Wednesday, January 9, 2008

Birchcliff Drilling Natural Gas Wells in Canada

Not too many years ago, Seymour Schulich told my colleague Eric Reguly to do what he was doing, and buy Canadian Oil Sands Trust. Units were around $5.
Eric didn’t listen to one of Canada’s most successful investors. Canadian Oil Sands is now at $38. Eric gets all bent out of shape when we bring it up. Which we do, frequently.

Now, I’m in the same position. Mr. Schulich, who has given away more money than most of us will make in 10 lifetimes, put out a short news release this week announcing he’d raised his stake in Birchcliff Energy. He now owns 19 per cent of a junior play with a $700-million market capitalization. So Mr. Schulich got a call: What’s up at Birchcliff?

The reply offers an insight into the investment philosophy of a very successful investor-entrepreneur.
First, Mr. Schulich respects the management team. Birchcliff CEO Jeff Tonken has had his ups and downs, but Mr. Schulich admires the fact that he founded Stampeder Exploration in 1987, and sold it a decade later for $1.3-billion.
Second, Mr. Schulich sees an angle. Birchcliff is just starting to drill natural gas wells on properties adjacent to fields owned by EnCana. Canada’s biggest player in natural gas has been exploring here for years. EnCana has already found all sorts of reserves.

The final and most interesting point for those interested in energy markets is that Mr. Schulich thinks we’re at or near the bottom on natural gas prices. He’s patient money. He says gas could easily go sideways for some time. But three years out, he sees natural gas fetching far more than it does today.
Birchcliff did a $100-million financing back in September at $3.80 a share, led by GMP Securities and Scotia Capital. The stock’s been rising ever since. Mr. Schulich says his average cost per share is around $5.
Birchcliff closed Tuesday at $7.49 on the Toronto Stock Exchange. Mr. Schulich fearelessly predicts it can hit $50 over the next few years, as gas reserves are proven and commodity prices rebound. I can’t buy the stock, ‘cause I’ve now written about it. I’ll have to mention this one to Eric.

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