21st Century Energy Centers Could Take the Bakken by StormSource: Emerging Growth LLC
Link: Yahoo! July 25th, 2014
The Bakken formation was initially described by geologist J.W. Nordquist in 1953, but didn't become widely exploited until recently with the development of new horizontal drilling and hydraulic fracturing ("fracking") techniques and technologies. In April 2008, the U.S. Geological Survey estimated that the amount of technically recoverable oil in the Bakken formation might now be as high as 3.0 to 4.3 billion barrels.
Despite producing more crude oil than any state except for Texas, North Dakota has only a single refinery that processes about 60,000 barrels per day, producing about 28,000 BBL/Day of diesel, which has forced the regional economic area to import more than half of the diesel it requires. Diesel prices in the state are also among the highest in the nation at $4.00 to $4.50 per gallon compared to about $3.80 nationwide.
In this article, we'll take a look at Quantum Energy Inc. (QEGY), who aims to solve the problem by developing Energy Centers near the Bakken formation in order to produce diesel fuel and eliminate the inefficiencies.
Quantum Energy plans to build a network of “21st Century Energy Centers” near rail transload facilities that would strip natural gas liquids, refine crude oil for locally produced diesel, and recapture carbon dioxide. Management anticipates that each facility will include a 20,000 BBL/Day micro refinery capable of producing 6-7,000 BBL/Day of diesel, a 100,000 BBL/Day natural gas liquids stripping facility for barrel value enhancement and propane production, and a carbon recapture capability for downhole recovery enhancement.
Recently, the company announced plans to construct its refineries using a design modeled after the refinery nearing completion in Dickinson, North Dakota. That refinery, known as the Dakota Prairie Refinery, is a joint venture of Calumet Specialty Products Partners LP (CLMT) with MDU Resources Group Inc. (MDU) and is expected to begin operations during the fourth quarter of this year. Demand for diesel in the Bakken area is estimated to be approximately 75,000 barrels per day. With the two refineries (Dickinson and the proposed Fairview) supplying about 7,000 barrels per day each, there is still ample room for expansion in the market.
Management anticipates that the each of its refineries will generate annual EBITDA in excess of $120 million and employ at least 100 full-time employees, upon permitting and completed construction. The entire process could take as little as 18 months from permitting to build out, according to management, along the same lines as the other refinery that is nearing completion. Total project completion times are expected to be in the 24-27 month range.
Quantum Energy trades with a market capitalization of about $23.7 million, according to OTC Markets, suggesting that the market isn't fully aware of or has not priced in its ambitious plans. While the company will require debt or equity financing to complete the energy centers, existing shareholders could benefit from dollar-cost averaging by purchasing as the projects move forward.
The likelihood of the projects moving forward may also be higher than investors would expect. With extensive experience as an M&A securities attorney, Chairman & President Stanley Wilson is experienced in raising the necessary capital. Regulators are also likely to be onboard with the projects given that they could reduce energy costs for famers and other voters in the area struggling with high prices.
In effect, the largest remaining barriers deal with the land zoning and acquisition. It is a very positive sign that the Dakota Prairie project has already successfully tested the market. Many of these small communities in eastern Montana and western North Dakota would benefit greatly from the influx of stable, high paying jobs that these refineries would bring. As long as the market demand is there to support the projects it would seem to make sense for all parties concerned.
Quantum Energy trades at a fraction of its potential valuation if it is successful in building even one of its planned network of micro refineries. With a successful refinery already in place serving as a model, the company only has land zoning and acquisition hurdles to clear before its 18 month build process can begin, which means that there are many potential near-term catalysts for investors.
On June 19th, the company also executed a Letter of Intent for the acquisition of 400 acres near the city of Baker in Fallon County, Montana for the development of a micro diesel refinery capable of producing 20,000 barrels per day. The facility would supply diesel and propane within a 100-mile radius, cutting back on the need for these products to be transported from out of state to meet local demand.
Finally, the company has also been on the receiving end of a lot of favorable press as of late, including stories appearing in Reuters. The national news coverage could help increase exposure for the firm's stock and ultimately bring its valuation in line with its future potential, while also ensuring that it maintains a high profile within the local communities where its operations are planned to begin.
- Company Website
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