http://www.theenergyreport.com/pub/na/12658

TER: Are there any gas-heavy names you believe deserve attention?

JW: Let's look specifically at names that might benefit from construction of LNG terminals in Canada. Although LNG terminals only process large suppliers of gas, even small suppliers can benefit indirectly.

The majors are going to be looking for juniors like Aroway Energy Inc. (ARW:TSX.V; ARWJF:OTCQX), which has an inventory of production and exploration targets in the form of lots of good three-dimensional (3D) seismic data. Besides drilling nine new wells this year, Aroway is shooting 3D seismic over 75% of its 101 sections on its 29K hectares. It is building itself into an attractive takeover target.

Shell Canada Ltd. is just to the south of Aroway. Birchcliff Energy Ltd. (BIR:TSX) is immediately to the west, and it has Crescent Point Energy Corp. (CPG:TSX) on its northeastern border. Aroway is essentially surrounded by billion-dollar plot companies, all of which will be looking to supply those LNG plants.

TER: Where and how is Aroway drilling?

JW: It is drilling in a very prolific region, into the Peace River Arch in the Leduc Formation. It's a traditional well with vertical and horizontal wells.

TER: In its first year, Aroway's share price went from
.20 in July to the mid-
.80s now. Can the company follow that with another successful year?

JW: I believe its second year will be even better for a couple of reasons. First, its joint venture partner controls the distribution and gathering infrastructure for the oil and gas on its land. Second, the company did a private placement at the end of 2010, which put some selling pressure on its stock. That pressure is gone; the company is cash-flow positive and no longer needs to raise money. At this point, there is no downward pressure on the share price from previous financing.

In 2011, Aroway said it would exit with 600 barrels per day (bbl/d). In fact, it exited with 670 bbl/d. Aroway under-promised and over-delivered. That is a key driver to getting a better share price valuation. But it remains under the 1,000 bbl/d mark. A company is not even considered a junior producer of any substance until it produces over 1,000 bbl/d. This year, Aroway's targeted exit production is 1,200 bbl/d. That will put the company into a new category and more companies will be looking at it as a takeover target and as a good, largely derisked investment, one with long-life wells and a clear growth strategy for a land package that could support average production of at least 100 bbl/d per well.

Its neighbor Birchcliff Energy is a billion-dollar company, producing 17,000 barrels of oil equivalent per day (boe/d). The possibility for Aroway to do that only grows with time. At the current price, it is still a fraction of what I think it will be worth. And remember, that 670 bpd reported production and its 1,200 bpd target for 2012, is only 50% of the oil being produced from those wells. Aroway's joint venture partner accounts for the remaining 50%. So, in essence, Aroway exited 2011 with more than 1,200 bpd on its own balance sheet.

There will be a lot of compelling reasons for Aroway and its joint venture partner to merge. At that point, it becomes a very attractive takeover candidate for a large mining company. I think 2012 will be even better than 2010 and 2011.