On February 10th, American Sands Energy Corp. [AMSE] provided an excellent corporate update regarding the engagement of Stifel, Nicolaus & Company as its exclusive investment banker and financial advisor. CEO, William Gibbs commented,
“We are excited to be working with Stifel. AMSE is approaching a pivotal point in our development as we work through the permitting process and move towards building our facility and beginning production. Stifel, with its expertise in the energy industry, is a significant addition to our team and we believe will be a great help in achieving our goals.”
I believe the retention of a full service investment bank with a strong reputation in the U.S. is a meaningful de-risking event. For those who don’t know Stifel Nicolaus, please consider the following,
“Stifel’s Investment Banking practice is principally focused on the middle-market. We have twelve industry-focused investment banking groups together with specialty groups providing coordinated financial sponsors coverage and private placement expertise. Stifel has extensive financial advisory and capital-raising experience, having completed over 3,100 public offerings, 900 M&A transactions and 400 private placements since 2000.”
Furthermore, progress towards the completion of permitting appears to be on track. According to CFO, Dan Carlson,
“We received the most recent comment letter from DOGM in early January. We are in the process of responding to the comments and expect to be resubmitting our application by the end of this week [mid February]. Based on the comments, and ongoing conversations with DOGM, the Company believes that we have met all their criteria and hope to finish the permitting process soon.”
I’ve written about American Sands Energy in the past and have routinely outlined what I believe to be the more significant risk factors. First on the list, in terms of timing, is the receipt of all the permits needed. As mentioned above, that risk factor appears to be fading. The second significant risk is obtaining financing for the processing facility. The amount of capital required was recently estimated at $123 million. That is a large figure, but represents the true amount needed to reach commercial production. On one hand, hiring Stifel, Nicolaus is an important step. However, one can not help but notice that the price of WTI Crude has fallen into the $50’s per barrel. Essentially, the oil price is a new risk factor, but one that could possibly be resolved as American Sands moves into production in about 2 years. In other words, I believe WTI Crude will rebound to $80/bbl or higher within 2-3 years i.e when the company should be really humming.
Having said that, the financing is expected to take place in 1h 2015. I still believe that an equity injection could probably get done at a significantly higher stock price after permitting is finalized and with the expert assistance of Stifel Nicolaus. Make no mistake, that capital round will result in meaningful equity dilution. Still, there remains tremendous upside once permitting and funding is in place, both likely in 2015. In my mind it’s a question of when, not if this ambitious project gets off the ground. As a reminder, a portion of the capital needed could come from non-dilutive sources such as project-level investments and equipment financing.
Therefore, this year could amount to a huge amount of de-risking from the completion of both permitting and a capital raise. Then, all eyes will turn to the building of the commercial scale facility to separate sand from the oil bitumen and the mining of ore. I would argue that getting permitting and funding done is a larger hurdle to clear then the mining and the construction of the 9,000/bbl per day facility. While the share price and crude oil price are disheartening, absolutely nothing changes the compelling story of the technology and the flowsheet. Recall that the oil sands in Utah are entirely different from the oil sands in Alberta, Canada. Upon reaching commercial production, operating expenses will be lower than that of the Alberta oil sand operations. Further– upfront capital per barrel of daily production will be a lot less.
That’s why Alberta oil sands companies are cutting cap-ex and people at an alarming and accelerating rate. Much of the oil sands in Canada have costs of $60-$80/bbl. American Sands announced in its February 10th update that its operating cost is estimated at $40/bbl of bitumen. Without going into too much detail, there are ample reasons to believe that global oil prices will rebound smartly in the next few years. Some analysts are calling for $80-$100/bbl crude, others still point to $50-$60/bbl crude in 2 years. Note, few if any analysts forecasted crude oil in the $50’s…
My view, shared by many pundits and analysts, is that much of the oil sands in Alberta will come offline if oil prices remain depressed, and that a significant portion of the U.S shale plays will start to slow as new capital will not be deployed. The shale plays won’t necessarily slow in the next few months, but it’s undeniable that at the current oil price, many planned wells in the U.S. will not see the light of day. Remember the shale oil plays start out strong but decline curves are very steep. In the first year alone, it’s not uncommon for a shale oil well’s production to decline by 50% or more. Therefore, a lot of newly drilled wells could keep supply at a high level for a period of time, but it’s a question of when, not if, crude oil prices rebound.
Finally, many observers of the oil market point out that a number of junior and mid-tier oil companies are carrying a lot of debt and are in serious trouble. When annual reserve calculations are made in March, investors will see a lot of write downs of high cost assets. Debt covenants will be breached. Finally, I should add that rig counts have already fallen dramatically in the U.S and elsewhere. To sum up, the oil price may remain depressed for the next 6-12 months, but the cure for low prices is….low prices. American Sands does not require a higher oil price for a least 2 years. Global demand for oil grows about 2% each year, which amounts to a few million barrels per day. The alleged over-suppy of crude in the markets today is pegged at 2-3 million barrels. As less capital is deployed for new and sustaining existing wells, the glut will be taken care of from natural oil well depletion matched with natural annual global demand of a few million barrels per day.