It’s never been a good idea to invest in a company based on a headline and Oilsands Quest Inc. (AMEX: BQI) has become the latest example as the struggling oil sands explorer and developer tries to drum up investor interest with their most recent press release entitled “Oilsands Quest to Sell Wallace Creek Assets.” Without question the sale of its Wallace Creek assets would bring in desperately needed cash the reality is the number of terms and conditions that must be met to complete the transaction could pose serious problems.
First and foremost there is no deal in place to actually sell the Wallace Creek assets; instead BQI has entered into a non-binding Letter of Intent with a third party for total consideration of $60 million. BQI still needs to negotiate a definitive agreement with the third party, board approvals need to be secured, due diligence needs to be practiced, financing needs to be secured and BQI shareholders need to approve. Saying that they are selling their Wallace Creek assets at this point is nothing more than putting the cart before the horse.
Despite the caveats that need to be met BQI CEO Garth Wong said “This prospective transaction is good news for Oilsands Quest shareholders. It will provide us much of the capital we need to complete the Axe Lake pilot and prove the commercial recoverability of our highest priority core asset.” If the sale does go through, and BQI “anticipates that a definitive sale agreement will be concluded by the end of October 2011, and that the transaction will close by the end of December 2011,” then Axe Lake would be the company’s only core asset as they have already relinquished the licenses in Saskatchewan and the southernmost permits at Raven Ridge in Alberta.
Aside from needing cash to complete the Axe Lake pilot and prove its commercial recoverability BQI is facing serious pressure from the staff of the NYSE Amex LLC which delivered a notice on September 12, 2011 informing the company that, “based on their review of the Company’s Form 10-K/A for the fiscal year ended April 30, 2011 and discussions and correspondence with management, the Company is not in compliance with certain of the Exchange’s continued listing standards as set forth in Part 10 of the Exchange’s Company Guide.”
It gets worse, “the Exchange noted that the Company is not in compliance with Section 1003(a)(iv) of the Company Guide because the Company has sustained losses which are so substantial in relation to the Company’s overall operations or its existing financial resources, or its financial condition has become so impaired that it appears questionable, in the opinion of the Exchange, as to whether the Company will be able to continue operations and/or meet its obligations as they mature.”
So BQI has a potential delisting hanging over their head and they need to submit a plan by October 12, 2011 addressing how they intend to regain compliance with Section 1003(a)(iv) by January 12, 2011. Somehow this potential transaction valued at up to $60 million seems like it will be part of their answer, if not the complete answer.
BQI had in the works a $60 million rights offering but cancelled that on the day it was to expire, September 12, 2011, the same day they received their notice from the NYSE Amex. While BQI credited the progress they were making with the talks involving the sale of their Wallace Creek assets as a reason for the cancellation they also noted that it “had become apparent that we would not achieve a full $60 million subscription through the rights offering, perhaps at least partially due to the weak markets of recent weeks.”
Given the weak markets of recent weeks and the significant investment needed to commercialize oil sands there are plenty of legitimate concerns surrounding the completion of the sale of their Wallace Creek assets. Never before has the subject of oil sands development been more controversial as it has been thrown in the category of “dirty” oil due in part to its impact on climate change, or so its critics claim.
While the Canadian government stands in support of the oil sands development the same support hasn’t been shown by the EU or the United States, both of which have seen several protests declaring oil sands development as an attack on the environment. There has been plenty of attention placed on the proposed Keystone XL oil pipeline that would run nearly 2,100 miles from the tar sands deposits of Alberta Canada to refineries in the Gulf of Mexico but before such a pipeline can proceed it needs official approval from the Obama administration and the President is expected to make his decision by the end of the year. Knowing that Obama has tried to pacify environmentalists in the past and push for greener fuel alternatives it would come as a major surprise if he gave the green light.
Unfortunately BQI has a lot of strikes against them already, aside from their battle with the NYSE Amex and the need for cash. They are also facing some serious financial obligations related to the abandonment of early exploration core holes in Saskatchewan, a re-abandonment program is being monitored by the Saskatchewan Ministry of Energy and Resources and according to BQI their “best estimates of the undiscounted/gross costs to complete this program over the next four years is $26.8 million.”
It would also be easy to take a shot at BQI’s corporate expenses as the three month period ending July 31, 2011 included $1.6 million in salaries and while that isn’t much more than the $1.5 million in salaries during the same period 2010 there is one stark difference, the most recent period counts 16 employees and no seasonal field employees while the 2010 period counted 46 employees including five seasonal employees. To justify this salary expense in the most recent quarter BQI said “Although total personnel levels have declined, salaries increased during the current period compared to the same period last year due to severance and termination payments.” That doesn’t sit well with shareholders nor does it attract new investors.
Right now BQI is in dire straits, the fact that they are banking on the sale of their Wallace Creek assets should be enough of a concern to investors. Of course today’s news was enough to push shares up nearly 28% to close at 0.23 with trading volume passing the 6 million mark but time is running out and while they are slightly ahead of their 50-day moving average of 0.21 they still trail their 200-day moving average of 0.39 and it would be reasonable to believe that they won’t see that level anytime soon as the unlikelihood of any $60 million deal sets in.