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TXCO Resources: Wall Street Is Missing the Big Picture


...there is a lot of value for longer-term investors in TXCO.

TXCO Resources (TXCO), one of my favorite energy stocks, has been trading very heavy these past few weeks. I think Wall Street is missing the picture here.

TXCO has an oil sand asset in Texas that I think is worth several times where the company is trading at today. TXCO partnered with Pearl E&P (PXX on the Toronto Exchange) on the San Miguel Oil Sands asset in the Maverick basin in South Texas because of Pearl's heavy oil expertise. At a conference in Calgary this past week, Pearl gave a presentation and discussed the San Miguel in a very optimistic manner stating that the pilot wells were producing 60-70 barrels of oil/day and it was moving ahead with an accelerated development program.

Pearl also said it expects to "move 250-350 mln barrels" into 2P reserves from the San Miguel" at the end of the year. According to my comps, oil sand assets are selling for about $1/barrel for non-producing assets and $4/barrel for producing assets.

TXCO has three times as much acreage in the San Miguel as Pearl. Using the lower end of Pearl's estimate they will book into reserves at year end (250 mln barrels), and multiplying by 3x gets you 750 mln barrels of reserves. Multiply that by $1/barrel and you get a value of $750 mln. TXCO's market cap is only about $350 mln. TXCO has also stated that it expects to be producing 10,000 barrels a day of oil from its San Miguel oil sand asset by this time next year. If you stick a "producing" multiple on potential reserves, the valuation quadruples!

Still, folks look at me like I am from Mars when I talk about oil sands in Texas. Conoco (COP) had the San Miguel acreage back in the early 80's and spent $50 mln on a science project using primitive (by today's technologies) steam injection to produce 160,000 barrels of oil over 2.5 years with a 50% recovery of oil in place. A SPE Paper was written on this in March 1983 by Conoco titled, "The Street Ranch Pilot Test of Fracture-Assisted Steamflood Technology" for those who want to do additional research. At the time, oil was $20 so the project did not go forward, but Conoco projected a 7% rate of return using a $9 differential. That was at $20 oil!!!

I think there is a lot of value for longer-term investors in TXCO. For those that are interested in learning more about this company, please see two articles I have previously written on TXCO: How to Invest in Unconventional Energy and Getting Your Arms Around an Unconventional Play.
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Position in TXCO

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