In my opinion, the age of cheap oil is over. We haven't run out of oil, and we can even continue to increase the amount we produce every day, but to meet the world's demand for oil, we need high oil prices.

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How high?

I think our new sources of oil dictate that. Those sources are the oil sands, tight oil and deepwater offshore. For this oil to be available for consumers, oil companies have to be able to produce it profitably.

And according to most sources, including Sanford Bernstein (below) the price of oil that these sources need is something north of $90 per barrel.

As time goes on, I believe that marginal cost of production is going to continue to creep higher.

As a result, I've been trying to take positions in companies that sit on massive amounts of oil. With the benefit of time, I expect technology and higher oil prices will make all of that oil much more valuable.

Bankers Petroleum (BNKJF.PK) is a company sitting on billions of barrels of oil in Albania and is of interest to me.

Today most of that oil isn't worth much. Ten years from now, it might be an entirely different story.

Where is Albania?

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Bankers Petroleum operates exclusively in Albania. Albania emerged from communism in 1992 and is now a democratic member of NATO and has applied for membership in the EU.

Situated just above Greece and across from Italy, Albania provides a reasonably stable operating environment for Bankers and shareholders.

Albania isn't exactly Canada, but it certainly isn't Iraq either. I'd consider it an acceptable jurisdiction to have exposure to, although position sizing should be keep to a reasonable amount.

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Properties

The company is focused on heavy oil and has three main properties (one dominant one):

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Patos-Marinza Oilfield - 7.7 Billion OOIP

- Largest onshore oilfield in Europe

- 100% W.I. and operatorship

- 140 Million barrels produced to date

Patos-Marinza is Bankers's main producing property. What should catch your eye is the massive amount of original oil in place in the Patos-Marinza field. With a massive 7.7 billion barrels in place, Bankers with Patos-Marinza has control of the largest onshore oilfield in Europe.

I'm very interested in investing in companies that control massive amounts of original oil in place. If oil prices go up, or technology improves sitting on that much oil has to be a good thing. It is much like owning a huge amount of land that is beyond city limits. Today a lot might be worth only a couple of thousand dollars. But once the city borders reach that land, it could be worth multiples of that.

In this case, improving techniques and technology along with rising oil prices are like the city borders moving.

It is always a good thing when time is your friend.

In June 2004, the Company's wholly-owned subsidiary, Bankers Albania, acquired an interest in the producing Patos-Marinza heavy oilfield in Albania.

The Patos-Marinza heavy oilfield is located in southern Albania and was discovered in 1928. As already mentioned, it is the largest onshore oilfield in continental Europe in terms of the quantity of original-oil-in-place.

Production commenced in the 1930's and reached a peak in the late 1950's and early 1960's. Historically, Albpetrol (Albanian state owned oil company) was the sole operator of the Patos-Marinza oilfield, holding the rights to evaluate and redevelop the Patos-Marinza oilfield under an existing license agreement with AKBN. Anglo Albanian Petroleum Ltd. ("AAP"), a joint venture of Albpetrol and Premier Oil Plc. was formed as a new operating company in 1994 and operated a portion of the field until 2004. AAP was dissolved in March 2004 and control of the field reverted back to Albpetrol.

In June 2004, Bankers Petroleum entered the picture when Bankers Albania entered into the Patos-Marinza Petroleum Agreement with Albpetrol.

Bankers Albania commenced operations in July 2004, taking over the operation of 28 wells, a disposal well, and associated equipment and facilities. Bankers Albania was entitled to take up to 24 months to evaluate the field and propose a plan of development to Albpetrol and AKBN. The evaluation phase was concluded and the development plan for the Patos-Marinza field was approved by AKBN in March 2006.

This approval allows Bankers to take over the existing wells in the field within the development plan area as set out in the plan of development and to produce and sell oil under the Patos-Marinza License Agreement for a period of 25 years with options to extend at the Company's election for further five year increments.

The terms of the Patos-Marinza Petroleum Agreement include a 1% gross over-riding royalty payable to Albpetrol which increases to 3%, 4% and to 5% (based on an incremental sliding scale) after payout of funds expended by the Company. In addition, the Company pays a royalty to Albpetrol for the latter's share of pre-existing production from the wells taken over by Bankers.

With effect from August 20, 2008, a new royalty tax of 10% on sales volumes, payable directly to the Government of Albania, was implemented. The new royalty tax is applied to gross sales amounts net of pre-existing production royalties in a fashion similar to the share of production royalty payable to Albpetrol. To mitigate the economic impact of the new royalty tax, as required by the Petroleum Agreement, a portion of the royalty tax amount paid until payout and the full royalty tax amount paid after payout is added to the cost recovery balance to delay and reduce the profits tax payable.

Crude oil produced from the Patos-Marinza oilfield is sold to both domestic and export markets.

The Company's Patos-Marinza average crude oil production for 2012 was over 15,000 Bopd, up from 600 Bopd in July 2004 when the Company began operating the oilfield.

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Patos-Marinza has had 140 million barrels produced out of the 7.7 billion barrels in the ground. There is a massive amount of oil left in the ground for Bankers or perhaps someone else (if Bankers is acquired) to work hard at getting out profitably.

Kuçova Oilfield - 300 Million OOIP

- 100% W.I. and operatorship

- 24 Million barrels produced to date

Bankers also holds the exclusive right to evaluate and redevelop the Kuçova heavy oilfield. The Kuçova Petroleum Agreement was signed in September 2007 and the Company received an extension to the evaluation period to February 2011. A Plan of Development for the Kuçova field was presented in January 2011 and was approved February 24, 2011. The Development and Production phase became effective in March 2011 and has a 25-year term with an option to extend at the Company's election for further five year increments.

Geologically, the Kuçova heavy oilfield is similar to the Patos-Marinza oilfield, consisting of several stacked sandstone reservoirs of the same geological age and of various oil gravities. The Company will undertake an evaluation and development program of the oilfield to further define its remaining reserves and production potential.

The Kuçova heavy oilfield has an estimated 297 million barrels of original-oil-in-place that averages approximately 17 API gravity. Estimated recovery to date of approximately nine percent (9%) is based on preliminary estimates and available data that were prepared by a qualified reserves evaluator in accordance with NI 51-101.- 13 -

Block F Exploration Acreage

- 185,000 Acres

- Gas and oil potential

During 2010, Bankers completed the negotiation of a production sharing agreement for Block "F" with the AKBN which was subsequently formalized and ratified by the Ministry.

Block "F" is located immediately west of the Patos-Marinza oil field and covers an area of approximately 740 km2 (185,000 acres). The area contains several seismically defined structural and amplitude anomalies prospective for oil and natural gas.

On March 29, 2012, Bankers spud the first Block "F" exploration well on the Ardenica prospect. The well was subsequently cased and suspended.

The second Block "F" well in Albania reached a total depth of 2,776 meters measured depth on July 17, 2013. That well was also cased and suspended.

Technical evaluation of the block will continue into the fall of this year and Bankers is reviewing several other prospects including a seismic program in the next two years.

Oil Price Received

As mentioned, the oil produced from the Patos-Marinza field is a heavy crude which receives a discount to light oil pricing.

During 2012, Bankers Albania exported 92% (2011 - 80%) of its production and received an overall average price of $79.73 (2011 - $72.84) per barrel sold. Bankers has indicated that its overall average sales price will approximate 81% of the Brent oil price for 2013, dependent upon total domestic versus export volumes.

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At $110 oil, Bankers has netbacks of just under $50 per barrel which provides an idea of how profitable the company might be at various oil prices.

Balance Sheet / Financing

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As of its June 30, 2013 filing, Bankers had $33 million in cash and $115 million in long-term debt.

Cash flow from operations of $127 million for the first six months of 2013 outpaced capital spending of $100 million.

Long-term debt has remained around the $115 million level over the past year while production has grown from 14,161 barrels per day in the second quarter of 2012 to 17,886 in the second quarter of 2013.

Bankers has had no equity issuances in the past year and is growing production from internally generated cash flow at a pretty healthy clip.

With $127 million of cash flow from operations in the first half of the year and net debt of $80 million, Bankers is very modestly leveraged with a debt to cash flow ratio for 2013 that will be roughly .3 to 1.

Reserves and Valuation

Enterprise Value

Shares - 254 million shares outstanding

Net debt - $85 million

Share Price - $3.32

Enterprise Value = $930 million

I like to look at Bankers valuation from three angles:

- Present value of the reserves

- Multiple of cash flow

- How much I'm paying for every barrel of oil in the ground

Be using all three metrics to help guide how to think about valuation, I can get a better perspective as to whether Bankers might be a good investment at current prices.

I've already determined that the balance sheet is in pretty good shape and that the company can grow with internally generated cash flow (a must).

Reserve Value

The most recent statement of reserves from Bankers independent reserve appraisal firms reports that Bankers has:

- 118 million barrels of proved reserves (116 million barrels from Patos-Marinza)

- 192 million barrels of proved plus probable reserves (183 million barrels from Patos-Marinza)

- PV10 value of proved plus probable reserves pre-tax of $3.13 billion

- PV10 value of proved plus probable reserves after tax of $1.9 billion

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Bankers has an after tax PV10 value of proved and probable reserves of $1.9 billion which is pretty much double the company's enterprise value at the current share price of $930 million.

I've turned over quite a few rocks over the past couple of years looking for undervalued opportunities in the oil sector. I don't know that I've come across many (if any) companies that have a good balance sheet like Bankers does and trade at half of 2P PV 10 reserves.

I've seen a few highly leverage companies that trade at pretty big discounts to proved and probable reserves. But these companies generally are one short-term commodity price downturn or one operational hiccup away from having an equity value of zero.

I don't see that sort of downside risk in Bankers Petroleum.

On a reserve basis, Bankers looks quite attractive.

Multiple of Cash Flow

For the last 3 full fiscal years, Bankers has generated cash flow from operations of the following amounts:

2010 - $71 million

2011 - $148 million

2012 - $193 million

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In the first six months of 2013 that number was $127 million which puts the company on pace for $260 million plus for all of 2013 (second half production will be higher than the first).

With an enterprise value of $930 million that equates to a cash flow multiple on 2013's $260 million of cash flow of ($930 million / $260 million) = 3.58 times.

Like the valuation versus proved plus probable reserves that appears to be a very compelling valuation.

I think that when you consider the growth of annual cash flow over the past four years and that the growth is not being financed by huge leverage, that valuation looks even better.

Value Per Barrel of Oil in the Ground

Bankers sits on 7.7 billion barrels of oil in the ground. Only 192 million of those barrels have been booked as proved or probable reserves.

That leaves a huge amount of oil in the ground that could potentially be recovered over time and booked as reserves.

Can we count on that happening? No. But for a long term oil bull like me, having that kind of huge oil resource base is a very good thing. I like the chances of growing demand for oil and higher prices making those 7 plus billion barrels more valuable.

Bankers Petroleum of course is working on recovering more of that oil all of the time. One opportunity to do so is through downspacing.

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Bankers current reserve bookings assumes 200 meter spacing between horizontal wells. Bankers believes that it could move to 100 meter spacing to recover more oil and increase the PV10 value per acre.

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Bankers is also looking at implementing secondary recovery methods such as water flooding which could also greatly increase recoveries from what is currently booked.

Bankers cites the example of heavy oil secondary recovery success stories such as Cenovus (CVE) on its Pelican heavy oil field which has gone from 10% recovery under primary drilling to almost 20% with waterflooding.

Bankers has an enterprise value of $930 million and sits on 7.7 billion barrels of oil. An investor at the current share price is paying 7.7 billion / $930 million = 12 cents per barrel of oil in the ground.

I think over the long term that could prove to be a pretty good bargain.

Cause of Discounted Share Price

Bankers share price really took a tumble in 2012 and hasn't really recovered. The reason for the decline was production growth not matching up to company guidance.

The cause of that was that Bankers provided guidance based on a small sample of horizontal wells that turned out to have better decline profiles (declined less quickly) than subsequent wells.

As the company continued with its horizontal drilling program in different areas and zones of the field, productivities and declines were different than from the initial sample. Production didn't meet expectations.

The production shortfall frightened the market but the subsequent wells are still economic and have settled into a comfortable trend.

A secondary factor in the production shortfall was the fact that Bankers is exploiting an old oil field that was developed with fifties technology. Old well casing corrosion and failure caused a loss of production from re-activated old wells. and water intrusion in other parts hurt production in the new horizontal wells.

The new production profile for the horizontal wells ultimately resulted in a 60 million barrel write-down in proved and probable reserves, so shareholders were disappointed for good reason.

That written down figure is the $1.9 billion after tax PV10 figure which is more than double the company's current enterprise value though, so it looks like the market has been too harsh.

It is going to take some time for Bankers to regain credibility with the market and until it does, the shares are likely to sell at a discounted valuation.

Catalyst

There is a potential catalyst that could get some positive attention from Mr. Market in the near term. This year Bankers hired a new CEO to replace the retiring Abby Badwi. This new CEO could mark a transition for the entire company.

David French is the new man running Bankers and he has considerable experience at a senior level with Apache (APA) that involved acquisitions and dispositions. He is well connected in the industry which could lead to a successful joint venture for Bankers, which has long been rumored to want to bring in a big partner on Patos-Marinza.

A joint venture would bring forward a lot of value as production growth would accelerate. It would also involve a bigger more experienced company bringing its expertise to this giant oilfield which could help with secondary recovery efforts.

Management / Board Of Directors

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Risks

The main risks to a Bankers shareholder include:

- Operations are exclusively focused in Albania which, while far from high on the political risk spectrum, is also less comfortable than operating in North America

- Oil prices. Bankers has excellent netbacks at current oil prices, but like all producers profitability drops as oil prices do

- There have been disappointments with production in the recent past for this company. It is always concerning when a company doesn't fully understand the production profile of wells it is spending millions to drill

Conclusion

I like Bankers because it seems to offer pretty decent downside protection and a lot of upside because of the 7 billion barrels of oil the company controls.

Downside protection: Bankers Petroleum is trading at half of its 2P after-tax NAV and has no net debt.

Upside potential: There is 100% upside just to the 2P after-tax NAV. On top of that, the current 2P reserves are 192 million barrels out of 7.7 billion barrels of OOIP. That is a recovery factor of 2.5%. If Bankers Petroleum can figure out a way to increase that just another 1%, the company could materially increase its recoverable reserves.

And it doesn't have to be Bankers Petroleum who figures out how to recover more of the heavy oil in place. If anyone in the industry makes a technological advancement in heavy oil recovery, Bankers Petroleum can put it to work.