By Michael Brush
Exclusively for InvestorIdeas.com
July 13, 2006

As the price of energy hangs at the highest levels seen in years, exploration companies are circling back and looking at reserves once considered too tricky or costly to exploit.

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One such company holding these kinds of reserves that are now worth a second look is the Exploration Company of Delaware (TXCO).

Based in San Antonio, TX, it holds extensive undeveloped reserves in southwest Texas along the border with Mexico. For some time, the company has been unable to fully exploit these holdings because of shortages of capital and a collaboration with another energy company that didn’t work out well.

But all that’s changed with a recently-inked partnership with the Canadian energy giant EnCana (ECA). Not only has the partnership verified for the world that this little company holds reserves worth exploiting. It has also shored up Exploration Company’s balance sheet.

Insiders put their own stamp of approval on the promise of the company’s reserves with purchases of about $372,000 worth of stock for $9.10 to $10.78 since May 12, as the stock retreated from above $13 in March. The stock recently sold for $9.75.

“The thing that is really different about us compared to a lot of our peers is that we are operating in areas that are under explored,” says Paul Hart, who handles communications for the company. “We are using technology to go in and explore and develop plays that may have been overlooked.”

Besides joint ventures with Encana, Exploration Company has two other partnerships, all of which give it the “capital, rigs, people, and drilling locations to grow daily oil production by over 50% per year for the next three years,” predicts C. K. Cooper analyst Philip McPherson.

The Maverick Basin

Located in Maverick County in Texas along the Rio Grande border with Mexico, the tricky formations in the Maverick Basin have frustrated oil companies for years.

Deep underground, the basin has spongy, porous structures because of the way the formation developed millions of years ago. So it’s been tough to image what is down there.

But that was back when energy prices were lower and it wasn’t worth spending more money to figure out how to deal with the difficult geology there. Now, using 3-D seismic imaging and advanced drilling techniques, it’s an easier job.

So with support from EnCana, the Exploration Company should be better able to exploit the porous formations there -- like one called Glen Rose Porosity. Over the next 6-18 months, daily oil production from Glen Rose should increase 233% to over 4,000 barrels a day, predicts C. K. Cooper analyst Philip McPherson. He has a $15 price target on the stock.

The Exploration Company also has a joint venture with EnCana to develop reserves in another Maverick Basin formation called Pearsall. And it has an agreement with Pearl Energy to exploit the San Miguel Tar Sands there.

“It is important for investors to remember that the Maverick Basin remains largely unexplored in many potentially productive formations, primarily due to the fact that the Exploration Company has been capital constrained virtually since its inception,” says A.G. Edwards & Sons, analyst Chris Pikul. Now, however, it looks like that’s about to change.

The company also has a pipeline business in the Maverick Basin.

Marfa Basin

A bit further north and to the west, the Exploration Company has a holding in the Marfa Basin, also along the border with Mexico.

This area contains a shale play that looks like it has potential given success of the Barnett Shale, now the largest producing natural gas basin in the U.S. It is called the Woodford Shale. Here, the company has a joint venture with Continental Resources.

A 50% gain ahead

A.G. Edwards’ Pikul estimates the value of the Exploration Company’s acreage and proved reserves is around $9 – a little below where the stock currently trades. “Growing production from the Glen Rose formation coupled with any degree of success in the Pearsall or Marfa Basin could easily generate a $15 share price by year-end, barring drastically lower oil and gas prices,” he says.

The bottom line: Investors are skeptical of this energy play because of the historical difficulties in getting energy from the reserves it holds. But insiders – not to mention the Canadian oil giant EnCana – don’t seem to share these doubts. That doesn’t make this a slam dunk winner, but it’s worth a gamble at current prices.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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