One of my top CBM picks that I recommended in Secret Stock Files at $0.38, is now trading at $2.50 - a 560% gain. If you picked up 100,000 shares at my original recommendation, you'd sitting on a cool quarter million bucks. Not bad!
Another of my coal bed methane picks is up 1,645%. And I still think that both stocks still have a lot of room to run.
That's the beauty of these tiny stocks. We get in at basement bottom prices, way before they pop up on anyone's radar screen, and ride them for major profits as they begin the steady march toward production.
Now we're at it again.
New Recommendation
Pacific Asia China Energy TSX:PCE
Pacific Asia China Energy TSX:PCE is a coal bed methane company operating in China. Known as PACE, an acronym for Pacific Asia China Energy, the company has signed two Production Sharing Contracts and two Memorandum of Understanding (MOU) Agreements involving 4 projects with 20 trillion cubic feet of potential methane.
As you know, China has massive energy needs. Its GDP growth has been in excess of 9%, and the government plans on doubling the country's GDP by 2010.
As a result, China is eager and willing to develop its coal resources. And that's how Pacific Asia China Energy got involved in Chinese CBM extraction, by signing an agreement with the Chinese government.
The landmark agreement, signed in Beijing on September 20, 2005, made PACE the first Canadian company to partner with China to help explore and develop its vast CBM resources.
The deal is between the company and state-controlled China United Coalbed Methane Corp. (CUCBM) to jointly prospect for coalbed methane in China's Guizhou province.
CUCBM has exclusive rights to joint-venture with foreign companies on CBM exploration. CUCBM hopes to produce an incredible 10 billion cubic meters of gas annually by the year 2010.
It's a 60/40 deal, with PACE providing the cash and expertise for their 60% interest in the property.
China needs help in finding and developing these resources. And they looked west, to the best in the business, to help them do it.
Already, China is the largest consumer of coal, and produces 1.6 billion tons per year. Coal fired plants are responsible for 75% of Chinas electricity, with only 2% coming from natural gas. The government wants to increase gas usage to 8% of the total by 2010.
There's a big push from the government to use cleaner energy sources.
And CBM fits the bill. Conventional gas sources are declining, and China has vast amounts of coal. CBM has been proven in the US and Canada as a viable alternative to conventional gas sources. In Alberta alone, there were 3000 CBM wells drilled last year.
Busy Bees
CUCBM has been busy developing China's CBM resources.
Since last year the amount of drilling has gone way up. Just like Canada is behind the US in CBM, china is way behind Canada in CBM.
Thing is, the door is closing for Western firms. Right now, there are a total of about 26 western companies in various stages of CBM development. The most advanced is already producing gas from a coal mine.
Most don't even have MOU's, let alone production sharing agreements.
Basically, CUCBM has to demonstrate to the Chinese government that Coal Bed Methane is a viable business and energy source. To a large extent, they've already done this.
At any rate, CUCBM wants to become more like China Offshore Oil...they want more money. And as a result, fees are going up. You simply won't see any more 60/40 deals like PACE has.
CUCBM is basically a clearing house for China's CBM assets. In a way, the country is asset rich and expertise poor.
But you can bet, as these things progress, they'll be less willing to do deals with outside firms, and as they learn how to exploit the deposits, they'll look to do so themselves.
Before I go any further, let me quickly tell you about two of PACE's projects.
Guizhou
The Guizhou project is located in the province of the same name, in Southwest China. It's a major coal producing region with well developed industry and, of course, a large population.
The CBM concession is about 950 square kilometers in a known coal district. The 60/40 deal means CUCBM finances their 40% interest.
The Quingshan Basin, where the concession is located, is estimated to hold 20.5 billion tons of coal, and 5.8 trillion cubic feet of gas. These estimates are based on extensive work done by the Chinese coal bureau, with 400 holes being drilled.
The project comprises 80% of the basin, and has the potential to host more than 4 trillion cubic feet of gas. By the way, 4 TCF is the equivalent of 800 million barrels of oil.
The coal exists in 7 to 12 seams varying in thickness from 10 to 15 meters. On top of that, the coals are relatively shallow, at less than 1,300 meters below surface. Based on current data, the coals have a very high gas content.
All of the current data has been reviewed, and the company plans to select six drill targets and drill four to six holes by April of this year. Once permeability and reservoir conditions have been determined, a pilot program will be initiated.
Huangshi
The Huangshi project is in the Hubei province in central China. It sits in a primary coal producing region with well developed transportation, infrastructure and gas pipelines.
Huangshi is 300 square kilometers, and the coals have an average thickness of 1.5 meters, with a very high gas content. The coal bureau estimates 1 trillion cubic feet of gas in place.
Once the company completes the mapping of the coals, they'll select 3 to 5 drill locatiosn to determine gas content and permeability. From there a test drill program will be started to determine producability.
This property actually sits only one kilometer from the pipeline, and within a population of 5 million people. Although not as far along as the Guizhou project, Huangshi also has incredible potential.
Driving The Market
The next step for PACE, which I'll get into a bit of detail on in a moment, is to begin a drilling program to determine the coal characteristics. The company is going to drill what's called slim holes to determine this, starting in March.
As you know, the steady march toward production can bring with it simply massive share price appreciation, like we've seen with our other CBM plays.
Right now, Pace is in the early stages.
Once the company has finished the slim holes, they'll command a much higher valuation because much of the uncertainty over the characteristics of the coals will be gone. Further, the company will be able to determine exactly how to run the production tests.
By the end of this year the company will begin pilot testing, which will prove commercial viability. But before that happens, we'll see an incredible amount of news from the company as they get a better handle on the engineering and geology.
The key is that once the slim holes are finished, the market will likely revalue the company with a significant jump in the valuation.
There's no question the gas is there....the company already knows the coals have a very high gas content. Ultimately, this project is going to be more of an engineering situation than anything else.
As an example of the gas content, the coal mining outfit surrounding the property has had explosions during mining because of high gas concentrations. In one incident, 12 miners were killed.
This area is the second most prolific area in China, and the amount of data that the company has from CUCBM is another major plus.
The property has six known coal seams. When the initial gas resource calculation was made for the basin, which amounted to 4 trillion cubic feet, it was based on only two seams.
Plus, only about 40% of the basin has been tested, which means it's probably only going to grow.
Surrounding the area is about 235 million people, representing a massive underserved market for natural gas.
Ace In The Hole
PACE signed a Joint Venture agreement with Mitchell Drilling to own 50% of Mitchell's business in China.
Now, Mitchell is a well-known, world-wide drilling company out of Australia. This company works almost exclusively for large companies, and has a reputation of being absolutely top-notch in drilling and completion. They also happen to have a proprietary technology which they've been using with great success on CBM wells.
Bottom line is, the company is one of the best in the drilling field. And now PACE has them locked down in China. The benefits of this agreement are numerous.
To give you an idea of their expertise and efficiency, the firm is making CBM wells profitable at $2 per Mcf in Australia. Right now in China, PACE can sell gas for up to $8 per Mcf.
Of course, the company has a fantastic team of engineers who understand how to make money in the field. On top of that, this makes access to drill rigs a non-issue for PACE. And believe me, that's a big, big deal, especially considering the company plans to have 5 to 10 rigs going at one time, and wants to drill 1,000 holes.
Right off the bat, this is an income generating joint venture. From what I hear, nobody does it better than Mitchell. In fact, check the company out online at www.mitchelldrilling.com
Plus, a company like Mitchell, with its relationships and expertise, isn't going to be content with just one play. I fully expect this to plant the seed for future property acquisitions.
Next Up
Beginning in March, PACE will begin drilling the slim holes to verify existing data, determine the size and characteristics of the coal seams. Based on the results, the company will plan and locate its pilot test, probably at some point this summer.
Of course, once this happens the company will know what the production rates are, and most of the risk will be gone.
Then, at some point over the next several months, the company will begin to pursue a listing on the AIM in London as well as the AMEX in the US. As soon as the slim holes are finished, we'll see this pick up steam.
Of course, these listings will greatly increase the company's exposure to investors and access to capital.
All the while, we should see steady share price appreciation as the company, and the market, gets a better idea and a better handle on the property, and potential production rates.
Meanwhile, Sproule will be issuing a new resource report within the next few weeks, in all likelihood showing an increase of gas in place.
Value?
Based on other CBM plays we've seen, this one is a dream...just like Verona TSX-V:VDC. It's absolutely huge, and has the potential to continue to grow in size.
As we go through the next several months we'll have a better and better idea of the production rates and future upside.
Based on what we already know, however, I expect PACE to be another huge winner.
CUBBM estimates this basin has a total of 5.6 TCF, with the PACE property containing 4.5 TCF...an absolutely huge number.
Once the slim holes are complete and many of the resource and engineering questions have been worked out, the market has given, in some cases, a valuation of about $250 million per 800 billion cubic feet. Based on 33 million shares outstanding, that would be a value of about $1.5 billion for the company.
That would translate into a share price of about $42, all else being equal.
That's the potential we're talking about here.
Now, you should realize that these numbers are based on loose peer valuations, but they do reflect how the market values these monster energy deposits.
At around 4 TCF we're looking at 10 to 1 upside easily.
But when these things are this big you have to authenticate them...you've got to prove not just that they exist, but that they can be produced commercially.
That's where we are right now.
Now, having said all of that, this project is going to grow, and could even double in size. The province in which it lies produces 150 million tons of coal per year...so hold on to your hats.
The risk is largely gone. Just buy the stock, have patience and let it happen.
The bottom-line is Pacific Asia China Energy has great projects, great people, and $17 million in the bank. That sounds like a recipe for success to me.
- Mike Schaefer
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