Overview
The management team at Questerre has been active in Quebec since 1989 with their first well and have been extolling the value of the St. Lawrence Lowlands henceforth. With the recent advances in horizontal drilling technology and completion methods, a number of tight reservoirs and shale gas plays have suddenly become potentially economic. Questerre is among a handful of players in the St. Lawrence Lowlands of Quebec testing the commerciality of a giant gas discovery in the Utica shales.
Near Term Catalysts
With drilling underway with Forest Oil, Questerre is expected to release further information on IP rates in October 2008.
Questerre recently announced the results from the recompletion of it's Gentilly shale gas well in the St. Lawrence Lowlands of Quebec. The Gentilly well, where Questerre has a ~25% working interest, flowed more than 800,000 cubic feet per day over an 18 day period while still recovering frac fluid. Commenting on the results on the Gentilly #1 well, Dundee Securities analyst Victor Rodberg writes “When extrapolating out to a horizontal rate it is also reasonable to assume a 2-3x IP rate multiple over a vertical producer suggesting horizontal rates of 1,000 – 1,500 mcf/d or better. At these rates, we calculate the Utica shale play to be economic at natural gas prices ranging from US$8.00/mmbtu at 1,000 mcf/d down to as low as US$5.50/mmbtu at 1,500 mcf/d. This most recent longer term Utica test provides more comfort that indeed we have an economic shale play in Quebec.” These are good initial flow rates from a limited perforation interval in the Utica and have convinced plans call Questerre’s joint venture partner in this play – Talisman Energy to “add another frac to the testing program. This second fracture stimulation is now underway. Following an evaluation of the results of the second fracture stimulation, two additional fracs of the Lorraine shale will be conducted. Results of these Lorraine tests are expected in the fourth quarter.” (Questerre September 3, 2008 news release) The Lorraine shale sits on top of the Utica and can be up to 6,500 feet thick. versus the Utica which from 300 to 1,000 feet thick. “Early indications show that both the Lorraine and Utica rocks are thick, porous and appear brittle and over pressured, all of which are conducive to artificial fracture stimulation.” (Questerre September 3, 2008 news release))
Questerre is currently also drilling a well with Gastem to “test the shallow acreage of the Utica. We still consider this acreage exploratory at this stage and any success would be incremental to our current valuation. We expect to hear news in the fourth quarter.” (Dundee Securities report)
Valuation and Target Price
Victor Rodberg of Dundee Securities initiates coverage on Questerre with a Buy, Speculative Risk recommendation and 12-month target price of $8.25 per share. Rodberg’s target includes “$7.50 for the probabilistic value of the Utica assets in Quebec and $0.75 for the conventional assets in Western Canada using a standard EV/DACF multiple.”
Questerre is also covered by Wellington West analyst Kim Page who has a Speculative Buy rating and $8.75 target.
My Take: Purchase Strategy = Buncha Patience + Stink Bids
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