Bottom of the Barrel: Drilling Into Real Resources

Rapid Pace

Its rate of production could increase more quickly than even the optimists expect. Real Resources expects to drill about the same number of wells as last year -- 110 to 120 -- and it has a better understanding of its land plays. As a result, the company may find better oil and gas yields with each prospect.

Although history is no guarantee of future results in the oil and gas business, 80% drilling success doesn't happen by luck. Real Resources appears to have a good exploration and drilling team that can choose high-potential prospects and execute. If wells continue to go its way, production of 7,500 BOE/D by the end of 2003 is not out of the question.

That would translate into cash flow of about C$2.00 per share, even assuming oil and gas prices decline to the mid-$3.00 range and oil prices to the low $20s. At today's prices, cash flow could be nearly $3.00 per share at a 7,500 BOE/D run rate.

With a conservative multiple for the cash flow results, the stock could trade close to C$6.00 per share, compared to Wednesday's closing price of C$4.98.

Getting Real Real Resources grows through the drillbit
Year	Revenue (in millions, CDN)	Earnings per Share
2000	$31.90	$0.47
2001	41.60	0.40
2002E	44.60	0.29
2003E	59.30	0.41
2004E	67.40	0.44
All dollar amounts in Canadian Source: Peters & Co., Company Reports, TSC Research

Canadian Concerns

As with any oil and gas exploration company, risks include the failure to find anything during exploration, the potential for commodity-price declines that make production less profitable and the possibility of technical delays in a drilling program.

Moreover, Real Resources only trades on the Toronto Stock Exchange, making it slightly more challenging for a U.S. investor to buy. It has a market cap of just under C$100 million and trades only about 30,000 shares per day. Therefore, building a position can be difficult and the stock will undoubtedly be choppy.

I give it two barrels and place it in the special situations portfolio. (For an explanation of our barrel rating system, see our description.)

Stampede

It isn't summer, so there was no Calgary Stampede, but 16 RealMoney subscribers showed up for happy hour this week during my visit to this energetic city. We had a fabulous time discussing oil and gas markets, among other topics. Thanks to those who attended and to Peters & Co. for their hospitality this week.