Investors Guru Small Cap Stock Observer - Mon, Jun 7, 2010

(TSXV: PMI) Raymond James likes Petromanas Energy

It's very rare for oil majors to find targets that can host multi-BILLION barrels of oil, or TRILLIONS of cubic feet of gas (and I thought trillions was reserved for US budget deficits).

It's even more rare for a junior oil company to get access to this kind of target. But recent research reports by Canadian firms Raymond James Ltd. Canada and GMP Securities have profiled Petromanas Energy (TSXV: PMI) as a well funded junior who could outdo the majors in finding a huge oil resource in 2011.

What's more, they're finding it in onshore Europe - where there is little political risk, in a proven oil basin.

In a research report dated May 28, 2010, Raymond James initiated coverage on Petromanas Energy (TSXV: PMI) with an Outperform 2 rating and a $1.33 target. GMP released their coverage on June 1st 2010 with a similar buy rating and a $0.80 target.

Part of the story is that Petromanas has a large land package - about 6500 square kilometres. So if they are successful in finding commercial oil, they could, in theory, replicate those discoveries in many development wells over a large area.

But part of the story is also the sheer size of the prize. An independent technical report has estimated that one, shallow $5 million well could find a resource of 150 million barrels of oil. Wells in Canada and the US by contrast that cost $5 million, in say, the highly prolific Bakken formation of North Dakota, might be 1 million barrels.

So just how big is the prize? Raymond James uses a resource estimate of 6.1 billion barrels, which they risk at just 2% for an NAV of C$1,137 million, or C$1.33 per share which they use for their target price. GMP uses a bit of a different approach but with the same result, they use a total risked exploration resources of 224 million barrels of oil equivalent which they use for a base estimated Risked NAV of C$0.79 share.

What makes this story even more interesting is that a prize this big is found in Albania, onshore and in a stable European country. Raymond James compares the size of the fields in Albania to the politically unstable Kurdistan region of Iraq and fields in Saudi Arabia.

Excitement is building around Petromanas due to the close proximity of Bankers Petroleum which pioneered modern oil and gas activities in Albania with a huge discovery in 2007. Petromanas has a massive land position on the doorstep to Bankers.

Lastly, Raymond James has an interesting way of valuing these plays. They look at the size of prospective resource, in barrels of oil, the company is chasing, as outlined by an independent engineering company. Then they divide that into the enterprise value - so if a company has a $100 million enterprise value (market cap- cash) and the target is 100 million barrels, then it has a value of $1 per prospective barrel in the ground. RJ values Petromanas at 3 cents per prospective barrel, compared to peers Vast Exploration and Longford at 79 and 36 cents respectively.

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