TORONTO () -- Mahalo Energy [TSX:CBM] is the latest energy company to tie its fortunes to coal bed methane (CBM).
CBM, the largest untapped natural gas reservoir in North America, was highlighted in a Resource Investor article.
It is created during the coalification process as methane becomes trapped in the molecular structure of the rock - hence coal is both the source rock and the reservoir. The methane is virtually identical to the gas produced from conventional sandstone reservoirs. Yet at the same pressure, much more gas can be stored in a coal seam than in a comparable sandstone reservoir.
CBM is produced by drilling conventional style gas wells. As the pressure is decreased, the gas molecules diffuse through the coal to natural fractures called cleats, then flow through these fractures to the well bore.
A potential drawback occurs if the CBM reservoir is water saturated. In such 'wet coals,' water must first be pumped from coal seams to reduce the reservoir pressure before the gas is released. As noted in the previous Resource Investor article, this process can take years. Disposal of the water, which may contain toxic compounds, is another issue.
Until the early 1980s, CBM was viewed as a hazard to coal mining as opposed to a potential source of low-cost natural gas. Tax breaks in the U.S. kick-started the industry, and high natural gas prices have drawn attention from both producers and investors.
Mahalo was created in April 2004 and completed an initial public offering in late July of this year that raised gross proceeds of just over C$50 million. As an indication of strong investor appetite in the sector, the company had originally planned to raise a maximum of only C$30 million.
Mahalo is currently producing 5.3 million cubic feet of CBM per day (mmcf/d, equivalent to 883 barrels of oil per day) and is aiming to exit 2005 at a rate of 10 mmcf/d.
Oklahoma
Current production is derived from three properties in southeastern Oklahoma. These properties are located within the Arkoma Basin, with CBM being produced from the Pennsylvanian aged (290 to 323 million years old) Hartshorne coals at a depth of 600 to 800 meters.
Mahalo and its partner, a company called Vectra CBM, have been drilling in the state since January and have completed 33 wells of a 48 well drilling program that it plans to complete in early December.
The Poteau property is approximately 130 kilometers southeast of Tulsa. Mahalo has a 50% interest in approximately 7,500 gross acres and has control of gathering lines and three compressors.
Both the Island and Shelton properties were purchased with the proceeds from the IPO. The Island property is located 100 kilometers south of Tulsa. Mahalo has an average 10% working interest in 20,480 gross acres of land, as well as all associated wells and facilities. The Shelton property is a further 10 kilometers to the south, with the company having a 48.9% working interest in 640 gross acres.
Keeping in the unconventional gas theme, Mahalo is also drilling for gas hosted in organic-rich shales. Two wells are planned to spud in the fourth quarter on the Island property.
The target is the Caney shale, a 130- to 150-feet thick unit found at a depth of 3,300 to 3,600 feet in the Arkoma Basin. This shale is believed to be the equivalent of the Barnett shale, arguably the hottest gas shale play in the U.S. The Barnett shale occurs within the Forth Worth Basin in north eastern Texas, and is the same age (Mississippian, 323 to 354 million years old) as the Caney shale but is deeper (7,000 to 8,000 feet) and generally thicker (200 to 300 feet).
Alberta
In Alberta, Mahalo is exploring the 'dry' Horseshoe Canyon and the deeper, 'wet' Mannville coals.
The Mannville prospect is located in the Corbett Creek field northwest of Edmonton. A total of 5 horizontal wells are planned for 2005 and a further 15 wells expected in 2006.
Corbett Creek has generated a lot of buzz of late following Nexen's [TSX: NXY; NYSE:NXT] announcement in July that it would spend C$400 million to develop its first commercial CBM project in the area.
Mahalo's Horseshoe Canyon drilling program is slated to begin in mid October.
Stock Performance
Mahalo shares are up over 28% since going public at C$4.50 a piece. Over the same time period, shares in other CBM pure-plays have posted the following results: Ember Resources [TSX:EBR] up almost 8%; Storm Cat Energy [TSXv:SME] up 49%; and Canadian Spirit Resources [TSXv:SPI] down over 14%.
At its current price, Mahalo has a market cap of over C$230 million, which appears fairly rich considering the company's current production (management is forecasting cash flow of $9 million this year). Clearly, the market is pricing in above average potential for the company, which could be realized fairly soon by success on the Caney gas shale targets. And management is tying its payoff to this potential, considering it holds a 25% interest on a fully diluted basis.
Though Mahalo has a lot to prove, potential investors/speculators would probably be wise not to bet against any oil and gas company in this market.
