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Energy Winners: Gulfport Energy

Last week ended with a rally for energy stocks on the combined effect of President Obama's offshore drilling plan and the price of oil rising above $85. The energy rally continued Monday, with the sector up by 1.6% in the afternoon and oil rising to its highest level in 17 months, near $87.

(Gulfport Energy story updated for Monday stock performance)



) -- Last week ended with a rally for energy stocks on the combined effect of President Obama's offshore drilling plan and the price of oil rising above $85. The energy rally continued on Monday, with the sector up by 1.6% in the afternoon and oil rising to its highest level in 17 months, near $87.

One energy sector winner from last week that was continuing its run on Monday was

Gulfport Energy

(GPOR) - Get Gulfport Energy Corp Report


Still, Gulfport Energy's share spike was due to events taking place far away from OPEC countries and the U.S. offshore drilling locations. Specifically, Gulfport was rising for the third consecutive day on Monday because of oil sands acreage in Canada.

Gulfport was up more than 4.5% on Monday, or another 62 cents, to above $14. Gulfport shares hit a new 52-week high intra-day on Monday, at $14.35. Last Thursday, Gulfport shares had begun trading at $11.30.

Most of the oil and gas drilling plays were up by decent gains on last week, between 2% and 4% gains on Wednesday and Thursday. The gains among the well-known drillers were led on the last day of trading before the Easter holiday by

ENSCO International


, up close to 5%.

ENSCO shares were up close to 3% on Monday, too, though short of the level of Gulfport Energy's continued rally. What's more, ENSCO's gains last Thursday were nothing when compared with the one-day 20% gain in shares of Gulfport last Thursday.

Gulfport's gained $2.18 on Thursday. There were close to 1.3 million shares of Gulfport Energy traded on Thursday, versus an average daily volume of shares traded under 300,000. Trading of close to 600,000 Gulfport Energy shares on Monday afternoon was still week above its average daily volume.

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many energy investors are hunting for the next big offshore oil plays, investors were banking on an eventual initial public offering in the oil sands as they drove up the share price of Gulfport Energy.

Last Wednesday, far from the U.S. capital markets, Canada's

Athabasca Oil Sands

raised $1.32 billion in its initial public offer, or $18 a share for the 19% of the company's Alberta-based oil sands holdings that were included in the IPO company.

It wasn't just Canada's biggest IPO, but the oil sands company was the largest IPO of 2010 in North America, according to



Gulfport's gain on the Canadian IPO is not the first time that the U.S. energy firm -- which owns a 25% stake in Canada's privately held

Grizzly Oil Sands

-- popped on oil sands news out of Canada. However, the post- Athabasca IPO spike for Gulfport is by far the biggest spike the U.S. stock has had in reacting to Canadian energy market plays, analysts said.

All the action in Gulfport's share price is related to its 25% stake in Grizzly Oil Sands, an exploration company similar in profile to Athabasca, though Grizzly is at an earlier stage of development.

At the end of 2009, PetroChina paid C$1.9 billion to buy stakes in Athabasca oil sands acreage adjacent to Grizzly Oil Sands holdings, and the price paid led to a gradual surge in Gulfport shares. Gulfport shares climbed from under $10 to over $12 by the end of January.

last Thursday's one-day gain in Gulfport Energy shares was equal to the action that took place over a month in December.

"It's clear there is an appetite for oil sands IPOs. This is one of the best oil sands deals we've seen," said Neil Dingmann, analyst at Wunderlich Securities. The Wunderlich Securities analyst noted that Gulfport's management has talked about an eventual spinoff of Grizzly Oil Sands at the right price. The majority owner of Grizzly Oil Sands is private equity firm Wexler Kronen Capital.

"It worked out much better than expected and now people are thinking they should mark Grizzly to market based on the IPO," said a second energy analyst. "Clearly, this is all about the IPO. Sure oil is up and offshore drilling is getting press and the whole group is getting a rally, but that wouldn't warrant a 20% pop," the analyst added.

Wunderlich estimates that Gulfport's oil sands acreage would be valued at $600 million based on the Athabasca initial public offering, or over $14 per share.

Even before the Athabasca IPO, C.K. Cooper analyst Sven del Pozzo estimated the value of the Gulfport oil sands holdings at $443 million, or $10.28 per share. The C.K. Cooper analyst only gave Gulfport credit for half that share price, or $6, in his financial model supporting at $14 price target. The C.K. Cooper share value for Gulfport based on proven reserves is $8.

The gap between the oil sands potential and the risk-based financial model discounting that potential is what has led the successful IPO to send Gulfport shares higher.

There is good reason to discount the full potential of the oil sands, too. "It's a shot in the dark, and not all oil sands acreage are created equal," said the C.K. Cooper analyst. "They still need to drill and take core samples and find out what's there," Del Pozzo said.

What's more, it might be several years before Grizzly Oil Sands reaches the stage of development at which Athabasca went public. While it is conceivable that Grizzly could go public at an earlier stage of development, to assume that it will receive the full value based on the $18 price commanded by Athabasca in its IPO, Grizzly would have to go public after more positive drilling results -- one analyst estimated the date could be two years off.

"Oil sands exploration requires lots of core hole drilling and a fair amount of upfront capital is involved," explained the energy analyst. "The value is there, definitely, it's a question of how much forward are you paying up for it, and maybe 20% is getting a little ahead of itself," the analyst cautioned.

Wunderlich, which wrote last Thursday that the oil sands could represent as much as $14 in Gulfport share price, does not model any of that potential into its current $16 price target.

-- Reported by Eric Rosenbaum in New York.


>>Offshore Drillers: Look, Before You Go Deep

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