A Counterintuitive Stock Pick in the Mississippi Lime

We try to be counterintuitive when we look for tips for our Premium readers. We try to think outside the box. With that in mind, this week we have a company for you that you might not have thought of, but it’s got some massive acreage in the Mississippi Lime in Kansas, and we think it’s sitting nicely for a cash injection that would fund some ambitious drilling.

Petro River Oil Corp. (PTRC:OTCBB) could very quickly go from being something small and easily dismissed, to something very large.

While the company’s stocks aren’t trading much right now due to a reverse merger that was just completed, over the past year, its stocks have seen some impressive performance. In 12 months, the stocks went from under $0.03 per share to $0.33.

What we’re eyeing here is the potential of Petro River’s 100,000 acres in the Mississippi Lime. This is a lot of acreage for such a small company, and that’s why we think it’s positioned for a sweet joint venture deal that would provide the cash necessary for drilling.

The key fundamentals aren’t good right now, but we think that’s about to change.

•    Stocks were trading at $0.22 (close, 7 June), with a 52-week high of $0.56
•    Market Capitalization: $147.5 million
•    Shares Outstanding: 737.3 million
•    Revenue $6.2k
•    Earnings per share -$2.04

The Acquisition

In late April, Petro River Corp. (formerly known as Gravis Oil) acquired Petro River Oil LLC (Petro LLC), thus adding 115,000 gross/85,000 net acres to its portfolio with its Mississippi Lime acquisition. This adds to its acreage in Missouri, Kentucky and Montana (60,105 gross/40,591 net). It also acquired over 60 square miles of proprietary 3D seismic data on the acreage.

This set in motion a major recapitalization of the Petro’s debt and outstanding warrants. So, all outstanding debt, preferred stock holdings and warrants have now expired or been converted to equity. The deal saw PTRC agree to issue about 600mm restricted shares of its common stock in exchange for all of the outstanding secured promissory notes previously issued by Petro LLC. 

PTRC has also undergone some management changes, with Scot Cohen taking over as CEO and a couple of board members replaced. The end result is we think the new drivers at the wheel here will take the company in a promising direction.

The Mississippi Lime

For more than 50 years, the Mississippi Lime has been producing commercially from thousands of vertical wells. Now we want to see what it does with new drilling tech and horizontal wells, and this is why we’re excited about this play and Petro’s potential given its vast acreage here.

The Mississippi Lime covers around 17 million acres in Oklahoma and Kansas—that’s bigger than Bakken and much bigger than Eagle Ford.

The Mississippi Lime is a regional carbonate that is thick and oil-prone across much of the northern part of Oklahoma, giving it the potential to become the largest and perhaps the most productive horizontal oil play in the state. The horizontal Mississippian wells completed in 2010 were clustered mostly around the main area of production in Woods and Alfalfa Counties, and this acreage is dominated by Chesapeake and SandRidge. Production stats are not really revealing yet because there are only 17 wells with records. But what we really like is that this is an REAL OIL PLAY and oil accounts for about two-thirds of BOE production.

And of course, there’s a ton of infrastructure in this area, which we’ve droned on about perhaps excessively in the past two newsletter issues focusing on the Tuscaloosa Marine Shale (TMS) and the Haynesville Shale.

But here’s the best part: It’s not nearly as expensive to drill here as it is in the TMS or Haynesville, for instance. We’re talking about a much lower-tech operation that is simpler and more efficient that in competing plays. A horizontal well here only costs on average $3 million to drill—that compares to between $11 and upwards of $17 million elsewhere!

This means a rate of return upwards of 75%. That means the Mississippi Lime is probably the most economical in the US. So Petro won’t need that much of a cash infusion to get down to drilling, and then the rate of return will be fabulous.

Now let’s look at Petro’s acreage:

•    95,000 acres in East Kansas
•    100% working interest
•    3 to 5 year primary term leases with extensions (all leased in 2012)
•    70 sq. mi. proprietary 3D seismic
•    Potential for over 2,400 vertical and 600 horizontal drilling locations
•    Shell (NYSE:RDS), Encana (NYSE:ECA), Chesapeake (NYSE:CHK), SandRidge (NYSE:SD), Range (NYSE:RRC) offsetting Petro River’s acreage

Bottom Line: We have been following Chesapeake’s progress here for a while, and this is the obvious move, but let’s look at the less obvious Petro River, because despite its less-than-perfect financials, we think it’s ripe for a sweet JV deal and that the house is in order, so to speak, and the timing is now.