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Pulse Oil Corp: THE INVESTMENT CASE
INVESTMENT OVERVIEW

The dream team behind Canada’s Pulse Oil may have a potential 10-bagger

Investors see future windfall as the firm employs modern oil recovery methods to try to unlock oil trapped in two Nisku reefs in Bigoray.
Pulse Oil President Drew Cadenhead and Pulse Oil CEO Garth Johnson
INVESTMENT OVERVIEW: PUL The Big Picture
The Dream Team: Pulse Oil President Drew Cadenhead and CEO Garth Johnson

Calgary-based oil and natural gas producer Pulse Oil Corp. (CVE:PUL) is laser focused on unlocking a fount of oil from “a low-risk, high upside” oil patch using modern oil recovery methods that don’t require pricey drilling.

Started in late 2017, Pulse Oil’s most prized asset spans 10,000 acres of oil-rich land in the Bigoray area of West Central Alberta. Bigoray is home to at least four different geological formations, which are a wellspring of oil.

The company’s second oil producing asset is in the Queenstown area of Alberta, in Canada.

Pulse Oil has a special weapon in two TAG Oil alums —  finance wizard Garth Johnson and crack exploration geologist Drew Cadenhead.  

The Dream Team

The Pulse oil management team has strong street cred built over decades in the tough-as-nails oil industry. With Pulse Oil, the duo is hoping to repeat the success they had with TAG Oil, which they built to a near C$700mln market cap firm from a financially distressed C$2mln low point.

Maybe it’s hard-wiring but financially detail-oriented Pulse Oil CEO Garth Johnson is disciplined about unlocking shareholder value. It is reassuring for investors that Johnson has a well-laid out CEO track record for creating value, reducing costs and expanding into growth markets.   

After joining TAG Oil as CFO in 2001, Johnson became the CEO six years later, presiding over tumultuous change. He took over a stalled non-producing minority interest explorer, and over eight years put a plan in place to catapult TAG’s C$2mln market value by 300x.

“We are taking all the good stuff we learned from TAG. We are pretty determined to put our cash to work on the things with the largest potential for returns,” said 44-year-old Johnson.

“As a low-cost operator with no debt, we are implementing the same operational strategy at Pulse Oil that we employed at TAG. What we do is capture strategic assets, unlock the bigger picture upside and increase value for shareholders.”

Quintessential oil explorers, Johnson and Cadenhead are bitten by the “building bug.”

“Drew and I are both builders. We had lots of employees at TAG who had options, many of them cashed in their stock options, paid off their houses and built a nice life for themselves. That’s why we started to build again,” said Johnson. “We are going to work hard, have fun. Hopefully those that trust us with their investment dollars will be well rewarded for it.”

At Pulse, Johnson is sticking to his “numbers have to make sense” approach, while toggling the risks involved in operating in the energy industry. The other half of the duo is geologist Drew Cadenhead, who is president and chief operating officer at Pulse Oil. Cadenhead, has 37 years of experience in the oil and gas industry, and brings a utility belt of technology solutions, so together the partnership is tough to beat.

“Drew is technically diligent, while I’m financially diligent,” Johnson quipped. “We’ve worked together for over 15 years.”

Bigoray oil discovery windfall       

In late-2017, Pulse Oil acquired neglected assets at Bigoray in west central Alberta that consist of the Cardium oil pools, the Mannville gas pools, the Pekisko oil pool and the Nisku oil pools. Pulse brought back production that had been shut off during historical low commodity prices in 2014.

The Nisku pools alone are estimated to contain 26.51 million barrels of petroleum initially in place, of which 9.3 million barrels of oil have been recovered by employing secondary water-flood recovery techniques.

“Although the acquired lands include proven reserves from different geological formations, the main reason Pulse acquired these assets was to tap into the oil still trapped and easily recoverable from one of the zones: the Devonian-aged Nisku Pinnacle reefs,” said Cadenhead.

“The Nisku Pinnacle Reef trend is a series of over 50 small, but incredibly profuse oil pools centered on Pulse’s land at Bigoray. These reservoirs were formed over 400 million years ago, when Central Alberta was situated near the equator and the seas were warm,” explained the geologist.

According to the company, each of the 50 pinnacle reefs in the Bigoray oil fairway contain 10 million to 50 million barrels of sweet light crude. Pulse says 10% of that oil will gush out simply through drilling a well. But the real money lies in Pulse’s plan to employ enhanced oil recovery (EOR) techniques using what’s called a “miscible” flood to recover the remaining oil.

For the layman, sophisticated EOR techniques using “miscible flooding” involve pumping in a solvent followed by a gas, which loosens up all the remaining oil in the reefs, so it can be sucked out from the bottom of the reservoir.

Watch: Pulse Oil Corp kicking off 'exciting' phase 1 of Bigoray asset

Pulse’s EOR project relates only to the Nisku D and Nisku E reef pools.

“By bringing immediate cash flow from restarting existing behind pipe production, we are funding our EOR plan in the Nisku D and E pools, a low-risk operation with tremendous upside,” pointed out Johnson.

Mostly self-funded

Pulse Oil says the final phase of the EOR project at the two Nisku reefs will require nominal capital investment. Most of it will be self-funded, although a small part might be raised through debt.

“Modern techniques will ensure early cash flow once the floods are in place, but we still need capital to get things rolling. We hope to make that happen this year. It will cost 3 million to 5 million Canadian dollars in hardware and re-configuration per pool, and 5 million Canadian dollars to acquire the miscible product per pool to be injected into the reservoirs, and later recovered and re-sold,” said Cadenhead.

“If our pools achieve the average 80% recovery rate that the other pools surrounding us did, we should recover an additional 10 million to 12 million barrels of oil. We internally put an NPV10 on that much oil at about 200 million Canadian dollars,” he added.

Pulse Oil has roped in oil-field services giant Schlumberger Ltd (NYSE:SLB) to complete all three phases of the petrotechnical modelling of the two Nisku oil reefs ahead of the miscible flooding.

“We’re not waiting for funding. We are financing the initial stages with our own working capital and cash flows. Bigoray comes with some assets which we have activated, and they are generating cash,” said Johnson. 

READ: Pulse Oil awards modelling contracts to Schlumberger ahead of enhanced oil recovery from Bigoray oil reefs

He indicated that production would expand to 500 barrels of oil equivalent per day (boe), from 200 boe by the summer. 

“That will help us fund a chunk of the EOR program. We’ve awarded three projects to Schlumberger, so they are completing our petrotechnical modeling for the miscible flood, the geological model and reservoir simulation work,” said Johnson.

Adding value to gas

The company said it will tap its own gas supplies for the enhanced oil recovery program. The Bigoray oil patch comprises at least three gas producing wells.

“The EOR technique requires gas to push the miscible product through the reservoir so instead of producing gas when prices aren’t attractive, it may be more valuable for us to focus on oil right now. We can save our gas to utilize for injection into the top of the reservoirs,” said Johnson.

“As you push the gas through the reservoir it picks up liquids, so you might inject it at a value of a dollar. But when you produce it in a couple of years it has picked up oil, so you are selling gas at premium when you strip the oil from the gas.”

Undoubtedly, there are tremendous value-adding opportunities for Pulse.

“It’s sort of like storing our gas for now and producing it later at a higher price,” said Johnson. “It’s a money smart way of using our gas asset.”

Quick pay back in Queenstown  

Pulse Oil’s other asset is in Queenstown and requires shallow drilling. There are five producing wells with 75 barrels of oil equivalent per day.     

“Bigoray kind of dominates the conversation when you are talking about upside, but the Queenstown assets are fantastic, spanning 30,000 acres of land between a proven Canadian sedimentary basin,” said Johnson.

Queenstown has proved to be propitious, swinging into production from day one. “We’ve enjoyed quick payback on the costs. It’s a really good cash flow producer,” said Johnson.

Potential 10-bagger

Pulse will complete its first full fiscal year as a public company in 2018. It’s currently positioned with no debt, positive working capital and growing cash for reinvestment.

Mackie Research rated the stock a Speculative Buy and targets C$0.50 for the shares — a long way from where they are now at C$0.18. The brokerage said there was "massive, low risk upside" from the miscible flood.

The broker assumes an 80% oil recovery rate, which is the average oil recovery accomplished by oil producers in the area.

“With a recovery factor equal to the average of 80%, we see upside value potential of C$177 million (C$2.01 per share),” Mackie analyst Bill Newman wrote in a note to clients.

“As most of the infrastructure is in place, the miscible flood project requires a relatively small investment per Nisku Reef providing massive upside without the risk and significant cost of an extensive horizontal drilling program,” noted Newman.

With oil prices rallying after a prolonged slump and Pulse Oil’s production expanding to 500 boe/d by this summer, the analyst expects the company to generate significant cash flow that can be reinvested into the EOR program currently underway.

“The potential upside from a successful Nisku reef EOR project is so large that we expect substantial stock price appreciation (i.e., 10 times upside) even if the miscible flood achieves expectations at the low end of the range," wrote Newman.

Enough technical studies show that the scale of the oil discovery in Bigoray is large, and commercially recoverable. No wonder Cadenhead describes Bigoray as the “biggest find” of his nearly four-decade career: “It is without a doubt, the lowest-risk/highest upside opportunity we have ever come across and I’ve been in the oil business since 1979.”

 

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