Cash Rich Mercom Oil Sands Sharply Higher
London AIM-listed Mercom Oil (MMO:L) Sands was up more than 30% on Thursday in heavy trading. There was no official news but traders speculated that there might be some development in the cash-rich company's ongoing plan to purchase a 50% stake in nearly 20,000 acres of oil sands property owned by Nordic Petroleum in the Chard field of the Athabasca Oils Sands of Canada.
Mercom (MMO:L) was organized in February 2012 for the purpose of acquiring a 50% stake in Nordic's oil sands leases and signed an agreement to farm-in that stake in May 2012. To support that effort, Mercom raised more than $3 million which is sitting on its balance sheet as cash.
However, volatile oil prices caused Mercom management to review their original agreement and the company attempted to renegotiate its deal with Nordic. Nordic refused to renegotiate the agreement and declared Mercom to be in breach of contract.
And that's where it has sat until today.
Although Nordic owns the leases for this valuable property that is estimated to contain as much as 60 million barrels of recoverable oil, the company has no money to explore and develop the Chard leases. Nordic had to borrow money from some of the company's shareholders to stay in business. That loan is due on June 19 and Nordic has no money coming in to pay back the loan.
The clock is ticking for Nordic and that is what makes Mercom (MMO:L) so interesting...
As mentioned above, Mercom has about US $3.3 million in cash on its balance sheet, which was raised to purchase its share of the Chard leases and to pay for an initial drilling program. Mercom has the cash to repay Nordic's debt and to carry out the drilling program. As Nordic ticks closer to default on its loan, the company will have to decide whether to renegotiate terms with Mercom or go back to its shareholders looking for more cash.
The Chard leases are worth fighting for. The lease properties are surrounded by other oil sands companies that are already producing large amounts of heavy oil. If Mercom gets its 50% stake, the recoverable oil in the Chard leases could be worth as much as $1.8 billion at current prices.
The oil is there. There are existing pipelines, highways and railroads to carry Chard oil to refineries in the United States that are thirsty for cheap heavy oil from Canada. If the Obama Administration approves construction of the Keystone XL pipeline, demand for Athabasca oil will rise.
Mercom has the money and the management to take advantage of the opportunities in the Chard oil sand leases. In the meantime, time is running out for Nordic. Investors may be beginning to sense that a deal between Mercom and Nordic may finally be completed.
Happy Trading!
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