SUPERNOVA ENERGY, INC. OTC: SPRN

Transcription

1 ANALYST S RATING: STRONG BUY SUPERNOVA ENERGY, INC. MARKET DATA INDUSTRY Energy STOCK SYMBOL SPRN SUPERNOVA ENERGY, INC. RECENT PRICE (OCT. 30, 2015) $ 1.00 SHARES OUTSTANDING (OCT. 30, 2015) FREE 6.82 M 1.32 M FISCAL YEAR END Dec. 31 Supernova Energy, Inc. () is an independent, US oil and gas exploration company with a difference: a strategy that makes it one of the most interesting plays for investors attracted to the sector. Specializing in low cost-of-recovery drilling operations, Supernova currently produces high quality oil and gas from wells in Kansas and Kentucky. Supernova plans to grow output aggressively by taking advantage of recent market conditions, which have made acquiring leases in known oil and gas formations economical. HIGHLIGHTS Independent oil market worth $800 billion. Leases in proven productive zones. Operations in low acquisition and extraction cost areas. Low-risk operational strategy. Dependable production even at current low cost per barrel. Poised to increase production by 800% or more. CONTACT INFO Supernova Energy, Inc. 153 West Lake Mead Parkway, Suite 2240 Henderson, NV Phone: ceo@supernovaenergyinc.com In addition to this report, refer to public Glenmark SEC Filings Capital and Financial Corp. Statements #4 for full disclosure East 3rd at Street North Vancouver, BC V7L 1E9 1

2 HIGHLIGHTS INDEPENDENT OIL MARKET WORTH $800 BILLION LEASES IN PROVEN PRODUCTIVE ZONES OPERATIONS IN LOW ACQUISITION AND EXTRACTION COST AREAS LOW-RISK OPERATIONAL STRATEGY DEPENDABLE PRODUCTION EVEN AT CURRENT LOW COST PER BARREL POISED TO INCREASE PRODUCTION BY 800% OR MORE OVERVIEW The potential returns on small cap oil exploration can be attractive but nerve-wracking for investors. After putting huge amounts of capital into acquiring drilling rights, developing infrastructure and sinking a well, sometimes the only thing investors are rewarded with is a deep, dry hole in the ground. Supernova Energy, Inc. () is an independent, US oil and gas exploration company with a difference: a strategy that makes it one of the most interesting plays for investors attracted to the sector. Specializing in low cost-of-recovery drilling operations, Supernova currently produces high quality oil and gas from wells in Kansas and Kentucky. Supernova plans to grow output aggressively by taking advantage of recent market conditions, which have made acquiring leases in known oil and gas formations economical. When other small oil producers are scaling back, Supernova is moving forward. Its production strategy- -avoiding risk by using new technologies on shallow oil wells--increases well output while minimizing cost of production, and avoids the uncertainty of sinking new wells into unproven ground. This strategy protects Supernova from the failure rates of other small cap exploration companies. Instead of striving to become one of the largest independent oil and gas producers in the nation, Supernova s strategy is to become one of the most dependable producers in the country. We think this strategic emphasis positions Supernova to deliver exceptional returns now and over the long term. 2

3 PRODUCING OIL BY EXPLORING FOR LEASES According to the US Energy Information Administration: Five states and the Gulf of Mexico supplied more than 80%, or 6 million barrels per day, of the crude oil (including lease condensate) produced in the United States in Texas alone provided almost 35%. The second-largest state producer was North Dakota with 12% of U.S. crude oil production, followed by California and Alaska at close to 7% each and Oklahoma at 4%. The Gulf of Mexico produced 17%. 1 On top of exploring for oil and gas, Supernova explores for great deals on oil leases. In essence, an oil lease is an agreement between a property owner and a production company that grants the company access to the property and rights to the oil and gas they extract. By focusing acquisitions and exploration on areas with proven reserves, Supernova minimizes risk and maximizes the return on every dollar spent in exploration. The company searches for leases in areas that will allow for economical acquisition and production, even with oil at the low prices we ve seen in It s that low cost that makes leases far less expensive today than in Supernova lets the big operators work in these areas, concentrating its own exploration efforts in Kansas and Kentucky--while looking for opportunities in neighboring states like Tennessee, Oklahoma and Colorado. These are the areas where Supernova believes there are many high-value, low cost acquisition opportunities. Given the current lower price of oil per barrel, these leases are available at a discount to their historical value. Investing this way, Supernova can expand while maintaining a low debt-to-revenue ratio. As of 2015, it holds leases comprising nearly 2,000 acres and more than two dozen well sites. Supernova s target is to reach 200 barrels of production per day by the end of 2016, increasing production every quarter between now and then. Supernova is a maverick in the oil and gas exploration industry: It is risk-averse. To remain competitive regardless of fluctuation in the price of oil, Supernova has adopted three guiding principles: To diversify risk by acquiring working interest ownership in multiple leases in oil and gas producing formations between 500 and 6,000 feet deep as opposed to several miles underground. To partner with qualified experts who know the local areas to facilitate the acquisition and exploration of Supernova s assets. To engage in lower cost exploration, utilizing state-of-the-art technologies with a minimal monthly operation cost-to-production ratio. 3

4 By targeting known oil producing, yet underperforming leases, and applying new exploration technologies to increase their production, the company seeks cash flow normally associated with higher risk projects, without exposure to high risk failure rates. The company makes acquisitions based on three key criteria: low cost of acquisition; depth of formations that enable low cost of drilling and exploration; and areas with state and local governments that are friendly to oil operations. That is another thing we like about Supernova its emphasis on being a good neighbor wherever it operates. To be a stable, dependable, long-term independent producer in these areas requires a commitment to environmental responsibility and engaging the local population not to mention its shareholders into its vision. UNDERSTANDING INDEPENDENT OIL AND GAS EXPLORATION The oil and natural gas industry is made up of two types of companies: independent and integrated producers. Integrated oil companies are often household names, like Exxon Mobile and Chevron. In addition to exploring for and producing petroleum, integrated oil companies have complex operations that take the product from the wellhead to end user. They refine, market and distribute a range of petroleum distillates and products. The business of being an independent producer, like Supernova Energy, is much more straightforward. An independent simply explores for and produces crude oil, so when their wells are producing oil, they are making money. They sell the oil they produce as a commodity, at market rates. The IRS specifically defines an independent as producing less than 50,000 barrels per day and less than $5 million per year in retail sales. While there are about 50 public integrated producers, there are more than 500 publicly traded independent oil and gas companies, and thousands of privately held businesses. Some independent companies might own and operate a dozen or fewer wells; other independents are much larger. The Domestic Energy Producers Alliance and industry group representing independents estimates there are more than 18,000 independent producers. They drill 95% of US oil and natural gas wells and account for 67% of US production. 2 Taken together, the US independent market is huge, representing well over $800 billion in value. 3 4

5 Source: U.S. Energy Information Administration, based on Evaluate Energy database According to the US Energy Information Administration: Five states and the Gulf of Mexico supplied more than 80%, or 6 million barrels per day, of the crude oil (including lease condensate) produced in the United States in Texas alone provided almost 35%. The second-largest state producer was North Dakota with 12% of U.S. crude oil production, followed by California and Alaska at close to 7% each and Oklahoma at 4%. The Gulf of Mexico produced 17%. 4 For independent companies in the oil and gas exploration and production industry, profitability is a function of sinking new wells and increasing production from existing wells. Research from the U.S. Department of Energy shows that spending on exploration and development throughout the world increased by $18 billion in 2013, while spending on property acquisition fell by $17 billion. 5 Supernova takes a different approach. Its investments are skewed toward properties that are known quantities, rather than on true exploration and developmental drilling. 5

6 DRAMATIC CHANGES IN THE US OIL PRODUCTION MARKET GOOD FOR SUPERNOVA Drillers have begun reducing rigs in big shale regions, including the Permian Basin in Texas and New Mexico, the country s highestproducing region, as well as North Dakota s Bakken Shale and the Eagle Ford in south and east Texas. But shutdowns in other, less productive and emerging areas will likely be more widespread... Another area that will definitely see cuts is the Mississippian Lime, said Michael Rowe, an analyst at Tudor Pickering Holt. Located in Oklahoma and Kansas, the play is comprised of a basin roughly the size of West Virginia.... The upside is that [exploration companies were] able to buy property in the area on the cheap, perhaps for as little as a few hundred dollars an acre... [compared] with tens of thousands of dollars per acre in parts of the Permian when oil prices were at highs. 7 A comparison of recent headlines will give you a sense of how dramatically things have changed in US oil production. In early 2014, Francisco Blanch, the head of Bank of America s commodity research, reported that annual investment in US oil and gas hit a record of $200 billion in In October of 2014, Bloomberg (among other financial news outlets) ran headlines like: Oil Slump Means Canceled Projects as Investment Declines. By late January of 2015, we read headlines like this one from CNBC: Oil fields at risk: Where the slowdown has begun. In that same article, however, there was reason to be excited for companies like Supernova, with a disciplined approach to investing. The key to Supernova Energy s success will be extracting oil on those newly inexpensive leases in a similarly inexpensive way. The fact that oils prices fell dramatically between July 2014 and July 2015 seems to have had little effect on projected oil demand. According to the 2015 edition of the BP Energy Outlook 2035, global demand for energy is exp ected to rise by 37% from 2013 to 2035, or by an average of 1.4% a year. 8 The IEA predicts that oil demand will increase to nearly 100 million barrels per day by

7 IMPROVEMENTS IN MINING TECH LED TO OIL BOOM IN US Supernova Energy uses the same advanced techniques that turned the USA into an oil giant. Consider this: In 2008, US oil production stood at 5 million barrels a day. By 2013, the country was producing more than 9 million barrels a day. 10 That growth continued to the point that in July 2014, the USA overtook Saudi Arabia and Russia as the world s largest crude oil producer, when the USA s daily output was in excess of 11 million barrels a day. 11 So what changed? The International Energy Agency answered that question definitively in World Energy Outlook 2012, which stated that the increase in U.S. oil and gas production was driven by upstream technologies that are unlocking light tight oil and shale gas resources... Using traditional vertical technology, there comes a time in the life of an oil well when the cost of extraction makes further production unprofitable. Conventional extracting practices leave about 60 percent of the oil trapped in rock. Petroleum trapped in sandstone or shale formations is called tight oil. (Similarly, shale gas refers to natural gas resources that are locked up in tight geological formations.) Successfully unlocking this oil could give access to nearly 300 billion barrels, according to International Energy Agency estimates. Tight oil plays accounted for 22% of the U.S. total of proved reserves of crude oil in To get at petroleum in shale formations requires advanced techniques like horizontal drilling and hydraulic fracturing. These techniques have substantially decreased the cost of finding producible oil and natural gas. Oil wells in shale formations are not necessarily vertical meaning boring a hole straight down into the ground. Advances in drilling technology have enabled operators to drill horizontally. As we reported, Supernova specializes in shallow wells, drilled into permeable stone formations. Let s assume Supernova is drilling into a 500-foot section of petroleum-rich shale. In a vertical well, the well would contact the section for 500 vertical feet, releasing whatever pockets of oil or gas that were in line with the bore hole. By using horizontal drilling, Supernova can drill laterally through the shale, cutting across many more pockets of oil thus making oil extraction commercially viable. Prior to horizontal drilling, Supernova might have had to sink multiple wells to access different areas of the formation. 7

8 When horizontal drilling is combined with another advanced technology, hydraulic fracturing or fracking production from shale can be super charged. 13 Simply put, hydraulic fracturing works by breaking up rock formations in a well with pressurized fluid. This fluid could be pressurized water mixed with sand and/or certain chemicals. The sand or chemicals prop the cracks open so the gas and oil flow freely. Fracking was introduced in the 1940s, and by the end of the 1990s, it was successfully applied on a wide scale to shale gas extraction. 14 For the past 10 years, fracking has been combined with horizontal drilling to set millions of barrels of domestic oil free. Source: U.S. Energy Information Administration, based on data from various published studies. 8

9 SUPERNOVA S LEASE HOLDINGS The majority of Supernova s oil and gas projects are located in what is called the Mississippi Lime Play (MLP), in southern Kansas. The MLP is shallow, highly permeable, highly porous and rich with high quality oil and gas deposits. It lies beneath some 6.5 million acres in northern Oklahoma and southern Kansas. Beyond the geological advantages of the MLP, this region is ideal for Supernova for its low drilling and service costs, existing infrastructure, and history of local production know-how. The Kansas portion of the MLP also offers favorable lease terms and readily available water and water disposal formations all of which are important in containing the cost of hydraulic fracturing. Supernova has acquired 11 leases covering 1,840 acres that contain 27 oil and gas well sites on the MLP. In Kentucky, Supernova s leases are in Devonian Black Shale country, again, rich with gas and oil, and featuring similar advantages of the Kansas lease holdings. KANSAS LEASE HOLDINGS: Asmussen Lease: Butler County, KS, 80 acres Producing wells: Asmussen 16-3 Salt Water Disposal: Asmussen 16-2 Ownership: 35% WI Sanders Lease: Butler County, KS, 160 acres Producing Wells: Sanders #5 & #6, Salt Water Disposal: Sanders SWD #3 Ownership: 35% WI Harrel D Lease: Pratt County, KS, 160 acres Producing Well: Harrel D #3 - Salt Water Disposal: Harrel #2 Ownership: 70% WI Keyes A Lease: Pratt County, KS, 80 acres Producing Wells: Keyes A #1 Salt Water Disposal: 0 Ownership: 70% WI Keyes B Lease: Pratty County, KS, 160 acres Producing Wells: Keyes B #1, #2 & #3 Salt Water Disposal: 0 Ownership: 70% WI 9

10 Larrison Lease: Pratt County, KS, 160 acres Producing Wells: 0 Salt Water Disposal: 0 Ownership: 70% WI Mason Lease: Pratt County, KS, 220 acres Producing Wells: Mason 1, 2 & 3 Salt Water Disposal: 0 Ownership: 70% WI Thompson Lease: Pratt County, KS, 40 acres Undeveloped 2015 Moon Lease: Cowley County, KS, 40 acres Producing Well: Moon Salt Water Disposal: Moon 1SWD &2WD Ownership: 20% WI Holt Lease: Cowley County, KS, 560 Acres Ownership: 30% WI KENTUCKY HOLDINGS: Antle Lease: Russel County, KY, 140 acres One well drilled Slugger 1 waiting completion Ownership 87.5% NRI Antle lease: Farm out drilling contract signed for up to an additional 10 wells. OIL MINING IN KANSAS The Kansas oil and natural gas industry is an economic engine that generates nearly $4.3 billion each year, and sends more than 118,000 Kansans to work each day. 15 Kansasstrong.com The region in Kansas were Supernova operates was considered tapped out by vertical drilling decades ago. 16 Advanced extraction technology has changed all that. Since the emergence of horizontal drilling combined with hydraulic fracturing in the mid-2000, production in Kansas has grown steadily. In 2014, Kansas operations produced a total of 49.5 million barrels a 20 year high in production. 17 Despite the slump in oil prices, production in Kansas remains high 18 as a result of the characteristics of the Mississippian Lime Play (MLP). It has become one of the major tight oil plays in the US exploration market because it is relatively shallow. Compare this to the Bakken Shale Play, arguably the most well-known tight oil play, which lies under Eastern Montana and Western North Dakota. That play contains an enormous amount of oil and gas, but as the Independent Petroleum Association of America explains: Production per well in [the MLP] may sometimes average less than other plays, but countering these lower production numbers are the advantages of lower well costs and increased access to infrastructure. The Mississippian Lime remains one of the nation s more active plays

11 Extracting oil from the MLP costs less than from Bakken for a number of reasons. First is access to infrastructure. There had been decades of vertical drilling in the Mississippian Lime region in the 20th century, so the area has existing infrastructure in place. The preexisting vertical wells are also a bonus. They can be used as starter bores for horizontal drilling as well as for catchments for waste water produced in hydraulic fracturing. The rock itself is carbonate, which is easier to fracture than shale. 20 Finally, and perhaps most importantly, the oil in those rocks is closer to the surface often 3,000 to 6,000 feet down where Bakken requires wells to go down 9,000 to 10,000 feet to hit oil. 21 SandRidge Energy one of the largest independent producers holds more horizontal drilling permits in Kansas than any other company. It estimates the region to have 15 billion barrels of recoverable oil. And according to CNN, its wells are hitting oil 100% of the time. 22 Given that, it is easy to see why we like Supernova s focus in Kansas. Source: Oilindependents.org OIL MINING IN KENTUCKY Currently, Supernova also has a lease in the Devonian Black Shale region of Kentucky. Considering the advantages this state has, it would not be surprising to see the company expand its lease acquisition strategy there. Kentucky has a successful history of oil production leading all the way back to Although hardly a blip on the radar of major oil producing regions, Kentucky has more than 12,500 producing oil wells as of The University of Kentucky s Geology Survey estimates there to be more than 3.4 billion barrels of oil beneath the state

12 Wells in the area are shallow in fact, the first producing well in the state was a mere 171 feet deep. 25 The cost of drilling here is among the lowest in the United States, according to a study by the US Bureau of Land Management. 26 Most wells in this region can recover oil at depths of less than 2,000 feet. Currently, it s less expensive to drill and operate in Kentucky than in other states. Nationally, the average cost of developing a well was more than $3.5 million or more than $570 per foot, according to the US Energy Information Administration. 27 In Kentucky, the cost is less than a tenth of that. 28 Considering the lower costs, Supernova calculates the potential return of capital investment in as short as 12 to 24 months. Source: Kentucky Geological Survey IN IT FOR THE LONG TERM As beneficial as advanced mining techniques have been to oil production in the US, they are not without controversy. Supernova Energy s strategy of being a stable, longterm producer relies not only on technology, but also on how they use that technology. The company has taken a strong stand on operating in such a way as to be seen as a beneficial part of the communities where it operates. In the world of independent oil production, being a good corporate citizen is a strategic advantage. To enhance its stature as a positive contributor to local communities, the company is committed to using local production resources, creating high paying jobs and increasing the value of the local workforce by transferring skills and technological know-how to the people they employ. Because oil extraction can happen in populated areas, Supernova has developed processes that minimize disturbances that may be caused by operations. The same holds true for the company s environmental commitment. Supernova has invested in the most modern technologies and techniques to safeguard clean, clear drinking water reserves. Over and above regulatory compliance, Supernova adheres to a rigorous environmental policy and sound management practices, under which it continually assesses and monitors its environmental performance, including in relation to climate change. 12

13 GROWTH STRATEGY Supernova Energy intends to benefit from lower acquisition costs, while avoiding significant, long-term exploration costs. Its primary growth strategy is therefore based on acquiring majority ownership in leases with historical production or minimal current production. These leases enable the company to re-enter and re-work the existing wells for what is known as secondary recovery. The advanced processes they use will vary based on the opportunities presented at each site, but will likely include deepening, acidizing or fracturing wells to increase production. The company encourages local operators to maintain a small stake in the leases, ensuring they have a vested interest in the success of each lease. By acquiring multiple small to medium size leases ( acres with drill targets of 2-15 wells per lease) Supernova will mitigate risk from any single lease that might underperform. The company also plans to invest in higher risk leases under a model of minority ownership. This strategy will position Supernova to participate in larger oil fields and more extensive drill programs, while shielding itself from significant exposure in these opportunities. The practical goal is to steadily increase daily production, enabling the company to evaluate leases in real time and consider the global economy, price of oil verses the cost of exploration, and lease acquisition costs. By the end of 2015, Supernova forecasts producing barrels/day. By following a disciplined investment strategy, the company expects to achieve aggressive production increases of barrels per month, leading to 200 barrels per day by the end of

14 Low oil prices and economic growth have helped drive up consumer demand for energy across the world in a phenomenon seen from U.S. gasoline stations to Chinese auto dealerships... The [International Energy Agency] said world demand for oil would increase by 1.4 million barrels a day this year, 300,000 barrels a day faster than it previously forecast, to a daily average of 94 million barrels this year. Global demand in 2014 was about 92.6 million barrels a day, the IEA said. 29 MARKET OPPORTUNITY: OIL FUELS THE GLOBAL ECONOMIC ENGINE The current low cost of oil is leading to increases in demand. A June 11, 2015, article in the Wall Street Journal illustrates how current low prices may lead to steady increases in oil prices sooner rather than later. It s hardly surprising. Oil is the only practical energy source for supporting commerce. Every form of wide scale transportation of people and goods relies on oil and that fact will not change in the near future. MANAGEMENT Kevin G. Malone, Director, President, Secretary, CEO and CFO Mr. Kevin G. Malone has been Chief Executive Officer, President, Chief Financial Officer and Secretary of Supernova Energy, Inc. since December 15, He has served on the board of US Highland Inc. since February Prior to joining US Highland, Mr. Malone had worked in the financial service industry since From March 2009 through October 2012, Mr. Malone served as head trader for R.F. Lafferty & Company, Inc. From January 2006 until March 2009, Mr. Malone worked in the same capacity at Westminster Securities Corporation. From December 2002 through January 2006, Mr. Malone worked for Aegis Capital Corp. RISKS AND UNCERTAINTY The major risk factor Supernova faces is having adequate financing to realize its lease acquisition goals. Having said that, often the best predictor of future performance is past performance, and Supernova has been successful in raising funds for its projects so far. The company has long term relationships with funding partners, but this is no guarantee of future funding. Individual lease performance correlates to the experience of the operators, drillers and pumpers that execute exploration and provide service needs. Here too, the company has had long term successful relationships in place. The strength of local resources will remain a critical factor is selecting lease acquisition targets, which should mitigate this risk. 14

15 CONCLUSION We believe Supernova Energy has the right model to achieve its production goals. We also believe that the price of oil is destined to rise. Both of those factors make SPRN a strong buying opportunity from our perspective. Baron Nathan Mayer Rothschild, the 18th century British nobleman and member of the famous Rothschild banking family, is credited with saying, The time to buy is when there s blood in the streets. He followed that advice and made a fortune. The price of oil has been bloodied lately. This seems like the perfect opportunity to follow Baron Rothschild s advice. 15

16 Par.7160.File.dat/KY_RFDS_R2.pdf Par.7160.File.dat/KY_RFDS_R2.pdf