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TXCO Resources is a Hidden Gem


TXCO has many oil and gas plays in its portfolio that hold significant potential value...

On Wednesday morning, TXCO Resources (TXCO) put out what I would consider to be a very positive operations update. As you will recall, I wrote a short note titled "Wall Street is Missing the Big Picture" a few weeks ago on TXCO as I feel there is much value in the company not reflected in the current stock price. Given the new data Wednesday, I thought I would take the time to walk through some different oil and gas plays to highlight some of the more important data points:

Glen Rose

Back in the 4Q of '06, TXCO reengineered the way it drilled the Glen Rose in an effort to improve recoveries. It didn't work and production tanked (and the stock price with it). TXCO reverted back to the old way it had been drilling wells but Wall Street has been waiting to see evidence that the problem was indeed mechanical and not due to the reservoir. The only way to verify this is to see production ramp back up. It appears production did indeed increase each month in the 2Q, going from 1,475 barrels a day in April to 2,175 barrels a day in June. These Glen Rose wells produce an average 131,000 barrels of oil over the life of the well and pay for themselves after only 41,000 barrels of production, using a conservative $50 number for oil, so they are extremely profitable to say the least. TXCO has hundreds of identified locations to drill.

San Miguel Oil Sands

TXCO and its partner, Pearl Exploration and Production (PXX.V on the CDNX), are now on the third cycle of a cyclic steam injection program. Each phase (steam, soak, and produce) raises the temperature of the oil sands a little higher, which allows oil to flow better. Remember, Conoco (COP) had this acreage back in the early 1980s and produced 160,000 barrels of oil (over 50% of the oil in place) during a pilot project, so there is no question of whether or not the oil is producible. This oil is very heavy and will probably require a $15 per barrel discount to West Texas Intermediate. Even so, the project could be widely successful given its seven to ten bln barrels of oil in place basin-wide and its strategic location of less than 150 miles to 70-80% of the heavy oil and coker capacity in the United States, where much of the heavy oil is sourced from places like Venezuela. TXCO and Pearl are moving forward with a second pilot program that will target 7,500-10,000 barrels of gross production by this time next year.

At a recent conference in Calgary, Pearl stated that it hopes to move 250-350 mln barrels of oil from the San Miguel into its reserve report by the end of the year based on the results they have seen. The market has been paying about $1 per barrel for non-producing oil sand assets and $4 per barrel for producing oil sand assets. This would value Pearl's San Miguel acreage at $250-350 mln using the non-producing multiple. TXCO has three times as much San Miguel acreage as Pearl, which would put the valuation north of $750 mln, or almost twice what TXCO's market cap is today.


The Pearsall shale is an over-pressured shale play in the Maverick basin that TXCO chose to partner with on with EnCana (ECA). EnCana paid TXCO $80 mln for its acreage in the Maverick basin and is currently drilling its first horizontal well in the Pearsall shale with TXCO. While it appears that it got itself stuck on its first attempt at going horizontal, efforts are being made to drill a second lateral leg. I would also note that Anadarko (APC) has picked up several hundred thousand acres just south of EnCana and TXCO and has drilled five vertical wells and permitted one horizontal well in the past six months. While it is still early, something has two of the largest natural gas producers very excited about the Pearsall shale, where TXCO has approximately 100,000 net acres. I am looking forward to seeing the results of these early wells in the next few months of what could be a very exciting shale gas play.

TXCO has other oil and gas plays in its portfolio that also hold significant potential value, including its Marfa basin play where Quicksilver (KWK) and Carrizo (CRZO) have acreage nearby as well as in the Fort Trinidad area north of Houston, where Chesapeake (CHK), Devon (DVN) and EnCana are all targeting the prolific Deep Bossier. TXCO currently has a record eight rigs operating on its Maverick acreage and several upcoming catalysts through the end of the year as it continues to make progress on the Pearsall and San Miguel plays, which makes them one of the more exciting energy plays.
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