Inside Pacific Asia China Energy



Posted: Monday, March 06, 2006

by JamesFinch
StockInterview.com

On January 20th, we alerted our subscribers to Pacific Asia China Energy (TSX: PCE). PCE shares traded under C$1.50/share, as low as C$1.25. About one month later on February 24th, PCE hit a record high of C$3.06/share. Shares are now trading at C$2.55/share – a respectable appreciation over a brief period. Why the excitement and the rally?



We failed to reach Michael Schaefer, a newsletter writer whose mid February recommendation suggested PCE shares might be valued, under certain conditions, well north of C$20/share. Mr. Schaefer’s eye has previously discovered other coal bed methane deals, which have had long and strong price share appreciations. In a Doug Casey newsletter, we found this strong endorsement of Schaefer’s grasp of coal bed methane deals, “… his last coal-bed methane stock recommendation – Canadian Spirit – gained 939% in 24 months." In a subscription promotion for his “Secret Stock Files" newsletter, Schaefer wrote, “Coal bed methane (CBM) has become one of the fastest-growing sources of natural gas. In my home state of Wyoming, for instance, coal bed methane drilling started in the late 1980s… and the CBM has been heating our homes ever since. Asia has some of the largest coal bed methane fields in the world, and they’re turning to North American energy companies to help extract the natural gas."



This may explain Schaefer’s excitement in enthusiastically recommending the shares of PCE. We investigated into the company’s recent filing (February 27th), and interviewed Dr. David Marchioni about Pacific Asia China Energy. Dr. Marchione is one of Canada’s leading experts on coal bed methane. At the same time, he is a director of PCE. We talked about the Sproule Report, a technical investigation into the Guizhou coal bed methane property, named for that province in China. PCE holds an option to acquire 100 percent of Asia Canada Energy Corp (ACE), for which the Sproule Report was prepared. Marchione told Market Outlook, “It was very fair, there were no surprises, no negatives, and reasonable."



This report addresses the geology and discovered coal bed methane resources of the Baotian-Qinghshan property located in China’s southwestern Guizhou province. During the exploration phase, the potential PCE subsidiary, ACE, is committed to fully funding and drilling and coring four exploration wells. Should the project move into commercial production, China’s coal bed methane government corporation, China United Coalbed Methane Corporation Ltd (CUCBM), the Chinese will have the right to participate in up to 40 percent of the working interest in the coal bed methane project.



The Sproule Report published three possible scenarios, for which confirmation drilling to support the Chinese geological work data. The high case volume of “discovered coal bed methane resources in place" for the seven coal seams in the Longtan Formation of the property is 11.2 trillion cubic feet of gas. The low case volume is 504 billion cubic feet. The most likely case volume, according to the Sproule investigation, is 5.2 trillion cubic feet. What does all of this mean to the typical investor, and how valuable is it as a resource?



In a comparative analysis, with a possibly similar coal bed methane in Asia – in this case, it is in India, we looked at Great Eastern Energy. In December 2005, Great Eastern Energy began trading on the London Stock Exchange’s AIM exchange, London’s global market for emerging companies. PCE and Great Eastern have at least one common denominator – both have contracted with Mitchell Drilling of Brisbane, Australia. Mitchell Drilling is Australia’s largest privately owned drilling company. Highly respected in international circles, Mitchell Drilling aspires to become a world leader in coal bed methane drilling. Both Great Eastern Energy and PCE have licensed the Mitchell’s proprietary drilling Dymaxion System. This is a unique surface to in-seam drilling technique, developed by Mitchell for the past six years. Reportedly it is highly effective, and more than 200 Dymaxion wells have been drilled on coal bed methane projects.



How does PCE stack up against Great Eastern Energy? In February, Great Eastern Energy had over 544 million shares outstanding, with a market value of more than C$308 million shares. On March 1st, PCE had over 43.4 million shares outstanding with a market value, based on Friday’s close, of about C$110.67 million.



In a geological comparison, Great Eastern Energy reported proven reserves of 55 billion cubic feet and 87.4 billion cubic feet of probable. Combined with another 673.5 billion cubic feet of possible reserves, Great Eastern’s West Bengali concession has the potential for a bit more than 1.38 trillion cubic feet of gas. This company plans 100 well development programs over the next four years and hopes to achieve commercial production by 2007. Simple mathematics suggests that PCE, when compared to Great Eastern Energy, may be well positioned to achieve Michael Schaefer’s ambitious price target. Schaefer may have the laugh last, after all, as well as delighting his subscribers with yet another spectacular stock recommendation.



To more carefully review PCE, we talked further with Dr. Marchione about the Sproule Report and to obtain further details about the property and PCE’s plans. Marchione is fairly confident the company’s confirmation drilling will duplicate similar numbers to the Chinese exploration data. He revealed, “We have a good idea what the gas content will be. Drilling the property won’t yield any surprises." PCE does not plan deep wells and their initial drilling will only be on one part of the property. “We will be drilling where there is the highest intensity of data provided by the Chinese geologists," Marchione explained. “Theoretically, we expect this to be the highest area of permeability."



PCE plans to drill only about 10 percent of the Guizhou property. “We want to elevate the Chinese data, correlating their data with ours, in order to confirm that their geological data is correct." The questions Marchione believes the confirmation drilling will answer are about permeability and productability. “Can we get it out at a reasonable price?" Marchione asked. That is what this drilling plans to answer.



Drilling the property will reveal the magnitude and orientation of the stress in the basin. “We expect it to be mild," said Marchione. “The lower the stress, the better the permeability." Shallow drilling of 300 to 850 or 900 meters, with a total of six drill holes, will answer his questions. While the basin goes down to 2000 meters, and the amount of gas increases with depth, PCE will start at the shallow depth to discover if they can get good gas content. “We will be trying to find out an optimal depth," Marchione explained. “There is abundant evidence of gas content, and that was confirmed by Sproule." Well, that is good news. Drilling could start before the end of March.

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