best completion methods. The State of Pennsylvania’s reports indicate wells in Cambria County have, on average, potential for over 450 SCF per ton and then later in the summer the Company will drill horizontal extensions on the wells. Admiral Bay is targeting seven coal seams at less than 335 meters (1,100 feet). And the Company continues to acquire additional acreage in the project area.
Investors should also take note that Admiral Bay’s accomplished and savvy management team is the main driving force behind its emerging success. Steven Tedesco is President and Chief Operating Officer. He recently replaced Mr. Mark Brennan, who moves to Chairman of the Board of Directors.
Mr. Tedesco is widely regarded as one of North America’s leading authorities on the exploration and development of coalbed methane. A certified petroleum geologist, he benefits from more than 24 years of experience in coal mining and 14 years of expertise in the realm of coalbed methane exploration and development. A key element to his successful track record is his role as the founder of Atoka Geochemical Services Corp., which is the parent company of Atoka Coal Labs — a leading service provider to the CBM industry. Notably, Atoka developed a unique geochemical tool for the petroleum industry that has resulted in numerous oil and gas discoveries.
On a corporate note, Admiral Bay is very well-financed and has no debt. And a recent Cdn. $12 million equity financing will ensure the Company’s ability to accelerate the implementation of its shrewd business strategy. This entails growing into a mid-tier gas producer over the next two years with production from in excess of 300 wells and a land position with much untapped potential totaling more than 200,000 acres.
Investors will also be encouraged to know that a number of these projects can be relied upon to generate near-term cash flow. At the same time, the Company will continue to aggressively explore in largely underdeveloped, gas-rich project areas with proven potential. SmallCapMedia believes that this is a surefire formula for success — one that promises to build intrinsic value into the Company’s share price while also offering investors considerable near-term “blue sky” potential.
From a technical perspective, the Company’s share price has been establishing an ascending trendline since the beginning of the year on good daily volumes. The advent of excellent results during the first seven months of 2005 should continue to underpin the share price's exponentially growing intrinsic value. With approximately 42.48 million shares outstanding (57.13 million fully diluted), the Company also offers the type of liquidity that attracts quality investors, particularly “blue chip” institutional funds. Such a situation should ensure that the Company earns a reputation as a “rising star” within influential circles in the investment industry.
SmallCapMedia therefore believes that Admiral Bay is still undercapitalized considering its many winning dynamics. However, the advent of continued positive news flow is also expected to continue to fuel the upward trajectory of the Company’s share price in 2005 and beyond. Accordingly, we firmly believe that Admiral Bay is poised to impressively outperform most of its peers in the oil and gas sector, as well as the broad markets, during the next 24 months.
