American Sands Energy Makes Important Progress on Permitting
American Sands Energy (NASDAQ: AMSE) is a pre-production oil company with oil sands resources located near Sunnyside, Utah. It proposes to mine oil sands ore using conventional mining techniques and a licensed, proprietary solvent to extract oil from the oil sands. The solvent and off-the-shelf equipment has been tested extensively at pilot-scale. The company’s water-free process produces heavy oil and recovers and recycles nearly 100% of the solvent. Therefore, American Sands will never require any tailings ponds, its only by-product is reclamation ready sand. If successful, the company would be one of just 2 or 3 operating in the U.S., none are in operation yet. Why Utah? Because that State happens to be sitting on a tremendous amount of oil sands resources, among other commodities like oil, natural gas and potash.
There have been a number of articles and senior executive interviews featuring American Sands Energy (a few of them by me) that describe the company as having the potential of reaching up to 5,000 bopd within the next 2-3 years. Most of the articles correctly point out that this is a highly speculative company, but one with tremendous blue-sky potential. Once in production of up to 5,000 barrels of oil per day, “bpd,” (which I think is a question of when, not if), the company will have proven that it’s viable at commercial scale and it will be in the enviable position to ramp up production to as much as 50,000 bpd over subsequent years. The main risks are getting the mining and technology processes fully permitted by the State of Utah, funding the company with $75 million of capital in 1h 2015, and the oil sands mining operation.
American Sands makes solid progress on permitting
The company continues to make solid progress towards obtaining the permits it needs by yearend. I identified permitting as one of the three most important risk factors, but also de-risking catalysts for the firm. The company submitted the permitting package to the Utah Division of Oil, Gas & Mining “DOGM” on March 5, 2014. Approval for the project from DOGM is doubly important because it will enhance the company’s ability to raise the $75 million of capital it requires to build the plant that can produce up to 5,000 bpd. CEO William Gibbs was quoted in the October 14th operational update press release,
“At this time, we believe that the revised submission fully responds to the comments provided by DOGM after review of our application. We believe that our project is fully compliant with all rules and regulations of the regulatory agencies. Our philosophy has always been to develop a world class, leading edge environmentally responsible project that protects the environment while extracting these valuable resources.”
On October 1, 2014 American Sands Energy reported that it has extended all its leases through December, 2019. This gives the company plenty of breathing room should it run into any meaningful delays and checks off a box for those investors doing due diligence. Mr. Gibbs said,
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“By extending our leases, AMSE will retain control of our Sunnyside project for the foreseeable future,” commented William Gibbs, Company CEO. “This extension allows us to work through the permitting process without threat to our resources. While the primary term of our leases is extended for five years, it is also important to note that once we are in production the leases are “held by production” and will last for the life of the project.”
American Sands break-even WTI crude price reiterated at $49/barrel
Many major E&P companies, including Canadian oil sands producers, are down 15%-25% with the current decline in oil prices. WTI crude is down about $20/barrel in the past few months. American Sands has little to worry about with WTI crude at $82.5/barrel, it’s break-even crude price was reiterated at $49/barrel. At $82.5/barrel, some oil production around the world is at risk, including marginal production in Iran. Not only is American Sands comfortably profitable at a WTI crude price of $82.5/barrel, it’s non-declining production curve means that operating expenses should not rise much if at all year after year.
American Sands’ simple, efficient, low cost operation superior to Alberta oils sands operations
In the Alberta, Canada oil sands operations, cost inflation is a problem as there’s competition for labor and other key resources as well as higher energy costs in part due to a much, much colder location. In addition, a substantial amount of Canadian oil sands production comes from, Steam-Assisted Gravity Drainage, “SAGD.” This production technique also boasts a non-declining production curve, but sustaining capital is significant as new production wells need to be drilled every few years. To further illustrate the extra costs of SAGD vs. American Sands’ more efficient flow sheet, SAGD requires immense amounts of water and steam and a facility to generate that steam. American Sands uses no water or steam in its process, it bypasses all of that expense and complexity. Due to the heavy use of water and chemicals, SAGD operations also require environmentally unfriendly tailings ponds. American Sands proposes to be a green company by comparison (no water, no tailings) to any E&P company on the planet.
American Sands Energy is sometimes compared to Canadian oil sands companies in Alberta, Canada. I find the comparisons compelling in that American Sands has a technology and process to exploit oil sands in Utah more efficiently, at a lower upfront cost, lower operating expense and most importantly, in a far more environmentally friendly manner. I believe that it’s important to recognize that Canada is producing 2 million bpd and American Sands is looking to initially produce up to 5,000 bpd. Why does this matter? It matters a lot because there’s really no need to worry about barriers to entry or competition in Utah or anywhere else. The company is not competing against Canada’s massive industry and there’s more than enough oil sands deposits in Utah, for multiple players, to last decades. Think about it, no competitive risks to worry about, what other industries can make that claim? American Sands is competing against itself, if it can execute and reach roughly up to 5,000 bpd, it will be a tremendous commercial success.
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