TXCO Resources (TXCO) reported its Q3 numbers after the close on Monday and also provided an operations update. This is one of my “hidden gems” that I believe will be a multi-bagger over the long-haul. Some of my take-aways:


Positives

• Pearsall: One of the vertical wells TXCO was drilling was producing 3mmcf/d of gas on an 8/64” (that’s small) choke. Apparently TXCO has to use heavy mud to control the well while drilling and is in the process of cleaning out the hole. Remember the Pearsall shale is “geopressured,” which essentially means twice the pressure of normal shale and twice the pressure can mean four times the volume of gas. The Pearsall shale play is one of the embedded call options in TXCO that I feel has great potential but that will need to be defined through continued drilling (it needs more data points to prove it up).
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• Glen Rose: TXCO’s porosity play continued to ramp production. I will be listening to the call for any additional details on the Schlumberger (SLB) study that was mentioned last quarter. I expect production to decline from the Glen Rose as it does every year as we get into hunting season.
  
  
• Ft. Trinidad / Deep Bossier: TXCO finally spudded its first Ft. Trinidad well, targeting the Glen Rose gas shoal, which is good news. More important, yesterday Encana (ECA) paid $2.5 bln for about 35,000 net acres in the “Deep Bossier” in East Texas. I would note that TXCO has 8,300 net acres in (it calls it Ft. Trinidad play) one county over from where Encana made its acquisition. While I believe the Deep Bossier play also exists on TXCO’s acreage, it may be on a deeper shelf. This may be the reason TXCO popped yesterday infront of its earnings. I will be looking for more information on the conference call.

Negatives

• San Miguel: The oil sands project continues to move slowly. The second pilot will not have steam generators until 2Q 2008, which is a disappointment. TXCO is going to use the exact same process Conoco (COP) used over 20 years ago in the same location. I expect the results to be the same, about a 50% recovery of the oil in place. The company still gets no credit for this asset.

TXCO is still one of my favorite names for the long haul (along with BPZ Resources (BZP)). The assets are enormous and will take time to delineate, but should be worth the wait for patient investors.

The call is today at 11AM EST and the call in number is (877) 387-9209 Passcode 20659382.