tri-valley corp. - Paul Cohen`s Marijuana hub

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D. Paul Cohen, President
21 Manzanita Avenue #1000
San Rafael, CA 94901
www.cohenresearch.com
Telephone: 415.454.6985
Fax: 415.455.0295
E-mail: [email protected]
E-mail: [email protected]
November 6, 2006
TRI-VALLEY CORP.
(AMEX: TIV)
$7.15
BUY
Copyright © 2006 by Cohen Independent Research Group. All rights reserved. This report may not be reproduced.
Cohen Independent Research Group
QUICK VIEW
TRI-VALLEY CORP.
(AMEX: TIV)
BUY
Page 2 of 134
Tri-Valley Corp.
$7.15 (AMEX: TIV)
November 6, 2006
Tri-Valley Corp. is a development stage company established to explore and produce oil and gas in the
United States. The Company’s production properties in California have total estimated recoverable oil
and gas of more than 100 MMBOE. Additionally, the Company also owns three properties with
indications of gold targets and industrial minerals in Alaska.
Long Term Price Chart
Long term Fair Value
50.00
40.00
30.00
20.00
10.00
Discount Rates
18.49%
16.99%
15.49%
13.99%
12.49%
Optimistic Case
32.47
35.30
38.50
42.10
46.18
Base Case
25.67
27.73
30.03
32.60
35.48
Pessimistic Case
21.21
22.89
24.77
26.85
29.18
At a price of $7.15, we believe shares of Tri-Valley are undervalued. We valued the company using
three forecast scenarios – Base Case, Optimistic Case and Pessimistic Case. Various methodologies
employed to value the Company indicate that an investment in Tri-Valley is likely to yield high returns
in the short-to-medium term. Even our most conservative long-term valuation approach based on the
Pessimistic Scenario indicates significant upside potential from the current market price, valuing TriValley at $24.77 per share.
Page 3 of 134
Chart 1: Price and Volume
5 Day Moving Average
10 Week Moving Average
30 Week Moving Average
7.53
7.74
7.18
6.87
7.18
Daily Vol. As % Of 10 Day Avg. Vol.
This Week Vol. Times Week's $ Change ($000s)
This Week's Dollar Volume ($000s)
Weekly Volume As % Of Shares Out.
Liquidity Ratio ($000s)
On-Balance Volume Index Last 4 Weeks (%)
High Price
Low Price
Close Price
Total Volume
Average Daily Volume
Price Change (%)
Price Change vs Market (%)
65
-463
2,518
1.46
224
132
Last 4 Weeks
8.49
6.75
7.15
1,312,600
65,600
-3.6
95
200 Day Price Index vs Market (%)
Price Momentum This Week (%)
Price Momentum Prior Week (%)
Beta (60 Month)
Beta (36 Month) Average
77
122
138
1.02
2.78
Current Market Value
Market Value As % Of Revenues
Reported Shares Out. (2006/07/31) (#)
Balance Sheet Shares Out. (2006/06) (#)
Float (#)
Float As % Of Shares Outstanding
Last 13 Weeks
8.49
5.8
6.24
3,770,800
58,900
10.4
104
Last 26 Weeks
9.5
5.52
6.57
13,225,700
104,100
4.9
102
160,403,892
1,377
23,280,681
23,275,401
20,824,328
89.4
Last 52 Weeks
12.25
5.52
8.94
22,972,400
91,500
-22.9
69
Page 4 of 134
Executive Summary
•
•
•
•
•
•
•
•
•
Tri-Valley Corporation (AMEX: TIV) is an independent energy and mineral development company
engaged in diverse businesses such as oil and gas exploration and production, minerals exploration and
production, and drilling services. The Company commenced its operations with the acquisitions of
working interests in several oil and gas properties in California and Nevada, which currently have more
that 100 MMBOE of estimated recoverable oil and gas.
Tri-Valley has designed a comprehensive multi-well drilling program to fully develop its current oil and
gas properties by utilizing new technologies such as directional and horizontal drilling and 2D seismic.
With the application of advanced technologies, many of the Company’s properties in California will
immediately commence production and start contributing to the top line.
The Company’s Temblor Valley property in California includes 860 acres of oil production land with
estimated oil and gas of approximately 342.6 MMBOE in place. The field currently contains 56 well bores
of which 27 are currently active with average daily production of 100 barrels of oil. Tri-Valley plans a
workover and re-completion program at the existing active wells and three new wells in this property by
2007, which is likely to result in a significant increase in the daily production.
Tri-Valley has increased its estimated recoverable oil and gas to 6.1 MMBOE with the modern day
evaluation at its Pleasant Valley Property in Ventura County, California. The total recoverable (proven and
probable) at this property is 138 MMBOE, providing a great potential to add to the shareholder’s value.
The company plans to start drilling wells on this property by October 2006 and expects to start commercial
production.
The Company’s Ekho Project (in south San Joaquin Valley) and Sunrise Natural Gas Property (in Delano,
California) are its most exciting prospects. We expect these properties to yield large amounts of oil and
gas with the deployment of new technologies. The Company estimates the Ekho project to hold nearly
1,657.5 MMBOE and the Sunrise Natural Gas Project to hold nearly 3.3 tcf of natural gas in place.
The establishment of Great Valley Production Services and Great Valley Drilling Services gives TriValley the ability to work on its own oil and gas properties in spite of the unavailability of contract rigs.
This will greatly aid the company in its exploration activities and help keep exploration costs down.
Tri-Valley has also identified industrial mineral opportunities in Alaska such as the Admiral Calder Mine,
containing a high-grade calcium carbonate deposit. The Company plans to start production on this mine in
FY07 and expects it to provide near term cash flow to support the Company’s future exploration and
production activities.
The Company’s Shorty Creek and Richardson properties have significant long-term upside potential. The
Company has identified targets on these properties estimated to contain nearly 1 MM Oz and 5 MM Oz of
gold respectively. Furthermore, fields analogous to these properties hold multi-million ounces of gold in
reserves, which increases the Company’s chances of production on these properties.
Rising energy prices makes Tri-Valley’s endeavor to re-exploit and further develop with modern methods
previously ignored oil and gas properties and emerging hydrocarbon destinations such as Nevada,
economically viable. Continuing global economic growth led by emerging markets such as China and
India along with worsening geopolitics in the key oil producing areas and events such as the shut down of
Alaska’s Prudhoe bay Oilfield are likely to keep pressure on the demand-supply situation of oil and natural
gas. We believe that Tri-Valley will benefit from these factors, as even smaller oil fields are likely to
generate above average returns. In addition, rising energy prices make such investments relatively less
risky.
Page 5 of 134
Valuation Summary
Chart 2: Short–Term Price Target
Short Term Fair Value
11.00
9.63
10.00
8.83
9.00
8.02
8.00
7.22
6.42
7.00
Discount Rates
6.00
Per Share Value
80%
90%
100%
110%
120%
6.42
7.22
8.02
8.83
9.63
We base our short–term (3–6 months) price target on
2006 reserve estimates because we expect most of the
Company’s facilities to begin operating with the new
technology in that year. Tri-Valley’s 2006 earnings also
correlate to the current stock price because investors
typically focus on future earnings. An 830.2x
EV/Reserves multiple on current proven, developed
reserves yields a fair price of $8.00. We also calculated
the price for a range of discount to the average
EV/Reserve multiple. However, our EV/Reserves
analysis does not take into account the expected increase
in reserves from proven undeveloped to proven
developed.
Chart 3: Medium–Term Price Target
Medium Term Fair Value
40
30
20
10
-
Discount Rates
18.49%
16.99%
15.49%
13.99%
12.49%
Optimistic Case
10.45
11.09
11.79
12.54
13.37
Base Case
9.48
10.08
10.73
11.44
12.22
Pessimistic Case
8.27
8.83
9.44
10.12
10.87
This chart indicates our medium–term (12-18 months)
price target. This price target is based on the Net Asset
Value (NAV) of the two production facilities with
proven reserves. We have excluded the NAV of other
facilities from our medium–term price target
calculation, as the Company does not have any proven
reserves at these properties. The NAV is calculated by
discounting the net operating revenues using a discount
rate range of 12.49%–18.49%. At an average discount
rate of 15.49%, we expect the Company’s stock price to
reach $10.73 based on our Base Case forecast
assumptions.
Chart 4: Long–Term Price Target
50.00
40.00
30.00
20.00
10.00
Discount Rates
18.49%
16.99%
15.49%
13.99%
12.49%
Optimistic Case
32.47
35.30
38.50
42.10
46.18
Base Case
25.67
27.73
30.03
32.60
35.48
Pessimistic Case
21.21
22.89
24.77
26.85
29.18
To derive a long–term (18–24 months) price target
range, we included the expected Net Asset Value of the
probable reserves of the Company’s properties. Our
Base Case forecast assumes that the Company would be
able to convert 10% of the probable reserves to proved
reserves. The low success rate assumed is in line with
our conservative approach used to value the
development stage company.
Page 6 of 134
Probable Oil Reserves- Base Case
Page 7 of 134
Proven Gas Reserves – Base Case
Page 8 of 134
Proven Oil Reserves – Base Case
Page 9 of 134
Valuation (Net Asset Value Analysis)
Page 10 of 134
INVESTMENT THESIS AND RECOMMENDATION
We believe Tri-Valley’s strategy to re-exploit and further develop with, modern methods, its lightly drilled
properties provides investors with a special opportunity. Also, its inventory of large target wildcat exploration
prospects enables the Company to pursue “Company Maker” projects as well and evaluate numerous attractive
options. The Company’s asset base places it in the enviable position of having high impact prospects adjoining
prolific oil fields. Tri-Valley’s strategy to leverage modern technology to rework prospects which are not close
to known production, and located in setting having no conventional prospects enables the Company to evaluate
several attractive options. We believe management has the ability to oversee these assets and increase longterm revenues. Going forward, revenues and profits are expected to be enhanced on a site-by-site basis. The
reward is the conversion of a market risk asset to a credit risk asset, and the commensurate increase in value of
the assets involved. We believe Tri-Valley’s production plans are exciting in an opportunity-oriented industry.
At a price of $7.15 per share, with a $30.03 long term valuation target, we recommend purchase of Tri-Valley’s
common stock for long term, moderate risk adverse investors
Page 11 of 134
THE REPORT
TRI-VALLEY CORP.
(AMEX: TIV)
BUY
Page 12 of 134
Table of Contents
QUICK VIEW ......................................................................................... 2
Tri-Valley Corp. .................................................................................................................................... 3
Long Term Price Chart................................................................................................................................................. 3
Chart 1: Price and Volume ........................................................................................................................................... 4
Executive Summary............................................................................................................................... 5
Valuation Summary................................................................................................................................................. 5
Valuation Summary................................................................................................................................................. 6
Chart 2: Short–Term Price Target................................................................................................................................ 6
Chart 3: Medium–Term Price Target ........................................................................................................................... 6
Chart 4: Long–Term Price Target ................................................................................................................................ 6
Probable Oil Reserves- Base Case......................................................................................................... 7
Proven Gas Reserves – Base Case......................................................................................................... 8
Proven Oil Reserves – Base Case.......................................................................................................... 9
Valuation (Net Asset Value Analysis)................................................................................................. 10
INVESTMENT THESIS AND RECOMMENDATION .................................................................... 11
THE REPORT ....................................................................................... 12
TRI-VALLEY CORP.......................................................................................................................... 17
THE COMPANY ................................................................................................................................ 17
Picture 1: Tri-Valley’s Business Structure.................................................................................................................. 19
BULL CASE ....................................................................................................................................... 20
BEAR CASE ....................................................................................................................................... 21
TRI-VALLEY’S VALUE DRIVERS................................................................................................................... 22
Picture 2: Tri-Valley’s Key Value Drivers.................................................................................................................. 22
Balanced portfolio of high risk and safe assets ..............................................................................................23
Acquisition of drilling equipment....................................................................................................................23
Use of modern technology in E&P activities .................................................................................................23
Findings of high quality oil and gold..............................................................................................................23
TRI-VALLEY’S ASSETS..................................................................................................................................... 24
OIL AND GAS OPERATIONS .......................................................................................................... 24
Picture 3: TRI-VALLEY CORP’S ACTIVITIES .......................................................................................................... 25
Table 1: Tri-Valley’s Oil & Gas Property Reserve Summary..................................................................................... 26
1.
2.
3.
4.
5.
6.
7.
Temblor Valley Property ......................................................................................................................26
Pleasant Valley Property......................................................................................................................26
Moffat Ranch Gas Field Property ........................................................................................................26
Sacramento Valley – Rio Vista and Dutch Slough Gas Fields .............................................................27
Chowchilla Ranch Gas Fields ..............................................................................................................27
Ekho – Exploration Project ..................................................................................................................27
Sunrise – Exploration Project...............................................................................................................27
MINING ACTIVITY .......................................................................................................................... 28
Table 2: Tri-Valley’s Gold Property Reserve Summary ............................................................................................. 28
1.
2.
3.
Richardson Property.............................................................................................................................28
Shorty Creek Property ..........................................................................................................................28
Admiral Mine Property.........................................................................................................................28
Table 3: Admiral Calder Mine Reserve Summary ...................................................................................................... 29
INDUSTRY DRIVERS.......................................................................................................................................... 29
Oil and Gas Industry ........................................................................................................................... 29
Gold Industry ..................................................................................................................................................30
Metal and Minerals Industry...........................................................................................................................30
CAPITALIZATION .............................................................................................................................................. 31
FORECASTS ......................................................................................................................................................... 31
Production Forecasts ........................................................................................................................... 31
Table 4 : Production Forecasts- Proven Reserves...................................................................................................... 32
Page 13 of 134
Table 5: Production Forecasts- Probable Reserves- Base Case................................................................................. 32
Revenue Forecast................................................................................................................................. 32
Table 6: Revenue Forecast - Base Case...................................................................................................................... 33
Table 7: Revenue Forecast - Optimistic Case............................................................................................................. 33
Table 8: Revenue Forecast - Pessimistic Case ........................................................................................................... 33
Cost Forecast ....................................................................................................................................... 34
Table 9: Cost Calculation........................................................................................................................................... 34
Table 10; Costs forecasts – Base Case ....................................................................................................................... 34
Net Operating Revenue Forecast......................................................................................................... 34
Table 11: Net Operating Revenue Forecast - Base Case............................................................................................ 35
Table 12: Net Operating Revenue Forecast - Optimistic Case ................................................................................... 35
Table 13: Net Operating Revenue Forecast - Pessimistic Case.................................................................................. 35
VALUATION......................................................................................................................................................... 35
Short-term price target......................................................................................................................... 36
Chart 5: Short Term Target Price Based On Comparative Valuation ........................................................................ 36
Table14: Calculation of Short Term Target Price ...................................................................................................... 37
Medium-term price target.................................................................................................................... 37
Chart 6: Medium Term Target Price Based On NAV ................................................................................................. 38
Long-term price target......................................................................................................................... 38
Chart 7: Long Term Target Price Based On NAV ...................................................................................................... 39
CONCLUSION ...................................................................................................................................................... 40
FINANCIAL EXHIBITS .............................................................................................................................................. 41
EXHIBIT 1 : BALANCE SHEET ................................................................................................................................. 42
EXHIBIT 2: INCOME STATEMENT .......................................................................................................................... 43
EXHIBIT 3: CASH FLOWS ........................................................................................................................................ 44
APPENDICES ........................................................................................ 45
APPENDIX 1: STOCK STATISTICS ................................................................................................ 46
Table 15: Key Ratios................................................................................................................................................... 46
Table 16: Institutional Trading................................................................................................................................... 47
Table 17: Short Interest Information .......................................................................................................................... 47
APPENDIX 2: VALUE DRIVERS FOR THE OIL AND GAS INDUSTRY.................................... 47
Continued rise in price....................................................................................................................................47
Picture 4: Trends in World Crude Oil and Natural Gas Prices.................................................................................. 48
Expected increase in Demand.........................................................................................................................49
Picture 5: Correlation between Primary Energy Demand and World GDP............................................................... 49
Picture 6: Expected Trend in GDP and Global Primary Energy Demand ................................................................. 50
Picture 7: Global Demand for Crude Oil ................................................................................................................... 50
Picture 8: Supply for Oil............................................................................................................................................. 51
Higher Cost of E & P Activities ......................................................................................................................51
Picture 9: F&D Cost on a Rise................................................................................................................................... 52
Unconventional Resources and Abandoned Fields gaining Attention ............................................................52
Policy Support for Developing Unconventional Resources ............................................................................53
APPENDIX 3: HORIZONTAL DRILLING....................................................................................... 54
Picture 10: Greater Length of Producing Formation Exposed to the Wellbore in a Horizontal Well ........................ 54
(A) Than in a Vertical Well (B) ................................................................................................................................... 54
Advantages of Horizontal Drilling..................................................................................................................54
Types of Horizontal Drilling ...........................................................................................................................56
APPENDIX 4: 2D SEISMIC TECHNOLOGY .................................................................................. 57
Digital seismic technology ..............................................................................................................................57
Why Seismic Surveys?.....................................................................................................................................57
How Does It Work?.........................................................................................................................................58
Picture 11 : Seismic Data ........................................................................................................................................... 59
APPENDIX 5: FRACTURE STIMULATION ................................................................................... 60
APPENDIX 6 : STEAM INJECTION ................................................................................................ 61
Picture 12: The SAGD Process................................................................................................................................... 61
APPENDIX 7: VALUE DRIVERS FOR GOLD INDUSTRY........................................................... 62
Page 14 of 134
Increasing Price of Gold.................................................................................................................................62
Picture 13: 5 Year Gold Prices................................................................................................................................... 62
Demand for gold to increase...........................................................................................................................62
Picture 14: Gold Demand in 2005 .............................................................................................................................. 63
Picture 15 : Jewelry Demand in the First Quarter (Tons) .......................................................................................... 64
Renewed interest in Gold ................................................................................................................................64
Picture 16 : Central Bank Reserve Changes vs. Changes to Gold Backing Reserves................................................. 65
Gold Production lagging ................................................................................................................................65
Picture 17: Supply of Gold in 2005 (Tons) ................................................................................................................. 66
Picture 18: +$1 Billion Discoveries ........................................................................................................................... 67
Higher costs of production: Energy cost.........................................................................................................67
Picture 19 : Worldwide Exploration Expenditures for Gold....................................................................................... 68
Picture 20 : Rising Cash Costs (HUI and XAU Components) .................................................................................... 68
New technologies ............................................................................................................................................69
APPENDIX 8: SHORTY CREEK PROPERTY................................................................................. 70
Location and History ......................................................................................................................................70
Field Description ............................................................................................................................................70
Picture 21 : Shorty Creek Property ............................................................................................................................ 71
Picture 22: Select Gold Properties ............................................................................................................................. 71
APPENDIX 9: RICHARDSON PROPERTY ..................................................................................... 72
Current Status .................................................................................................................................................72
Holding Structure............................................................................................................................................73
Picture 23: Richardson Property ................................................................................................................................ 73
APPENDIX 10: ADMIRAL CALDER MINE PROPERTY .............................................................. 74
Current Status .................................................................................................................................................74
APPENDIX 11: TEMBLOR VALLEY PROPERTY......................................................................... 75
Rework and Production Plans: .......................................................................................................................75
Current Status:................................................................................................................................................76
APPENDIX 12: PLEASANT VALLEY PROPERTY........................................................................ 77
Production Plans ............................................................................................................................................77
APPENDIX 13: EKHO – EXPLORATION PROJECT ..................................................................... 78
Picture 24: Ekho Project ............................................................................................................................................ 79
Current Status .................................................................................................................................................80
Picture 25: Ekho Project Area Map............................................................................................................................ 80
APPENDIX 14: SUNRISE – EXPLORATION PROJECT................................................................ 81
Picture 26: Sunrise natural gas Property ................................................................................................................... 81
APPENDIX 15: MOFFAT RANCH GAS FIELD PROPERTY ........................................................ 82
Production Facilities and Plans......................................................................................................................82
Picture 27: Moffat Ranch Property............................................................................................................................. 82
APPENDIX 16: SACRAMENTO VALLEY – RIO VISTA AND DUTCH SLOUGH GAS FIELDS83
APPENDIX 17: CHOWCHILLA RANCH GAS FIELDS ................................................................. 84
APPENDIX 18: COMPANY MANAGEMENT ................................................................................ 85
Board of Directors ..........................................................................................................................................87
Page 15 of 134
APPENDIX 19: RECENT EVENTS .................................................................................................. 91
APPENDIX 20: DCF EXPLANATION ........................................................................................... 115
Table 18: Present value of $100 ............................................................................................................................... 115
Table 19: Free Cash Flow Calculation of XYZ Company......................................................................................... 116
Table 20: DCF Analysis With Terminal Growth Rates............................................................................................. 119
Table 21: Example of WACC Method ....................................................................................................................... 121
Table 22 Sensitivity Analysis with Discount Rate ..................................................................................................... 122
Table 23: Sensitivity Analysis with Growth Rate ...................................................................................................... 122
Net Cash Flow from Operations (NCFO) ..................................................................................................... 124
Table 24: Comparing NCFO to Traditional Bottom Up Cash Flow......................................................................... 125
Glossary Of Terms ........................................................................................................................................ 127
Page 16 of 134
TRI-VALLEY CORP.
Tri-Valley Corporation (AMEX: TIV) is a
holding company that, through is subsidiaries, is
engaged in the business of exploration,
acquisition, and development of oil and gas
properties and metals and mineral properties in
the U.S. TIV is primarily a wildcatter company
which targets high impact prospects that are not
close to known production, located in settings
having no conventional prospects. The
Company has acquired properties in such
wildcat prospects like the Sunrise Gas
Exploration Project, in Delano, California in
addition to the acquisition of properties such as
the Temblor Valley property, consisting of a
lightly drilled property adjoining a prolific oil
field. Rising oil and gas prices over the past few
years, along with technological and geological
advances, makes these previously idled oil and
natural gas deposits very attractive. By utilizing
new technologies, Tri-Valley has designed a
comprehensive multi-well drilling program to
fully develop its current oil and gas properties
The Company also plans to start generating
revenues this year through operations in its
industrial mineral properties. Consequently,
with an increasing staff of high quality technical
personnel, a large inventory of valuable
prospects and minerals acreage, growing
demand for its services and products, Tri-Valley
Corporation offers investors an uncommon
platform to access a growing industry
opportunity.
THE COMPANY
Incorporated in Delaware on September 27,
1971, Tri-Valley Corporation was successfully
taken public on January 6, 1972. Tri Valley is a
diversified holding company, engaged in the
business of oil and gas exploration and
production as well as the exploration,
development, and production of a variety of
metals and industrial mineral resources. The
Company conducts these businesses primarily
through three wholly owned subsidiaries – TriValley Oil & Gas (TVOG), Tri-Valley Power
Corporation
(TVPC),
Select
Resources
Corporation. In addition, the Company also has
controlling interest in Great Valley Production
Service and Great Valley Drilling Service,
which provides drilling services primarily for its
oil and gas exploration business.
Tri-Valley Oil & Gas, TIV’s primary
investment, manages the Company’s oil and gas
operations. Based in California and established
in 1963, TVOG subsequently merged with the
parent Company in July 1981. The subsidiary
historically operated in the Sacramento Valley
and produced gas that the Company sold to oil
and gas majors in Northern California. It
operated through exploration relationships with
oil majors such as Phillips Petroleum Company,
Occidental USA, and Texaco USA. It coventured with these companies to use their
proprietary data to explore the Sacramento
Valley on a 50-50 basis.
More recently, TVOG has been funding its
explorations through partnership programs such
as the Opus I Drilling Partnership. In the Opus I
Partnership, the Company proposed 26 wildcat
prospects in the California and Nevada regions
that potentially have large resources and thus
attracted investors to own a working interest in
the properties. It used the money from the sale
of these interests for its exploration and drilling
expenditure and for purchasing the oil
producing properties.
Presently, TVOG’s major properties are located
in California’s Sacramento Valley gas province
Page 17 of 134
and the San Joaquin Valley oil province. The
Company’s current activities are confined to
California and Nevada where the Company’s
assets include a proprietary database of 700
leads and prospects along with more than
20,000 line miles of digitized 2-D seismic, the
workhorse of the majority of the seismic in
California. Tri- Valley plans to capitalize on the
opportunity provided by the large gap between
the demand and supply of oil in California. The
state imports nearly 60% of its oil requirements.
TVOG currently sells substantially all of its gas
and oil production to ConocoPhillips and Pacific
Summit Energy.
Select Resources Corporation manages the
mineral and metals operations of the Company.
TIV diversified into precious metals exploration
in 1987 when it bought a precious metal
property at Richardson, Alaska. Since then, the
Company has continued exploration for gold
and other precious metals in the area with the
support of TsNIGRI, the Central Research
Institute of Geological Prospecting for Base and
Precious Metals based in Moscow, Russia.
Select Resources Corporation, a Delaware based
entity, was created in December 2004 to handle
the Richardson Property and to acquire and
explore new precious metal and industrial
mineral properties. It has interests in properties
in Alaska (gold, copper, and super high-grade
calcium carbonate) and in California (basalt,
cinder and limestone). The Company conducts
its industrial mineral and metal mining
operations through Tri-Western Resources JV.
Although currently inactive, Tri-Valley Power
Corporation (TVPC) was formed in December
1997 with the intention to convert part of the
TVOG gas production into electricity. The
Company believes it can capitalize on the
market for electricity in California and the
opportunities that deregulation might offer to
clean natural gas producers. TVPC plans to sell
the gas produced by TVOG directly to industrial
end-users.
TIV also owns and manages production and
drilling rigs through in Great Valley
Production Services and Great Valley
Drilling Services. Great Valley Production
Services manages and operates a fleet of
production rigs. The Company controls 100%
share in Great Valley Production Services.
However, it intends to offload around 49% stake
in the company to strategic investors. Great
Valley Drilling Services owns a fleet of drilling
rigs. Tri-Valley recently sold 23% stake in this
venture and is further expected to offload
additional 26% share and thus bring down its
stake to 51% in the drilling company. Both of
these investments provide strategic support to
TVOG by furnishing oil production and drilling
rigs at its operational properties. However, when
not utilized on Company’s projects, the
Company contracts these rigs to other
companies in California and Nevada.
Tri-Valley’s strategy is to rework the idle wells
on its properties, drill new wells and explore the
possibility of starting production in untested
deeper zones. The Company intends to rework
wells in its producing properties to increase
production and to drill horizontal wells to
realize their full potential. The Company owns
producing and exploratory properties in
California such as the Temblor Valley Property
and Pleasant Valley Property, which are
producing properties and the Ekho Project and
Sunrise Project that are exploratory properties.
In addition, to accelerate its growth, the
Company continuously conducts research on
companies and properties as potential
acquisition targets. Under SEC criteria, the
Company can currently report only 218,000
BOE (barrels of oil) and 779,598 MCF
(thousand cubic feet) in its filings. However,
standard industry methods for evaluating oil and
gas properties estimate in excess of 100
MMBOE (million barrels of oil equivalent)
Page 18 of 134
Picture 1: Tri-Valley’s Business Structure
Page 19 of 134
BULL CASE
•
•
•
Tri-Valley has a strong base of assets in areas
known for producing high quality oil and gas
and minerals. The Company’s oil and gas
properties are located in adjoining areas of
California and Nevada, known to produce
billions of barrels of high quality oil and gas.
The mineral claims are near the known gold copper mineralization area of the Tintina
Gold Belt in Alaska and drilled-resources of
basalt and limestone in California. These
assets are likely to provide assured funds to
finance other projects to be undertaken in the
future.
Tri-Valley’s plan to use the latest technology
to attain oil production in the near term is
likely to add significantly to the economic
value of its fields. Most of the properties
recently acquired by the Company consist of
wells idled in the past due to the non-viability
of production using conventional recovery
methods, when prices were too low.
Employing new technologies, Tri-Valley has
commenced the task of reworking and reexploiting these idle wells in an effort to
bring them to or increase production. Any
success in this venture is likely to translate
into immediate returns for its shareholders.
The acquisition of production and drilling
equipment is expected to give the Company
the ability to work on its own oil and gas
properties in spite of the unavailability of
contract rigs. With nearly 50,000 wells in
California and only 500 production rigs, there
is a scenario of increasing demand and
declining fleets. The Company is able to
avoid delays as it has successfully procured
eight production rigs to work over its
growing inventory of oil and gas wells (five
are being refitted to also drill from 2,000 feet
to 8,000 feet). As TIV is among the few
companies to own its rigs, this may
translate into a competitive advantage for
the Company. Furthermore, this situation
may give the Company the ability to reduce
its drilling costs.
•
The tested quality of the oil and the
industrial minerals found by TIV is
impressive. There is considerable demand
for sweet 48-gravity crude oil being less
expensive to refine, enables the Company
to sell it in the market at a premium price.
The Company has an opportunity to
capitalize on this situation by finding ways
to commercially exploit this oil. In
addition, TIV has also begun quarrying and
processing specialty basalt deposit, a good
quality material in great demand, for the
building and construction industries. We
expect these moves to add considerably to
the Company’s top line growth.
•
TIV reported the positive results of recent
geophysical and satellite interpretation
testing programs at its gold properties. The
gold found in these properties is of a high
grade, providing additional upside to the
economic value of the properties. Driven
by geopolitical concerns and the increased
desire of developing countries to hold gold,
the price of gold has soared. There was a
5% increase in the global industrial demand
for gold in Q1 FY06 and this increasing
demand is expected to create a demand and
supply gap in the market. Taking note of
this spike in demand and the price of gold,
the Company has acquired properties
having the possibility of great mineral-rich
systems underlying the claims.
Page 20 of 134
•
exploit this opportunity. Success in this
venture is likely to translate into a
significant top line growth for the
Company.
Tri-Valley owns valuable petroleum reserves
in California, the biggest gas-consuming state
in the U.S., which currently imports almost
60% of its oil and nearly 90% of its natural
gas requirements. Tri-Valley is using new
technologies to extract oil from previously
inaccessible reserves in California in order to
BEAR CASE
•
•
•
Tri-Valley tested many of its properties,
revealing substantial quantities of oil. The
Company is relying on the possibility of
commercially exploiting these reserves with
the aid of thus far, untried technologies.
However, in the event that these
technologies are unsuccessful in achieving
economically viable production, the
Company must wait for the discovery of
new, more effective technologies. This may
have a direct effect on the prospects of the
Company and reduce shareholder value.
Factors that govern commodity prices are
beyond the Company’s control. Any
significant price corrections of the
commodities in which the Company
operates can render Tri-Valley’s business
uneconomical. In addition, the quality of oil
and gas in the discovered reserves may not
be of the high quality discovered in the test
wells and may consequently lead to a
reduction in the selling price of their oil and
an overall erosion of corporate value.
route. Environmental and/or routing
concerns can also delay major projects.
Furthermore, it will be difficult for sponsors
to develop and maintain commitments for
their projects in the event of financial
difficulties or an overall slowdown in the
economy.
•
The Company is relying heavily on the
upcoming large infrastructure spending by
California to provide a market for its
industrial minerals, especially ground
calcium carbonate (GCC). However, it faces
substantial competition from alternative
minerals successfully used in construction
projects.
•
Most of Tri-Valley’s oil and gas reserves are
concentrated in California. As the Company
is not geographically, diversified, local
conditions may have a greater effect on it
than on other more diversified companies.
The oil and gas industry is highly regulated
by the government, often causing delays to
projects because of the extended time
required to acquire local permits from
numerous towns and land use agencies
located along the proposed construction
•
Page 21 of 134
TRI-VALLEY’S VALUE DRIVERS
Tri-Valley is likely to experience substantial
growth led by increasing activity in the global oil
and gas industry. With traditional reserves
rapidly depleting, previously abandoned and
unconventional oil and natural gas deposits and
emerging hydrocarbon-productive regions and
unconventional reservoirs are beginning to
comprise an increasingly large percentage of
supply. The use by Tri-Valley of modern
technology is likely to help the Company
improve its efficiency in exploiting oil from
these previously ignored sites. Additionally,
the Company, with its balanced portfolio of
safe and high-risk properties with high quality
oil reserves, is likely to benefit from the
increasing prices of oil and natural gas.
Picture 2: Tri-Valley’s Key Value Drivers
Page 22 of 134
Balanced portfolio of high risk and safe
assets 1
Tri-Valley is essentially a wildcatter company,
with investments in many properties that have
not shown any commercial production. However,
to avoid erosion of shareholder value, the
Company made a conscious move towards the
balancing of its asset portfolio by acquiring lowrisk properties such as the Moffat Ranch Field,
which produced around 12.5 bcf of gas from the
shallow zones without any fracturing. It also
acquired the Temblor Valley property, which has
a current production that is improvable by
reworking some of the idle wells on the property.
All of these re-exploitation properties have
additional untested zones that produce on
neighboring properties. Additionally, the
Company plans to reduce the financing burden
by starting profitable calcium carbonate
operations in FY07 at the Admiral Calder
Carbonate Mine. This move to balance its
portfolio will reduce the risk associated with
wildcatting for high impact prospects and
massive development potential and is likely to
provide stable returns to the shareholders in the
longer term.
Acquisition of drilling equipment
There is an acute shortage of drilling equipment
in California as the number of wells requiring
equipment far exceeds the amount of rigs
available. This is causing delays in drilling
programs and increasing drilling costs.
Recognizing this situation, the Company is
backward integrating and has acquired eight
production rigs and one land drilling rig of
varying capacities, enabling it to service its
properties without any delay. Furthermore, as
more operators are unable to service their own
properties on a timely basis and as production
1 Refer to Appendices 7-16 for detailed
information on Tri-valley’s assets
declines, they will be motivated to divest their
properties. This will open up acquisition
opportunities for operators such as TIV who
can service additional properties. These
potential acquisitions can build the Company’s
revenue base and will give an edge over its
competitors by having the ability to reduce its
drilling costs. The Company will also own the
only drilling rig in Nevada and can therefore
lease it to other companies in the area.
Use of modern technology in E&P
activities 2
In recent years, the increasing demand for oil
and gas in California prompted exploration
companies to investigate previously unexplored
properties and abandoned wells using new
technology. Tri-Valley has acquired many
properties abandoned by other oil companies
and has successfully begun production using
modern technologies such as fracture
stimulation and horizontal drilling. The
Company has reworked two idle wells at the
Moffat Ranch and the Martin-Severin No. 3
natural gas well at its Sacramento Valley
program, bringing these to commercial
production of 200,000 cubic feet per day. It
plans to start similar reworking programs at
wells in its Ekho project, Temblor Valley, and
Pleasant Valley. We believe that if the
Company can attain commercial production
from all its properties, this will lead to
substantial top line growth for Tri-Valley.
Findings of high quality oil and gold
Light sweet crude oil is in great demand in the
market as it is easy to recover and refine.
Refineries are willing to pay a premium for this
type of crude, expanding producers’ margins.
Although most of the crude found in California
2 Refer Appendices 2-6 for detailed
information of drilling technology
Page 23 of 134
is heavy and sour, the Company has made
discoveries of sweet light crude in many areas.
The oil found in the Ekho 1 well is of 48 gravity
(compared to gasoline which is 56 gravity) and
will require much less refining. Moreover, the
Company expects to extract oil ranging from 26
to 28 gravity free flowing oil from the Temblor
Valley project and six gravity heavy to 34
gravity light oil from the Pleasant Valley
property. This is likely to be economically
beneficial to the Company as they can charge a
premium for their product.
The gold found on its properties is very
anomalous which adds value to its assets.
Exploration at Richardson has found physical
gold in samples at 60 locations along a 20 mile
(32 kilometers) swath suggesting the
possibility of a huge system underlying the
claim block. At Shorty Creek, the Company
did extensive testing resulting in samples
reporting highly anomalous gold, silver,
arsenic, bismuth, antimony, tellurium, and
tungsten values. With similar testing at the
Richardson property, a soil survey identified a
zone approximately 8 kilometers long (5 miles)
and approximately ½ to 1½ kilometers wide
with anomalous gold concentrations. This
anomaly is typical of the region around the
successful Tintina Gold province, which
includes many multi-million ounce deposits
such as Pogo and Fort Knox.
TRI-VALLEY’S ASSETS
OIL AND GAS OPERATIONS
Tri-Valley has acquired several oil and gas
properties in California and Nevada. Most of the
recently acquired properties consist of idled
wells and are located near high producing fields.
In addition to these assets, Tri-Valley also has a
proprietary worldwide geologic library that
gives it data on every continent except
Antarctica. In California, its present area of
emphasis, TIV has 700 petroleum leads and
prospects for drilling along with more than
20,000 line miles of digitized 2-D seismic, the
workhorse of the majority of the seismic in
California.
We believe that these properties have vast
untapped resources of oil and gas that, if
brought to commercial production, will add
immensely to the Company’s value. The Sunrise
Natural Gas Property for example, contains
probable natural gas in place of nearly 3.3
trillion feet (550 MMBOE). The Ekho Project
and the Pleasant Valley property also have vast
reserves of oil and gas. The rising demand and
increasing prices for oil and gas, coupled with
the fact that Tri-Valley has the opportunity to
reduce its cost by using its own drilling rigs,
adds significant upside to the Company’s future
profitability.
Below is a description of the properties. Some
oil and gas properties have been acquired jointly
with the Opus I Partnership in which Tri-Valley
owns 25% and investor partners owning 75%.
Page 24 of 134
Picture 3: TRI-VALLEY CORP’S ACTIVITIES
Page 25 of 134
Table 1: Tri-Valley’s Oil & Gas Property Reserve Summary
WELLS
Field
Area
(Sq. Feet)
Total
Reserves in MMBOE (TIV's Share)
Producing
Proven
Probable
Total
30.5 MM
49
24
0.1
Temblor East (Opus)
7 MM
7
3
Temblor West (TIV)
22 MM
0
0
Pleasant Valley (Opus)
22 MM
3
0
6
12
18
Pleasant Valley (TIV)
22 MM
0
0
0
120
120
Ekho No. 1 (Opus)
14 MM
1
0
0
7.5
7.5
Ekho Project (TIV)
1 Bn
0
0
0
1,650
1650
288 MM
1.44 Bn
3
0
63
0
0
27
0
0
6.1
Temblor West (Opus)
Sunrise Natural Gas
Great Valley Ranch Gas
TOTAL
1.
Temblor Valley Property
The Temblor Valley property in Kern County
consists of two producing oil properties, one in
the South Belridge Oil Field containing 49 wells
(24 producing, 24 idle and 1 injector well). The
other property, in the Edison Oil Field, consists
of seven wells (three producing, three idle and
one injector well). The Company purchased the
850 acres of land in Jan 2006 at a price of
$2,850,000. In 1930, the then worlds’ deepest
well was drilled to 11,377 feet on this property
and had 59 API gravity oil.
The Company plans to return the idle wells in
both fields to production and to start drilling new
wells. It plans to drill a new well on the Temblor
West Prospect (Opus I) beginning in August
2006, and on the Temblor East and Temblor
West (TIV) portions from 2007. The Company
has managed to balance its portfolio of assets
with the help of this property as it has wells,
which are currently producing at a rate of 100
barrels of oil per day. Furthermore, the property
also consists of wells, which the Company plans
to re-work and use new technology to bring to
immediate production. This will help in starting
9
9.1
0
0.6
0.06
0
19.5
19.5
550
550
91
91
2459.6 2465.16
an instant stream of cash flow to fund its future
E&P activities.
2.
Pleasant Valley Property
The Pleasant Valley property covers three
leases in the Oxnard Oil Field, Ventura
County. The property, acquired in May 2005,
contains estimated reserves of 6 million barrels
of proven, undeveloped recoverable oil. The
property also consists of 12 MMBOE of
probable reserves. The Company plans to start
drilling wells from October 2006, and plans to
start commercial production on this site. The
acquisition of proven undeveloped reserves on
this site has led to an increase in the potential
of the Company. It will also lead to an
immediate inflow of cash from the oil
produced and start the process of reducing the
accumulated losses of the company.
3.
Moffat Ranch Gas Field Property
Tri-Valley acquired approximately 6,900 acres
in the Moffat Ranch Gas Field, west of
Madera, California.
Page 26 of 134
Tri-Valley recently completed reworking on two
old wells, both of which are now in production.
A previous leaseholder drilled a third well that,
however, was not tested and subsequently
abandoned. The Company’s technical team
believes this well should be re-entered and
completed for production. The Company plans to
drill a 10,300 foot well to appraise several other
zones that produce on neighboring properties but
are thus far untested on the Moffat Ranch
property.
4.
Sacramento Valley – Rio Vista and
Dutch Slough Gas Fields
The Company has producing interests in gas
fields in the Sacramento Valley of Northern
California in the Rio Vista and Dutch Slough
Gas Fields.
The Sacramento Valley project is a six well
program that has produced more than 22 bcf of
high quality gas from the unit set up by TriValley and Phillips Petroleum Company. TriValley took over Phillips’ interest in the
partnership in 2000. Tri-Valley also recompleted in Nov. 2005 its Martins-Severin No.
3 natural gas well, originally drilled in 1990.
5.
Chowchilla Ranch Gas Fields
Tri-Valley purchased approximately 6,670 acres
of mineral rights, covering what was the
Chowchilla Ranch Gas Field in Madera County,
California. The Company believes this land
position to be extremely under-developed and
under-exploited and plans to re-enter, recomplete, and further infill drill the leasehold
position. Tri-Valley also has leased an
approximate additional 7,500 acres offsetting
the 6,670-acre Chowchilla property.
6.
Ekho – Exploration Project
The oil field is located near the center of the
south San Joaquin Valley, 40 miles northwest
of Bakersfield. The Company intends three
wells in the region. The independent estimate
of reserves for the Ekho No. 1 is 133 million
barrels of oil and 162 billion cubic feet of gas
in place per 320-acre unit.
The Company is investing in research on the
tight Vedder sand and the area is estimated to
hold billions of barrels of high quality oil and
gas in the tight sands.
7.
Sunrise – Exploration Project
The Sunrise Mayel No. 1 has been drilled near
the City of Delano, California and reveals
approximately 300 net feet of gas saturated
McClure Shale. Independent reservoir analysis
firms estimate 80 billion cubic feet of dry
natural gas in place in a 160-acre area. TriValley has mapped approximately 6,600 acres
of possible closure. The formation is tight and
may require horizontal drilling and hydraulic
fracturing, and perhaps additional formation
treatment to obtain commercial flow rates.
Tri-Valley also owns a small segment of a pipeline
in Tracy, California. In addition, to counter the
mounting shortage of production and drilling rigs,
the Company has assembled a fleet to service its
own wells and contract out when not in use.
Page 27 of 134
MINING ACTIVITY
Select’s
mineral
properties
include
approximately 61 square miles of claims
surrounding areas of known gold copper
mineralization in two areas of the Tintina Gold
Belt of Alaska and drilled-resources of basalt and
limestone in California. Select Resources’
precious metals properties are located in
interior Alaska, United States.
They are
Richardson, and Shorty Creek. The high
quality of gold and increased market demand
enhances our optimism for Tri-valley’s success
in this venture.
Table 2: Tri-Valley’s Gold Property Reserve Summary
Reserves in MM OZ
Field
Area
(Sq. Feet)
Proven
Probable
Total
Shorty Creek
446 MM
0
1
1
Richardson
1.25 Bn
0
5
5
1. Richardson Property
Located 65 miles south of Fairbanks, Alaska,
the Richardson property is located between
Richardson Highway and the Alyeska
Pipeline service road. This property was
acquired by Tri-Valley in 1987, with
exploration starting in 1991 as a joint effort
with TsNIGRI, the Russian mineral research
institute. TsNIGRI geoscientists have
previously evaluated Tri-Valley’s claims and
by 1999 had identified physical gold in as
many as 60 locations. Bulk sampling at one
high-grade dike yielded close to 3000 rough
ounces of gold from 30,000 tons of partially
crushed ore. The Company’s partnership with
the premier research institute and the vast
quantities of gold found in the area make this
a very profitable prospect for the near future.
2. Shorty Creek Property
Select Resources obtained the Shorty Creek
property in 2004. It is located about 60 miles
northwest of Fairbanks, Alaska on the allweather paved Elliott Highway that connects
Fairbanks, Alaska with the North Slope
petroleum production areas. At Shorty
Creek, Select Resources controls mineral
rights through staking and lease
arrangements from Gold Range Ltd.,
covering approximately 16 square miles of
State of Alaska lands.
3. Admiral Mine Property
Select Resources industrial mineral projects
consist of the Admiral Calcium Carbonate
Mine in Alaska and through Tri-Western
Resources, LLC joint venture. The
Company obtained the Admiral Mine from
Sealaska Corporation in 2005. It is located
on the north-west side of Prince of Wales
Island, approximately 150 air miles south
of Juneau and 88 air miles northwest of
Ketchikan. The mine consists of 13.7
million tons of drilled high chemical grade,
brightness, and whiteness mineralized
material, considered to be in the top 1% of
high-grade CaCO3 deposits in the world.
The current mine covers only 15 acres
while the entire property covers 572 acres
Page 28 of 134
of patented mining ground and includes all
operating permits and tideland leases. The
Company plans to start the mine in 2007 and
the increase in infrastructure activities in the
area provide a ready market for the calcium
carbonate found on the area.
Table 3: Admiral Calder Mine Reserve Summary
Prospect
Admiral Calder Mine
Held Under
Proven Reserves
MM Tons
Probable Reserves
MM Tons
Total Reserves
MM Tons
Select
13
117
130
13
117
130
Total
INDUSTRY DRIVERS
Oil and Gas Industry 3
The global oil and gas price exhibited a rising
trend since 2002. Rising exploration and
production costs and the increasing imbalance
between demand and supply are the main
drivers for this increase. This indicates that the
price rise is more fundamental in nature as
compared to earlier price increases (the current
prices of oil and gas stand at $75.29 and $7.40
respectively).
The inability of oil companies to replace their
reserves is the main reason behind ongoing
supply constrains. Existing reserves are
depleting and OPEC does not have spare
capacity to increase supply. It is also
increasingly difficult for companies to find new
oil fields. Additionally, political issues such as
Iran’s nuclear standoff and civil unrest in
Nigeria, nationalization of production by
Venezuela, Eucador and Bolivia along with
maturing fields in the U.S. and Europe are
further constraining supplies. This is
exacerbated by events such as the shutdown of
the Giant Prudhoe Bay Oilfield in Alaska. An
increase in oil supply is likely to depend on
technological advancements or further price
increases that may make currently commercially
unviable oil resources profitable. High demand
from emerging markets such as India and China
is pushing demand higher. In addition,
speculative market activities are also increasing
the demand for oil.
The limited supply of drilling and exploration
equipment with the growing cost of steel and
other raw materials needed for exploration and
production activities are driving costs higher. As
a result, land previously abandoned is now
likely to be used for profitable oil production,
using new technology in the face of a growing
demand-supply imbalance.
3 Refer Appendix 1 for Value Drivers for oil
and gas industry
Page 29 of 134
Gold Industry4
Gold prices have been rising since 2001. From
an average price of $271 in 2001, gold is
currently selling at $658.4. The high price of
gold has caused a drop in demand for gold
jewelry (a reduction of 22%) and hence a net
decrease of 16% in overall demand. This
decrease was despite investors contributing a
23% increase in demand (in tons) in Q1 FY06
as compared to Q1 2005. In dollar terms
however, there is an increase of 9% in total
spending on gold. Furthermore, the demand for
gold for industrial use rose by 5% in Q1 2006.
Electronic components and dentistry form the
bigger portion of this demand while new
demand comes from bio-medical and chemical
uses (as a catalyst) of gold. The weakening of
the dollar is also driving the price of gold
higher. The increased investment in gold is
attributable to the failing confidence of investors
and central banks in the dollar and the growing
importance of gold as an investment asset. With
supply constrained by the ability of gold mining
companies to find and develop commercially
viable reserves and the depletion of existing
gold reserves, the supply-demand gap is likely
to widen further leading to higher prices.
Exploration activities reduced in the late 1980s
and 1990s, leading to the low rate of
replacement of gold reserves. However,
increasing prices have rekindled interest in gold
and the exploration related spending of
companies has increased in recent years. There
are expectations of continued constrains of
supply in the near future due to the fact that the
companies that find reserves will need time to
develop these reserves and to start commercial
production. Moreover, led by high labor and
energy costs, exploration and production costs
are increasing at a fast pace.
New technology in mineral processing and
extraction is necessary to exploit resources with
low gold content and to increase overall supply.
An increasing price of gold in the future will
make even those resources with very little gold,
commercially viable as a mining target.
Metal and Minerals Industry
Industrial mineral production in the United
States is a significant part of the national
economy from both the producer's and the
consumer's viewpoints. Industrial mineral
production in the United States was $29.6
billion in 2003. This amount was 78.1% of the
total value of all non-fuel minerals produced in
the United States. Of the 25 minerals with the
highest domestic production value, 17 are
industrial minerals. Domestic industrial mineral
producers play an important economic role in
providing affordable materials essential to
infrastructure development and maintenance
(including homeland security), agriculture,
industry, and the mitigation of environmental
problems. Industrial minerals are important as
fillers in commonplace items such as paint,
wallboard or sheetrock, shoes, and cosmetics.
They are also important to the production of
essential components in sophisticated, leadingedge equipment used in information processing
and other technologies that are essential to
homeland security and national defense. The
consumer costs for purchasing industrial
mineral commodities are likely to increase as
costs to rebuild infrastructure (bridges, roads,
etc.) and improve homeland security and
national defense add to the total price tag.
4 Refer Appendix 6 for Value Drivers for Gold
Industry
Page 30 of 134
CAPITALIZATION
Through its drilling partnerships and judicious
private placements of its unregistered, restricted
common stock, Tri-Valley has always had
sufficient resources to finance its oil and gas
exploration and production activities. The
Company funds its operations primarily through
the selling of interests in its Opus I drilling
partnership, with little long-term debt on its
balance sheet. Tri-Valley has an authorized
share capital of 100,000,000 common shares at
a par value of $0.001. As of June 30, 2006, TriValley had issued 23,275,401 common shares
amounting to $23,275 (22,806,176 shares
outstanding) and $27.89 million of additional
capital.
FORECASTS
Natural Resource companies are valued based
on the proven and estimated reserves they hold.
These reserves are awarded a net value, and
other important variables such as the price of the
resource and the amount recoverable are taken
into consideration.
To determine an appropriate value for TriValley, we model the development process for
those oil and gas resources that may be
economically recoverable. We assess the costs
of oil and gas extraction and forecast revenues
based on a range of prices for the two
commodities. Due to the lack of current
production on most sites owned by the
Company, our valuation is based on a set of
assumptions. We normalize and spread the total
value of recoverable sources of oil and gas and
the total cost incurred over the entire life span of
the projects. This method helps us derive the
present value of operating revenues from the
Company’s oil and gas operations. We then
deduct the current working capital requirement
and make necessary adjustment to account for
the Net Debt of the Company. Due to the lack of
cost and sales information about the Company’s
mining and metals activities, we have used a
relevant multiple to reflect the cash flows that
might arise from these activities. The Net Asset
Value (NAV) arrived at is then divided by
number of outstanding shares to derive the fair
value per share.
Production Forecasts
In 2005 the Company had an annual production
of 17 barrels of oil (BBL) associated with
128,602 thousand cubic feet (MCF) of natural
gas. This increased to 100 barrels of oil per day
from a proven production reserve of Production
is expected to increase substantially due to the
reworking on many wells on recently acquired
properties. With its exhaustive well re-entry and
well re-completion plans, and with deployment
of newer production technology, the Company’s
annual production rate is expected to increase to
more than 73,000 BBL and 77,959 MCF in
FY07. In the future, we expect the production of
oil to gradually increase to 547,500 BBL by
FY08. However, the production of gas is
expected to remain constant at current levels.
Page 31 of 134
Table 4 : Production Forecasts- Proven Reserves
Production
2006E
2007E
2008E
2009E
2010E
Oil (BBL) Annual Rate
73,000
224,997
547,500
730,000
1,095,000
Natural Gas (MCF) Annual Rate
77,960
77,960
77,960
77,960
77,960
85,993
237,990
560,493
742,993
1,107,993
Total (BBL) Annual Rate
Tri-Valley also has probable reserves on its
various properties that we expect, in the near
term, to start commercially producing nearly 200
BOED. The Company’s share of estimated
recoverable oil on properties such as the Temblor
Valley property is nearly 29.1 MMBOE. There is
currently a small amount of production on the
property and the Company has identified new
drilling targets on which it plans to start work in
the coming months. The reserves on properties
such as the Pleasant Valley and part of the Ekho
Exploration projects are estimated to be 139.5
MMBOE and the Company plans to start
drilling operations in 2007. We believe that the
Company will achieve commercial flow rates
on the Temblor Valley, Pleasant Valley and on
a part of the Ekho project by FY07. In the
future, we expect the Company to achieve a
success rate of 10% in recovering the estimated
reserves on the Ekho, Pleasant Valley and
Temblor Valley properties and to achieve the
optimum annual production rate of 1.61
MMBOE by the end of 2012.
Table 5: Production Forecasts- Probable Reserves- Base Case
Production
(MMBOE)
2007E
2008E
2009E
2010E
2011E
2012E
Oil
0.34
0.58
0.93
1.30
1.54
1.61
Total
0.34
0.58
0.93
1.30
1.54
1.61
In addition to the above, the Company has
additional probable recoverable resources of
nearly 2,291 MMBOE from properties such as
the Ekho, Great Valley Ranch, and Sunrise
properties. However, commercial viability of
these enormous amounts of oil and gas has not
been established so far. Therefore, we have
excluded these properties from our calculations.
However, we believe that once the Company
finds the appropriate technology to retrieve the
petroleum on these properties, it will lead to
further unlocking of value for the Company.
Revenue Forecast
The key drivers for the Company’s top line are
the prices of natural gas and oil and the
production rate of oil and gas from various
properties. Although we expect the demandsupply situation for oil and gas to be tight in
the future, we believe that the oil and gas prices
are currently at their peaks and will ease in the
near future. Our Base Case forecast expects
natural gas prices, currently around $5.75 per
1000 cubic feet, to hover around $4.67 per
1000 cubic feet by 2010. Furthermore by 2010
Page 32 of 134
we anticipate a minor correction in oil prices
from its current levels of $75 per barrel and
expect it to touch $74.36 per barrel by 2010.
Based on our above premises for oil and natural
gas prices and the Company’s proven reserves in
the short term, we estimate Tri-Valley’s revenues
from all the blocks combined to be $6.01 million
in 2006 and $43.95 million in 2007. The 631%
jump in top line is attributable to the Company’s
aggressive rework and development plans for all
its properties. The Company has begun to work
over 17 idle stripper wells and 25 currently
producing wells at the Temblor Valley property
in an effort to maximize production. In addition,
the Pleasant Valley Property has total oil in
place of 138 MMBOE (million barrels of oil
equivalent) and is expected to begin
commercial production of its proven
undeveloped reserves of nearly six MMBOE in
FY06. The Company is planning to drill two
other wells on this property. The reserves of
the Company have increased considerably due
to the acquisition of many properties having
current production. This will considerably
increase the production of the Company.
Additionally, oil prices are expected to remain
high in the near future, increasing the revenues
of the Company.
Table 6: Revenue Forecast - Base Case
In $ million
2006E
Probable Gas Reserves
2007E
2008E
2009E
2010E
2011E
25.88
45.31
71.23
96.84
113.13
Proven Oil Reserves
5.52
17.54
41.92
54.28
79.27
77.10
Proven Gas Reserves
0.49
0.54
0.44
0.41
0.36
0.37
Total Revenues
6.01
43.95
87.68
125.92
176.47
190.60
Table 7: Revenue Forecast - Optimistic Case
In $ million
2006E
Probable Oil Revenues
2007E
2008E
2009E
2010E
2011E
28.61
49.57
77.73
106.65
135.87
Proven Oil Revenues
5.45
18.60
46.03
69.47
95.32
93.41
Proven Gas Revenues
0.49
0.58
0.53
0.50
0.46
0.49
Total Revenues
5.94
47.79
96.14
147.71
202.43
229.77
Table 8: Revenue Forecast - Pessimistic Case
In $ million
2006E
2007E
2008E
2009E
2010E
2011E
24.77
38.45
57.21
76.89
95.96
Proven Oil Revenues
5.45
13.76
26.70
44.85
64.59
62.01
Proven Gas Revenues
0.45
0.44
0.36
0.33
0.29
0.29
Total Revenues
5.90
38.98
65.50
102.39
141.77
158.25
Page 33 of 134
Cost Forecast
The key cost components of an oil and gas
is a key positive to bring expenditures down.
exploration and production company are the
Based on our above premises, we have
drilling costs it incurs. We expect the Company
calculated the cost incurred for production of oil
to stabilize its costs, especially drilling costs, in
and gas by the Company to produce one barrel
the medium term. The fact that the Company
of oil (BBL) and one thousand cubic feet (MCF)
has acquired drilling rigs through its subsidiaries
of gas, based on the annual production in FY05.
Table 9: Cost Calculation
Amount In $
Gas Produced (MCF)
128,602
Oil produced (BBL)
17
Total BOE produced
21,451
Total MCFE Produced
128,704
Production Costs
93,429
Cost per BOE
4.3555
Cost per MCFE
0.7259
We believe that as the Company moves from
exploration towards production, by FY2010, the
costs related to production will stabilize and
grow at the nominal rate of 3.5%, reflecting the
average inflation rate. Since the Company will
not be producing on all its properties until then,
.
and the rigs it owns may largely subsidize the
drilling costs, there will be an increase of
approximately 2% in the costs incurred. The
costs for the Pessimistic and Optimistic Cases
are calculated by increasing the percentage by
which the costs are expected to grow
Table 10; Costs forecasts – Base Case
Costs (in $)
Cost of 1 BOE
Cost of 1 MCFE
2006E
2007E
2008E
2009E
2010E
2011E
4.36
0.73
4.44
0.74
4.53
0.76
4.62
0.77
4.78
0.80
4.95
0.83
Net Operating Revenue Forecast
After considering the revenues and the costs, we
calculate the Net Operating Revenues for the
Company. The following table shows our
forecast for the Company’s Net Operating
Revenues based on our Base Case, Optimistic
Case, and Pessimistic Case scenarios.
Page 34 of 134
Table 11: Net Operating Revenue Forecast - Base Case
In $ million
2006E
2007E
2008E
2009E
2010E
-
24.36
42.68
66.93
90.61
Proven Oil Revenues
5.21
16.54
39.44
50.91
74.03
Proven Gas Revenues
0.43
0.48
0.39
0.35
0.30
Total Revenues
5.64
41.38
82.51
118.19
164.94
Table 12: Net Operating Revenue Forecast - Optimistic Case
In $ million
2006E
2007E
2008E
2009E
2010E
-
27.02
46.72
73.07
100.00
Proven Oil Revenues
5.14
17.56
43.38
65.31
89.37
Proven Gas Revenues
0.43
0.52
0.47
0.44
0.40
Total Revenues
5.57
45.10
90.57
138.83
189.77
Table 13: Net Operating Revenue Forecast - Pessimistic Case
In $ million
2006E
2007E
2008E
2009E
2010E
-
23.31
36.03
53.33
71.24
Proven Oil Revenues
5.14
12.95
25.02
41.81
59.84
Proven Gas Revenues
0.39
0.39
0.29
0.26
0.23
Total Revenues
5.53
36.65
61.34
95.40
131.31
VALUATION
We valued Tri-Valley using three different
approaches related to our short-term, mediumterm and long-term investment thesis. The
short-term price target is derived, focusing on a
3 to 6 month investment horizon, using
comparative valuation, while the medium-term
(6-12 months) and long term price targets are
based on the Net Asset Value (NAV) of the
Company’s proven and probable reserves. The
medium term price target discounts the
Company’s net operating revenues from the
proven reserves of oil and gas in its existing
properties. The long-term price target is our
estimate of the long-term NAV of the
Company’s proven reserves and its probable
reserves from two properties. We have used a
relevant multiple (1.25) to adjust our Net Asset
Value to represent the Company’s mining
interests in the medium and long term.
The present value of the Company’s operating
revenues from oil and gas business was derived
at by using the Company’s weighted average
cost of capital as a discount rate. We arrived at a
cost of equity of 20.09% using a long-term bond
rate (risk-free rate) of 5.25% and a risk premium
Page 35 of 134
of 7.0%. A Beta of 1.5 was used as we feel that
in the medium-to-long term, the share price of
the Company will stabilize and volatility will
reduce. The cost of debt was taken as per the
Company’s interest expense on average longterm debt it had during the year. Based on the
cost of different sources of capital, we derived
at a weighted average cost of capital of 19.69%.
valuation metrics of these companies vary
greatly due to the differences in their
exploration style and technology. Nevertheless,
for the purpose of our estimates, we used the
enterprise value-to-reserves ratio because it is
popularly used for comparison of energy
companies.
We used the competitive companies’ current
proven reserves to estimate their individual
EV/Reserve ratio. Thereafter, we calculated the
average EV/Reserve ratio and multiplied it by
Tri-Valley’s proven reserves to determine its
estimated enterprise value. Subsequently, we
deducted Tri-Valley’s long-term debt and added
back the cash balance to derive the equity value
attributable to common shareholders.
Short-term price target
We arrived at the short-term price target for the
Company by applying the comparative based
valuation method using the EV/Reserve ratio.
We only considered comparable companies for
the oil and gas business of Tri-Valley, as we do
not expect the mining activities to give concrete
results during the short-term. Tri-Valley’s oil
and gas business is analogous to other energy
companies such as Dune Energy (DNE) and
Isramco Inc. (ISRL). Most of the companies we
chose for the purpose of our relative valuation
are similar to Tri-Valley in terms of reserve base
and market capitalization. However, the
Tri-Valley’s target price, as determined by our
comparative valuation approach, is estimated at
$8.02 as shown in the table below. This
represent an upside potential of 14% over the
current market price of $7.15.
Chart 5: Short Term Target Price Based On Comparative Valuation
Short Term Fair Value
11.00
9.63
10.00
8.83
9.00
8.02
8.00
7.00
6.00
Per Share Value
7.22
6.42
80%
90%
100%
110%
120%
6.42
7.22
8.02
8.83
9.63
Page 36 of 134
Table14: Calculation of Short Term Target Price
EV
(in $ million)
Company
Contango Oil&Gas (MCF)
Gasco Energy Inc.(GSX)
Apollo Reserve International (AOOR.OB)
NGAS Resources (NGAS)
Credo Petroleum Corporation (CRED)
Isramco Inc (ISRL)
Kodiak Oil & Gas Corp. (KOG)
Tri-Valley (not taken into average)
Reserves (in MMBOE)
(proved developed)
187.73
0.08
2,346.63
380.54
147.88
217.67
209.63
32.86
147.67
0.38
0.21
0.33
0.39
0.11
0.52
0.22
1,001.42
704.19
659.61
537.51
298.73
283.98
Average
Discount to Industry Average Multiple
Expected EV - Tri-Valley
Less: Debt
Less: Preferred
Add: Cash
Expected Market Capitalization
Outstanding Shareholders
Per Share Value
EV/Reserves
833.15
80%
90%
100%
110%
120%
146.63
(5.20)
0.00
4.88
146.31
22.81
164.96
(5.20)
0.00
4.88
164.64
22.81
183.29
(5.20)
0.00
4.88
182.97
22.81
201.62
(5.20)
0.00
4.88
201.30
22.81
219.95
(5.20)
0.00
4.88
219.63
22.81
6.42
7.22
8.02
8.83
9.63
Medium-term price target
Our medium-term price target estimate ranges
from $9.48-12.22 based on our Base Case
forecast for the Company’s operating revenues.
To derive the medium-term share price, we
discounted the Company’s operating revenues
from its proven reserves of oil and gas. After
calculating the present value of the Company’s
operating profit, we make appropriate
adjustments to derive its Net Asset Value. This
is divided by Tri-Valley’s current outstanding
shares to arrive at the NAV per share. Our
medium-term price target was arrived at by
using a multiple of two on the per share NAV
value to account for the upside expected from
the Company’s minerals business in the medium
term. In addition to a price range based on our
Base Case forecast, we also derived an
Optimistic Case and Pessimistic Case price
range. This price range is as illustrated in Chart
6 below.
Page 37 of 134
Chart 6: Medium Term Target Price Based On NAV
Medium Term Fair Value
40
30
20
10
-
Discount Rates
18.49%
16.99%
15.49%
13.99%
12.49%
Optimistic Case
10.45
11.09
11.79
12.54
13.37
Base Case
9.48
10.08
10.73
11.44
12.22
Pessimistic Case
8.27
8.83
9.44
10.12
10.87
Long-term price target
According to our long-term valuation approach,
the price target estimate for Tri-Valley ranges
from $25.67–35.48. In addition to the
Company’s proven reserves, we derived the
long-term target price range using the probable
reserves of the Company. The resulting figure,
when divided by the Company’s outstanding
common shares, gives us the per share NAV.
The upside of $18.68 represents the probable
revenues Tri-Valley is likely to achieve from its
gold and other mining properties. Chart 7 below
outlines our calculation for the Base Case,
Optimistic Case and Pessimistic Case scenarios
and indicates the target price for the stock for a
range of discount rates.
Page 38 of 134
Chart 7: Long Term Target Price Based On NAV
50.00
40.00
30.00
20.00
10.00
Discount Rates
18.49%
16.99%
15.49%
13.99%
12.49%
Optimistic Case
32.47
35.30
38.50
42.10
46.18
Base Case
25.67
27.73
30.03
32.60
35.48
Pessimistic Case
21.21
22.89
24.77
26.85
29.18
Page 39 of 134
CONCLUSION
Tri-Valley
is
an
independent
energy
development company engaged in the
exploration and development of oil and natural
gas reserves in the domestic market. It has
successfully diversified its operations through
investing in gold and mineral properties. TriValley has acquired an exciting balanced set of
assets; the low-risk properties like Temblor
Valley and Pleasant Valley are expected to
provide the immediate cash flow needed to fund
the development of higher risk properties such
as Sunrise Natural Gas Property. Tri-Valley has
designed a comprehensive multi-well drilling
program to fully develop its current oil and gas
properties by utilizing new technologies. With
the technological and geological advancements,
the Company’s properties at California and
Nevada hold immediate upside potential.
boosts our optimism. Rising energy prices
makes Tri-Valley’s endeavor to develop
previously idled oil and gas properties and
emerging hydrocarbon destinations such as
Nevada economically viable.
We expect Tri-Valley’s prolific Temblor Valley
property adjoining the South Belridge Oil Field
in California to provide significant upside
potential in short to near term. While the proven
oil in place in this reservoir is just 0.1 million
barrels, the estimated reserve is of nearly 29.1
MMBOE (Tri-Valley’s share). Currently, many
oil and gas companies in California are
experiencing significant increases in daily
production rates from reservoirs with similar
characteristics when subjected to new balancedhorizontal-multilateral drilling technologies. In
addition to the Temblor Valley, the Company
has proven oil reserves of 6.0 MMBOE at the
Pleasant Valley property in Ventura County,
California. Tri-Valley is currently experiencing
success with its re-entering operations to tap
reserves at Temblor Valley, which further
Tri-Valley Corporation has assembled a
platform of assets, equipment and professionals
and is beginning exploitation of these assets to
build share value as they are proved up. Other
short-to-medium-term growth catalysts for TriValley includes: a) aggressive workover and recompletion program by the year 2007, which is
likely to significantly increase the daily
production from the Temblor Valley Property;
b) well re-completion program at the Pleasant
Valley property, with estimated reserve of 132
MMBOE; and c) selling the high grade calcium
carbonate deposit at the Admiral Calder Mine.
The long-term growth catalysts for the
Company include the Ekho property, the
Sunrise Natural Gas Property in Delano,
California and the gold deposits, which are
currently in the testing stage.
The Company’s Shorty Creek and Richardson
properties are very exciting and have a
significant long-term upside potential. With
probable reserves as high as 1 million Oz and 5
million Oz respectively, they are expected to
drive growth in the long term. The Company
also owns the Admiral Calder mine on north
Prince of Wales Island in Alaska. This ranks
amongst the top 1% super high-grade calcium
carbonate deposits in the world and can be
placed into immediate operation for the
premium markets.
Page 40 of 134
FINANCIAL EXHIBITS
Page 41 of 134
EXHIBIT 1 : BALANCE SHEET
Page 42 of 134
EXHIBIT 2: INCOME STATEMENT
Page 43 of 134
EXHIBIT 3: CASH FLOWS
Page 44 of 134
APPENDICES
TRI-VALLEY CORP.
(AMEX: TIV)
BUY
Page 45 of 134
APPENDIX 1: STOCK STATISTICS
Table 15: Key Ratios
FY Ended 2005/12
Latest 12 Months As Of 2006/06
12,407,702
Revenue
-0.39
EPS
Gross Margin (%)
-30
EBIT Margin (%)
-96
EBITDA Margin (%)
LTM As Of 2006/06
Revenue
Income From Continuing Operations
Income From Total Operations
11,648,266
11,941,566
11,941,566
-84.2
Current Ratio
0.6
Quick Ratio
0.6
Leverage Ratio
2.9
Receivables Turnover
32.1
Diluted EPS From Continuing Ops.
-0.46
Inventory Turnover
Diluted EPS From Total Operations
-0.46
Asset Turnover
0.5
0
0.5
Net Profit Margin From Continuing Ops. (%)
0
Revenue To Assets
Net Profit Margin From Total Operations (%)
0
ROE From Total Operations (%)
Latest Reported
Price/Sales Ratio
13.54
Revenue Per Share
0.5
Revenue Per Employee
Net Income From Total Ops. Per Employee
323,563
-331,710
0
Return On Invested Capital (%)
-92.7
Return On Assets (%)
-52.4
Price/Book Ratio
19.91
Book Value Per Share
0.34
Debt/Common Equity Ratio
0.81
Total Debt/Equity Ratio
0.75
Revenue This YTD/Last YTD (%)
-37.5
Long-Term Debt To Total Capital
0.39
Revenue Current Qtr./Qtr. 1 Year Ago (%)
-49.3
Cash Flow Per Share
53.9
Revenue Annual/Last Annual (%)
184.6
Free Cash Flow Per Share
Earnings This YTD/Last YTD (%)
0
Tangible Book Value Per Share
Earnings Current Qtr./Qtr. 1 Year Ago (%)
0
Price/Cash Flow Ratio
Earnings Annual/Last Annual (%)
0
Price/Free Cash Flow Ratio
Price/Tangible Book
0.4
13.46
0
-0.18
0.21
Diluted EPS Information
Change in EPS This YTD vs. Last YTD
EPS This YTD/Last YTD (%)
Change in EPS Current Qtr. vs. Qtr. 1 Year Ago
EPS Current Qtr./Qtr. 1 Year Ago (%)
Change in EPS Annual vs. Last Annual
EPS Annual/Last Annual (%)
Change in 12 Month EPS vs. 1 Year Ago
12 Month EPS/1 Year Ago (%)
-0.06
5-Year Averages
0
Return on Equity (%)
0
-0.1
Return on Assets (%)
-18.2
Return on Invested Capital (%)
-40.3
0
-0.33
0
-0.26
0
Gross Profit Margin (%)
9.2
Pre-Tax Profit Margin (%)
-28.2
Post-Tax Profit Margin - Cont. Operations (%)
-28.7
Net Profit Margin - Total Operations (%)
-28.7
R&D As % Of Sales
Annual Growth Rates (%)
3Yr Revenue Growth Rate
19.2
5Yr Revenue Growth Rate
35.58
0
SG&A As % Of Sales
35.3
Debt/Equity Ratio
0.23
Total Debt/Equity Ratio
0.29
Page 46 of 134
Table 16: Institutional Trading
2006/09
2006/08
2006/07
2006/06
2006/05
2006/04
2006/03
2006/02
2006/01
2005/12
Shares
Bought
459,380
459,380
82,352
122,000
122,000
126,513
179,712
179,712
271,030
308,989
Shares
Sold
368,477
368,477
427,503
140,271
140,271
65,579
67,696
67,696
78,616
86,916
2005/11
2005/10
312,789
195,348
84,499
8,645
Date
Shares
Institutions
Held
(#)
2,513,269
33
2,513,269
33
2,016,894
31
2,344,130
33
2,344,130
33
2,264,739
32
2,214,041
30
2,214,041
30
2,190,462
32
2,128,484
33
2,134,701
1,526,272
33
30
Table 17: Short Interest Information
Date
10/10/2006
9/12/2006
8/10/2006
7/11/2006
6/12/2006
5/10/2006
4/10/2006
3/10/2006
2/10/2006
1/10/2006
12/12/2005
11/10/2005
Short Interest Short Interest
Shares (#)
Ratio
3,192,293
61.8
3,266,297
54.7
3,263,093
58.7
3,436,104
20.4
4,156,544
19
3,650,143
38
3,584,379
62
3,789,445
73.3
3,956,897
65
4,102,837
45.8
3,950,446
41.6
4,025,937
22.8
APPENDIX 2: VALUE DRIVERS FOR THE OIL AND GAS INDUSTRY
Continued rise in price
Oil prices continue to be high and fundamental
factors such as the widening gap between
demand and supply continue to drive them
further. There are several factors contributing to
this imbalance such as dramatic increases in
China’s demand for oil-generated power and
Page 47 of 134
oil-based transportation fuels, as well as a
continuing war in Iraq and uncertain prospects
rebound in the U.S. oil demand. In addition, oil
for a return to normalcy in Iraq’s oil sector,
prices are sensitive to any tightening of supply
contributed to the volatility in world oil markets.
during periods of high economic growth.
Oil prices are also high due to greater energy
demand and power supply disruptions resulting
On the supply side, there is very little spare
from last year’s U.S. hurricane season. With a
upstream capacity, and the spare downstream
return to normal conditions and the use of other
capacity is not always properly configured to
fuels such as natural gas, prices are likely to
produce the required slate of products. This
decrease but are expected to continue to remain
condition coupled with geopolitical tensions in
above historic levels.
major oil-producing countries, including the
Picture 4: Trends in World Crude Oil and Natural Gas Prices
12
70.00
10
60.00
50.00
8
40.00
6
30.00
4
20.00
2
10.00
0
0.00
02
na
J
2
03
l-0
na
Ju
J
3
04
l-0
na
Ju
J
4
05
l-0
na
Ju
J
Natural Gas Prices ($ per 1000 CF)
USD per Barrel
$ per 1000 cubic feet
Crude Oil and Gas Prices
5
06
l-0
na
Ju
J
Oil Prices USD per Barrel
Source: International Energy Agency
The drivers of natural gas prices are regional
2004. Prices experienced a rising trend because
compared to the relatively global nature of
of supply disruptions caused by hurricanes in
crude oil pricing. The natural gas price in the
the Gulf of Mexico. Henry Hub closed at $9.45
U.S. strengthened in 2005 with Henry Hub gas
per million Btu in 2005. In 2006, Henry Hub
prices averaging $8.80 per million British
prices are expected to ease with a recovery from
thermal units (Btu) as compared to $5.87 in
the weather related supply disruptions in 2005
Page 48 of 134
and an increase in LNG imports. However,
economic activity, which in turn is linked to
these prices are expected to remain above
regional GDP growth rates. The energy needs of
historic levels as strong demand continues to
the world probably will increase, as the
challenge the growth in supply.
efficiency of energy use is already high. China
and India are among those nations with huge
increases in oil power requirements as more
Expected increase in Demand.
Driven
by
strong
economic
growth,
manufacturing activity moves to the emerging
the
markets. New alternate sources of energy may
International Energy Agency (IEA) expects
cause some decrease in the growth rate of
global primary energy demand to increase by
demand in the future but the rate at which the
1.7% a year until 2030, reaching 15.3 billion
new fuels replace oil will be slow due to an
tones of oil equivalent. The total global energy
existing infrastructure built for using crude
demand is directly linked to the level of global
oil/oil products as fuel.
Picture 5: Correlation between Primary Energy Demand and World GDP
Energy Demand and World GDP Growth Rate
7%
6%
5%
4%
3%
2%
1%
0%
-1%
1973
1978
1983
1988
1993
1998
2003
-2%
Energy Consumption Growth
GDP growth
Source: Global Insight/BP Statistical Report
Page 49 of 134
Picture 6: Expected Trend in GDP and Global Primary Energy Demand
World Primary Energy Demand and GDP Growth
80000
70000
Billion $
60000
13500
12500
11500
10500
50000
40000
30000
20000
MTOE
16500
15500
14500
9500
8500
7500
10000
1990
1995
2000
2005
World GDP (Bn $)
2010
2015
2020
2025
2030
World Primary Energy Demand (MTOE)
Source: International Energy Agency.
Picture 7: Global Demand for Crude Oil
World Oil Demand
86
83.6
84.9
82.5
84
82
MM Barrels 80
Per Day
78
79.4
76.5
77.1
77.8
76
74
72
2000
2001
2002
2003
2004
2005
1Q06
Period
Source: International Energy Agency, Monthly Oil Market Report
For the past several years, the supply for oil has
grow at a pace faster than its supply over the
been just meeting the demand. This trend is
next couple of years, the demand for natural gas
expected to continue in the future. While
is forecasted to grow at a pace similar to that of
demand for crude oil in the U.S. is projected to
its supply. Consequently, to bridge the gap
Page 50 of 134
between demand and supply, oil companies are
continue in future. Canada, a major supplier of
increasingly undertaking more exploration and
natural gas to the U.S. saw its production peak
development projects. In slight contrast, demand
in 2004.
for natural gas in the U.S has in the past,
outstripped supply. This trend is expected to
Picture 8: Supply for Oil
World Oil Supply
86
83
84
2004
2005
84
82
MM Barrels 80
78
Per Day
84.6
79.7
76.9
76
74
72
2002
2003
1Q06
Year
Source: International Energy Agency, Monthly Oil Market Report
Higher Cost of E & P Activities
Led by the high price of oil over the last few
years, there has been an increase in the
exploration and production activities in the
industry. This rush for exploration has led to a
shortage of oil drilling rigs and other mining
equipment and services. An increase in demand
coupled with rising steel and raw material
prices, have led to an overall increase in the cost
of E&P activities. This increase in cost is
expected
to
continue
in
the
future.
Consequently, the profitability of oil production
dependent on exploration costs is expected to
stay at high levels.
Another trend that has emerged as a result of oil
companies having to wait for months to gain
access to drilling equipment is that of the
drilling companies purchasing their own rigs.
There has been a large increase in onshore rig
Page 51 of 134
counts as well. It is forecasted that 175 land rigs
will come to the market in 2006-07.
Picture 9: F&D Cost on a Rise
Rising F&D Cost
14
12
10
8
6
4
2
0
1991
1993
1995
1997
1999
2001
2003
2005
Source: World Energy Council
Unconventional Resources and Abandoned
Fields gaining Attention
Large oil and gas companies operated many of
In the scenario of rising oil prices, growing
the sites to be uneconomical. There is much
demand, and depleting resources, technological
research done on such sites, and most of the
advancements are making it possible for
infrastructure for production is in place thus
exploration companies to economically source
allowing substantial cost savings for the new
reserves from abandoned oil and gas properties.
operator.
Hence, unconventional reserves are beginning to
incentives,
form a significant part of the supply picture. In a
production technology, combined with potential
very broad sense, unconventional resources are
cost
reserves that were previously uneconomical to
infrastructure, generates considerable interest in
extract. However, with rising oil prices and
these abandoned properties. Companies such as
advancing technology, formerly uneconomical
Tri-Valley with the technical expertise to
reserves
develop such sites to their full potential are
appear
to
economical to extract.
have
now
become
these sites, abandoning them when they found
taking
Factors
advances
savings
from
advantage
such
in
the
of
as
government
exploration
already
these
and
existing
emerging
opportunities.
Page 52 of 134
deep water development in the Gulf of Mexico.
Policy Support for Developing
Unconventional Resources
It also provides for royalty incentives for
The United States government acknowledges
technologies such as injection of carbon
the importance of unconventional resources and
dioxide. The government also offers technical
includes certain provisions in its energy policy,
assistance
and
providing incentives to oil and gas companies
companies
operating
exploring these types of properties. In its Energy
Companies such as Tri-Valley, operating in the
Policy of 2005, the U.S. government declared
abandoned fields of California and Nevada,
that
stand to gain significant financial benefits from
oil
shale,
tar
sands,
companies
and
other
unconventional fuels are strategically important
using
enhanced
financial
on
production
incentives
abandoned
for
sites.
these government policies.
domestic resources and, must be developed to
reduce the growing dependence of the U.S. on
politically and economically unstable sources of
foreign oil imports.
In order to develop these unconventional
resources, the U.S. government is providing
financial incentives such as allowing expensing
of 50% of cost for investments made in
increasing capacity by at least 5% and providing
royalty relief for marginal offshore wells and
Page 53 of 134
APPENDIX 3: HORIZONTAL DRILLING
Horizontal wells are a controlled, directional
technical objective is achieved. That objective is
completion
un-
to expose significantly more reservoir rock to
recovered mobile hydrocarbons in existing
the wellbore surface than might be the case with
fields. These reserves usually remain because
a conventional vertical well penetrating the
the reservoir’s heterogeneity prevents efficient
reservoir perpendicular to its plane of more
development using vertical wells. Most oil and
extensive dimension. The intended achievement
gas reservoirs are much more extensive in their
of more important objectives (such as avoidance
horizontal dimensions than in their vertical
of water production) related to specific physical
(thickness) dimension. By drilling that portion
characteristics of the target reservoir, usually
of a well, which intersects such a reservoir
motivate the desire to attain this immediate
parallel to its plane of more extensive
technical objective.
dimension,
technique
horizontal
for
exploiting
drilling’s
immediate
Picture 10: Greater Length of Producing Formation Exposed to the Wellbore in a
Horizontal Well
(A) Than in a Vertical Well (B)
Source: EIA
Advantages of Horizontal Drilling
Page 54 of 134
An
important
advantage
associated
with
horizontal drilling is the ability to reach
environmental costs and/or land use problems
associated with vertical drilling operations.
reservoirs in hard-to-reach locations. Vertical
wells can be used to extract resources only when
Secondly, horizontal wells are known for
the deposit is located directly under the drilling
increasing daily production rates by three to five
location. However, many times the reservoir
times, sometimes even more (as much as ten-
deposits are located in inaccessible areas such as
fold increase in some cases) as compared to
under shallow lakes, protected areas, railroads,
vertical wells. This is due to the increased
or any other area on which the rig cannot be set
wellbore surface area within the producing
up. In such cases, it was necessary to discover a
interval.
new technology to reach those reservoirs as
horizontal drilling projects yield a higher rate of
traditional
returns when compared with vertical drilling
vertical
drilling
had
its
own
limitations. With the advent of horizontal
With
a
faster
production
rate,
projects.
drilling technologies, it became technically and
economically feasible to extract reserves from
Last but not the least, the use of a horizontal
such inaccessible reservoirs. In addition, there
well may prevent or significantly delay the
are other benefits associated with horizontal
onset of production problems resulting in low
drilling. First, operators often are able to
production rates, low recovery efficiencies,
develop a reservoir with a relatively smaller
and/or premature well abandonment. These
number of wells as, unlike vertical wells, each
factors, quite often associated with vertical
horizontal well can drain a larger volume
wells, could reduce or even eliminate return on
surrounding its bore. As a result, per well
investment and total return.
proven reserves are higher in case of horizontal
wells. Additionally, horizontal wells lower the
aggregate surface "footprint" of an oil or gas
recovery
operation
thereby
reducing
the
Page 55 of 134
Types of Horizontal Drilling
There are primarily three types of horizontal
useful when the drilling target is a long distance
wells: a) short-radius; b) medium-radius; and c)
from the drill site, or where reservoirs are
long-radius. Short-radius wells, being the
spaced apart underground. Multiple completions
sharpest turning of the three types, typically
may be used to gain access to numerous
have a curvature radius of 20 to 45 feet. These
deposits simultaneously.
wells can be easily dug outwards from a
previously drilled vertical well and are ideal for
Long-radius wells typically have a curvature
increasing the recovery rate of oil or natural gas
radius of 1,000 to 4,500 feet, and can extend a
from an existing developed well. These wells
great distance horizontally. These wells are
can also be used to drill non-conventional
typically used to reach deposits offshore, where
formations such as tight-sand reservoirs.
it is economical to drill outward from a single
platform to reach reservoirs that are inaccessible
Medium-radius wells on the other hand,
through vertical drilling.
typically have a curvature radius of 300 to 700
feet with the horizontal portion of the well
measuring up to 3,500 feet. These wells are
Page 56 of 134
APPENDIX 4: 2D SEISMIC TECHNOLOGY
In the absence of seismic technology, oilfield
The middle of the 19th century saw the
exploration was largely a guessing game based
invention of instruments to measure the
on the visible surface signs. The discovery of an
movement of the ground at the time of an
oil field beneath the Nash salt dome in Brazoria
earthquake. After a series of studies, seismic
County, Texas in 1924 marked the beginning of
technology underwent a significant change. The
the use of seismic technology for finding oil and
basis of oilfield seismic technology changed
gas deposits. The discovery of the oilfield in
from refraction to reflection. During 1950s,
Brazoria County was based on single-fold
advances in technology continued and seismic
seismic
geologists
signals were recorded on magnetic tapes instead
discovered that they could utilize low-frequency
of maintaining paper records. This led the way
sound waves to map subsurface geologic
for machine processing and development of the
structures and to locate hydrocarbon reserves.
analog processor.
data.
Going
forward,
Digital seismic technology
During
1960s,
oil
seismic
technology
development of comprehensive digital gathering
experienced another key shift. Geophysical
and
processing
Service Incorporated (GSI) introduced the first
companies also started adopting a systems-
digital field system and computer for seismic-
based approach. As a result, information
data processing in 1961, in collaboration with
available on geological conditions below the
Texas Instruments and a few other oil
Earth’s
companies. Three years later, with IBM’s
technology increased the resolution of the
introduction of 360 series digital computers, the
pasteurized information provided and facilitated
storage of data in computers gained popularity.
the modeling of the Earth with nonlinear
The signals detected by geophones could be
characteristics.
surface
systems.
Oil
improved.
exploration
Computing
read at millisecond intervals and recorded as
binary digits with the help of digital technology.
The evolution of technology led to the
Why Seismic Surveys?
Page 57 of 134
Oil and gas exploration companies require
exploration surveys, but also to tap offshore
information on the presence of oil reserves and
opportunities in a cost-efficient way. As a result,
on geological conditions before they can start
seismic technology has, over time, evolved from
drilling in a particular region. Seismic surveys
2-D to 3-D.
are the major source of information to assess
Reflection seismic is a method that allows oil
conditions and evaluate the potential for
geologists to image changes in the subsurface
successful drilling, development, and production
geology by inducing an acoustic wave from near
of oil and gas. An oil exploration firm’s success
the surface of the earth and listening for the
depends on its ability to minimize risk and
echoes from deeper stratigraphic boundaries
uncertainty. That, in turn, has driven the need
(such as ultra-sound is used to create pictures of
for accurate information. The challenge today is
an unborn baby in the mother’s womb).
not
only
to
carry
out
onshore
reserve
How Does It Work?
2D seismic is recorded using straight lines of
to data processors where they are adjusted and
receivers crossing the surface of the earth.
corrected for known distortions. The final
Acoustic energy is usually provided by the
processed data is displayed in a form known as
detonation of explosive charges or by large
"stacked" data.
vibroseis trucks. The sound spreads out through
the subsurface as a spherical wave front.
2-D seismic survey is the standard method used
Interfaces between different types of rocks will
to acquire data to assess and map the geological
both reflect and transmit this wave front. The
conditions over a broad surface area during the
reflected signals return to the surface where they
early stages of the seismic technology evolution.
are observed by sensitive microphones known
However, the 2-D technique lacks accuracy as
as geophones. The signals detected by these
seismic data could be visualized only as a single
devices are recorded on magnetic tape and sent
vertical plane.
Page 58 of 134
Picture 11 : Seismic Data
Source: MP & Associates
The limitations of 2-D seismic technology in
providing accurate data have led to the
The cost of 3-D is dramatically higher as nine
evolution of 3-D technology, as the data
square miles must be shot for every mile of
gathered from this technology can be visualized
prospect coverage. While significant results
as an information cube. The 3-D technology
have been obtained in the carbonate regimes, 3-
gives information that is more accurate. The
D has not been a significant contributor to
cube of information can be further cut into
discovery in California’s elastic geological
several planes that give a better picture of the
setting. Accordingly, Tri-Valley stays with 2-D,
geological structure from different angles. The
the workhorse seismic program in California.
geological structure can be viewed with much
higher resolution using this technique.
Page 59 of 134
APPENDIX 5: FRACTURE STIMULATION
Fracture Stimulation is a technique used to increase the permeability of reservior to enhance or redirect
the flow of oil in desired directions, thereby increasing production rate. It may be defined as the highpressurized injection of specially engineered fluids into the formation to create “cracks” in the reservoir,
aimed at improving oil flow. In other words, under this technique, a hydrocarbon bearing zone is
fractured to allow greater drainage of oil into well bores. Fracture stimulation also helps in analyzing the
difference between testing results and actual production.
Page 60 of 134
APPENDIX 6 : STEAM INJECTION
Steam-assisted gravity drainage (SAGD) is
steam into the oil sands. As the bitumen or
potentially the most successful method of steam
heavy oil thins and separates, gravity causes it
injection because it significantly improves
to collect in the parallel lower well where it can
bitumen
more
be pumped to the surface. Further processing is
elementary single-well steam injection methods
then required for the mix of recovered materials,
and therefore lowers costs of production. SAGD
especially removing the water that results from
involves drilling two horizontal wells one above
injecting steam.
recovery
rates
over
the
the other. The upper well is used to introduce
Picture 12: The SAGD Process
Source: Husky energy
As these in-situ techniques are highly energy-
Tri-Valley’s tar sand unit south of Ventura,
intensive, additional methods of recovery and
California has never seen the modern and highly
separation of the oil sands are currently being
efficient recovery methods largely developed in
developed which are less reliant on the already
Canada’s massive Athabasca tar sand projects.
stretched North American gas resources.
Tri-Valley expects modern SAGD development
to exponentially enhance recovery rates.
Page 61 of 134
APPENDIX 7: VALUE DRIVERS FOR GOLD INDUSTRY
supply/demand gap. The weakening of the
Increasing Price of Gold
The price of gold has been rising since 2001.
From an average of $271 in 2001, gold prices
are now over $600. Increased consumption of
commodities
in
China,
India,
and
other
emerging markets, coupled with general global
economic growth over the past four years, are
the main drivers for this increase in price. The
gold price, however, is believed to have a more
fundamental
support
from
a
widening
dollar is also driving the price of gold higher.
Increased speculative activity and the Gold
Exchange Traded Funds (ETFs) are also adding
more demand pressure. Additionally, gold price
is negatively correlated with the dollar, as more
banks and investors tend to sell dollars and buy
gold when the dollar is weak. Gold is no longer
negatively correlated with the USD, but its price
will continue upward if the USD is weakening.
Picture 13: 5 Year Gold Prices
Demand for gold to increase
The demand for gold has traditionally been less
than the supply. However, the trends have
begun to reverse since 1997, with the demand-
supply gap decreasing. In 2004, there was a
supply deficit as the demand increased more
than the supply. Regardless of the supply
surplus in 2005, it is expected that the trend of
Page 62 of 134
demand supply imbalance will continue, as the
of gold wires for pacemakers, implants, and in
supply for gold is not increasing fast enough to
dentistry, forms the bio-medical demand, which
satisfy demand. The gold consumption for
accounts for 2% of the industrial demand. Gold
jewelry is strong in India, and is fast growing in
is also increasingly used as a catalyst in various
China and the Middle East and accounts for the
chemical processes in industry.
largest portion of demand (70%). However, the
investment demand and industrial demand has
A 26% rise in investment demand for gold and a
grown at a faster rate than the jewelry demand.
5% rise in demand for jewelry formed a part of
The weakening of the dollar together with the
the overall demand growth in 2005. The overall
introduction of gold Exchange Traded Funds
rise in dollar terms was 16%, compared to 7% in
(ETFs) has lead to increasing investment
tonnage terms. There was a year-on-year decline
demand for gold. With China’s consumption of
in gold demand for jewelry purposes, and the
gold also growing, demand is expected to
overall quantity demanded also declined in Q1
continue its upward trend. Greater demand for
FY06. However, higher prices led to a year-on-
gold components in high tech electronic devices
year increase in consumption in dollar terms.
is driving the industry demand forward. The use
Picture 14: Gold Demand in 2005
Gold Demand in 2005(Tonnes)
Industrial&
Dental
11%
Jewelry
73%
Retail
Investment
10%
ETFs&Simila
r Investments
6%
Source: Report on Gold Demand Trends, World Gold Council
Page 63 of 134
Picture 15 : Jewelry Demand in the First Quarter (Tons)
Source: GFMSLtd, WGC
Renewed interest in Gold
Gold as an investment asset has started to gain
more faith among the investors. Investors have
added 194.5 million ounces of gold to their
collective holdings from 2001 through 2005,
and may hold an additional 45.2 million ounces
this year on a net worldwide basis. This
compares with annual average net purchases of
9.2 million ounces of gold by investors from
1950 through 2000. Investors are increasingly
investing in gold for portfolio diversification, as
it usually negatively correlates with the S & P
index. The strong growth in the gold price is
believed to be a sustainable price rise as
compared to the price increase in 1970s, which
had no fundamental reason such as a supplydemand imbalance. This is attributable to the
weakening of the dollar, which has led more
investors to diversify their portfolios by
investing in gold, which they see as an
intrinsically valuable asset. The gold price
increase is also influenced by the Central banks,
which often prefer to hold their assets in gold
rather than in currencies, particularly the dollar.
Gold prices have gone up both when the dollar
was weak and when it strengthened in 2005.
Page 64 of 134
Picture 16 : Central Bank Reserve Changes vs. Changes to Gold Backing Reserves
Source: World Gold Council and CIBC World Markets Inc.
Gold Production lagging
The supply of gold comprises newly mined gold
and recycled gold. The total gold produced from
mining activities is 2500 oz per annum while the
demand is close to 4000 oz. This supply deficit
is met by the gold sold by central banks. Larger
companies are finding it increasingly difficult to
gain access to new reserves of gold through
routes other than the acquisition of smaller
companies. The current reserves are being
depleted and the lack of exploration activity in
the late 80s and 90s has lead to lesser reserves
being available every year. Though there has
been increased exploration activity since the
gold price started rising, even where gold is
found, it will take more time for production of
gold to start. North American gold exploration
investment has increased from $193mm in 2001
to $521mm through 2004. The lead-time for
new mine development is generally 8 years.
Alternatively, since the central banks have sold
up to 50% of their gold reserves and may not be
willing to sell more, the gap between demand
and supply may widen further. More banks are
likely to diversify their forex reserves by
keeping more reserves in the form of gold.
Page 65 of 134
Picture 17: Supply of Gold in 2005 (Tons)
Mine
Output,
74%
Old Gold
Scrap, 26%
Source: Report on Gold Demand Trends, World Gold Council
Page 66 of 134
9
Millions of Ounces
70
60
50
8
6
40
5
30
3
2
20
2
2
2
1
10
1
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
0
10
9
8
7
6
5
4
3
2
1
0
# of Discoveries
Picture 18: +$1 Billion Discoveries
Year
Primarily gold only
Copper Gold Porphyry
Number of Discoveries
Source: Mineral Economics Group & CIBC World Markets Inc.
Higher costs of production: Energy cost
After labor costs, energy is the next largest
expenditure of total operating costs. The
increasing cost of mining due to high oil prices
and growing prices of raw materials have
increased the cost of production of gold. The
increase in exploration activities has lead to
competition for rigs and other mining equipment
and thus again higher exploration and mining
costs.
The last five years have experienced a 50%
increase in the average cash cost-per-ounce of
gold produced and are now averaging over $250
per ounce of gold. The rising costs that mines
are facing are well over the CPI or inflation
rates. This increase in costs is a result of
increased exploration and mining activities,
which is causing a shortage of mining
contractors, cyanide, equipment, and other
necessities.
Page 67 of 134
Picture 19 : Worldwide Exploration Expenditures for Gold
Source: Mineral Economic Group and CIBC World Markets Inc.
Picture 20 : Rising Cash Costs (HUI and XAU Components)
Page 68 of 134
undesirable
New technologies
New
methods
in
terms
of
extraction
technologies and processes will make feasible
the
extraction
of
gold
from
previously
reserve
areas.
The
scale
of
production output needed for profitability may
also decrease because of the current price level
of gold.
Page 69 of 134
APPENDIX 8: SHORTY CREEK PROPERTY
Location and History
The Shorty Creek property is located in the
Livengood District, 60 miles northwest of
Fairbanks, Alaska. It is on the all-weather paved
Elliott Highway connecting Fairbanks, Alaska
with the North Slope petroleum production
areas. Select Resources obtained the property in
2004 through staking and lease arrangements
from Gold Range Ltd.
campaigns.
These have identified anomalous
concentrations of gold, copper, molybdenum
and their pathfinder elements. In 2005, Select
Resources carried out a geophysical and satellite
interpretation programs over the entire Shorty
Creek property. The Company also conducted a
multi-element soil auger geochemical program
extending
over
one
of
four
distinctive
aeromagnetic anomalies, covering an area
approximately of 2.3 square kilometers. 566 soil
samples were collected on a 50-meter by 100-
Field Description
meter grid. Highly anomalous concentration of
At Shorty Creek, Select Resources controls
gold, copper, silver, and other indicator
mineral rights to State of Alaska mining claims
elements were found.
covering 16 square miles (9700 acres). It is an
early stage gold exploration project with
historical exploration and geochemical sampling
and drilling over several previous exploration
Page 70 of 134
Picture 21 : Shorty Creek Property
Picture 22: Select Gold Properties
Page 71 of 134
APPENDIX 9: RICHARDSON PROPERTY
Field Description
Located 65 miles south of Fairbanks, Alaska,
Spread over 44.9 square miles or 28,720 acres
the Richardson property is positioned between
of land, the Richardson property consists of 626
the all year Richardson Highway and the
forty-acre and fifteen 160-acre claims, 104 of
Alyeska Pipeline service road. Tri-Valley
which are leased from others. A per-claim fee is
acquired this property in 1987 and started
paid annually to the state and annual assessment
exploration in 1991 as a joint effort with
work of a minimum of $100 per State of Alaska
TsNIGRI,
research
claim is needed. The field has a power-line
institute. TsNIGRI geoscientists have evaluated
running through the land and fuel and water are
Tri-Valley’s claims for some years and by 1999,
always available. The Trans Alaska Pipeline
identified physical gold in as many as 60
corridor is near the northeastern edge of the
locations along a 20-mile swath. Bulk sampling
claim block and the service road along the
at one high-grade dike yielded nearly 3000
pipeline provides access to the claims from the
rough ounces of gold from 30,000 tons of
north. Numerous good to fair dirt roads traverse
partially crushed ore.
the claims.
The Richardson District had past placer and
Current Status
the
Russian
mineral
lode gold production and has prospective
geochemical signatures consistent with intrusion
related gold systems. A number of prospective
zones were identified in previous historical
exploration, geochemical sampling and drilling
over several previous exploration campaigns
including the Richardson Lineament (including
the
Democrat
Mine),
Buckeye and others.
Hilltop,
Shamrock,
In 2005, Select Resources carried out a
geophysical and satellite interpretation programs
over the entire Richardson property and a multielement
soil
auger
geochemical
program
extending along the length of the known
Richardson Lineament. The surveys defined a
series of six discrete precious metal and other
element anomalies along the approximate 4.5mile strike length and one mile width of the
Page 72 of 134
geochemical area tested. Select Resources also
drilled eight diamond drill holes in the
Democrat Mine area for a total of 3,050 feet.
Assay information confirmed anomalous gold in
Holding Structure
Tri-Valley has leased claims for the entire
property from the State of Alaska and two
earlier prospectors.
the area and more drilling is required to support
potential commercial resources.
Picture 23: Richardson Property
Page 73 of 134
APPENDIX 10: ADMIRAL CALDER MINE PROPERTY
The purchase also includes all associated
The Admiral Mine was obtained in 2005 from
Sealaska Corporation. It is located on the northwest
side
of
Prince
of
Wales
Island,
approximately 150 air miles south of Juneau and
88 air miles northwest of Ketchikan.
infrastructure and equipment that the previous
owner installed at a cost exceeding $20 million.
Infrastructure associated with the Mine includes
the current permitted Mine, material handling
and crushing circuit, a deepwater ship loader
(2,000 tons per hour) and docking barge with
Field Description
over 40 feet of draft for inter-coastal barges up
The Mine consists of 13.9 million tons of
to Handy Class (45,000 dwt) sized vessels,
proven reserves and 12.5 million tons of
laboratory, shops and offices, mine camp, and
possible resources of high chemical grade
various
calcium carbonate for use in the paper, plastics
equipment.
and paint filler, whitener, extender and loader
Current Status
markets. In addition, the property also contains
over 20 million tons of possible resources of
high chemical grade calcium carbonate for use
in chemical applications and as off-white fillers,
loaders, and extenders. While the current mine
covers only 15 acres; the entire property covers
pieces
of
mining
and
operating
Tri-Valley does not currently have plans to
proceed with redevelopment of the mine but
intends to hold it while Select Resources
pursues
other
previously
identified
opportunities.
more than 572 acres of patented mining ground
and includes all operating permits, tideland
Holding Structure
leases, and timber rights. The Mine began
It is 100% owned and managed by Select
production by Sealaska and SeaCal in 1999 and
Resources Corporation.
ran for three years. It has been idle since 2001.
Only about 10% of the property has been
explored.
Page 74 of 134
APPENDIX 11: TEMBLOR VALLEY PROPERTY
Bakersfield, California. Tri-Valley estimates the
The Temblor Valley property is located in Kern
County, California. It has 56 wells, 49 wells (24
producing, 24 idle and 1 injector) abutting South
Belridge Oil Field (Temblor Valley West) and 7
wells (4 producing, 2 idle and 1 injector) in
Edison Oil Field (Temblor Valley East). The
Company purchased the 850 acres of land in Jan
2006 at a price of $2,850,000. In 1930, the then
worlds’ deepest well was drilled to 11,377 feet
potential of this property based on two similar
acreage blocks in the area. Due to high density
and horizontal drilling, each of these has yielded
in excess of 4,000 barrels per day. Hence, TriValley intends following the same approach for
the development of this property and dig
horizontally to the diatomite zone.
The Temblor Valley east property is 160 acres
in size, 15 miles east of Bakersfield.
on this property and had 59 API gravity oil. TriValley has a 25% working interest in this
Rework and Production Plans:
property.
Tri-Valley will utilize the oilrigs purchased by
its own drilling services company to perform
The SEC allowed a report of 218,000 barrels of
rework on some of the existing wells. The
proven producing oil reserves. However, using
Company plans to use its second production rig
standard industry formulae for evaluating field
of 8000 feet capability for horizontal drilling
potential
property
work on the wells. It will drill in the diatomite
production, the Company estimates a total in
zone in Temblor Valley West where adjoining
place resource of 342 MMBO on the Temblor
fields have been producing tens of thousands of
property with 47,800,000 barrels recoverable
barrels per day, but has not been exploited on
with conventional methods from just three
the lightly drilled Temblor Block.
including
adjoining
formations.
In the Temblor Valley East property, the
Field Description
The Temblor valley west property comprises
700 acres (approx), located 40 miles west of
Company plans to rework idle wells, drill a
horizontal well, and hydraulically fracture the
oil bearing formation. Tri-Valley will do a
production comparison of the horizontally
Page 75 of 134
drilled and the conventionally drilled wells.
Valley West field. These wells will core at
They will also further evaluate the potential in
intervals in the Tulare Etchegoin and the
deeper zones for additional reserves.
Diatomite formations between 400 and 4,000
feet to provide data to optimize horizontal wells
Tri-Valley also sees prospects of deep drilling in
to be drilled in the third and fourth quarters. The
these locations in addition to the reworking,
wells will also be hydraulically fractured to
once its re-exploitation and production activities
enhance the flow from the completed intervals
are operational.
and provide the model for field development.
The diatomite section contains 26 to 28 gravity
Current Status:
As of June 2006, one of the Tri-Valley’s newly
acquired production rigs began a program of
reworking 17 idle wells on the property. A
second rig is onsite to drill new wells and
multiple drilling locations are being built for the
2006 drilling campaign on the property.
In addition, the Company is also planning to
free flowing oil according to nearby producing
wells. Following a successful test, the Company
will drill horizontal wells, which are expected to
produce at significantly higher rates than
vertical wells. We believe this design will
exponentially
increase
production
on
the
Temblor Valley properties from their present
100 barrels per day.
drill the first of four test wells in the Temblor
Page 76 of 134
APPENDIX 12: PLEASANT VALLEY PROPERTY
of using technology to fully develop the
The Pleasant Valley property comprises of three
leases in the Oxnard Oil Field, Ventura County,
property and achieve a much greater recovery
than estimated.
California. The property, acquired in May 2005,
contains estimated reserves of 24 million barrels
Production Plans
of proven, undeveloped recoverable oil (arrived
The Company plans to initially drill a number of
at using a recovery factor of 26% in the
vertical wells and then drill horizontal SAGD
shallowest
wells in this region. The following details the
of
several
zones
and
using
conventional recovery methods).
Company’s plan of action for 2006: Tri-Valley
will drill a 3,000 foot well to core to evaluate
the upper Vaca Sand unit near Oxnard. It will
Field Description
This project contains several hydrocarbonbearing intervals from 1,800 feet to 10,000 feet,
ranging from 6 gravity heavy oil to 34 gravity
light oil. The Company believes there is a high
multiple of recoverable oil possible from this
property particularly from the use of horizontal
drilling and other modern technologies never
before applied on this property. With these new
methods, the Company expects to rapidly
test the Monterey Shale intervals. The Company
then will drill twin horizontal well bores for
steam
assisted
gravity
drainage
recovery
(SAGD). In the best case, they intend to have as
many as 20 SAGD wells. Deeper formations
will be evaluated later for possible additional
recovery for lighter gravity oils. For this
purpose, a 10,000 foot well is planned at a later
stage.
reclassify presently un-reportable volumes of oil
Holding Structure
into
The working interest of Tri-Valley is 25% in
reportable
reserves
while
building
production and revenue. Tri-Valley is confident
this partnership.
Page 77 of 134
APPENDIX 13: EKHO – EXPLORATION PROJECT
Field Description
The oil field is located to the center of the south
Tri-Valley’s proprietary and licensed data
San Joaquin Valley, 40 miles northwest of
delineate an immense, deep geologic structure
Bakersfield. The Company intends three wells
in the south San Joaquin Valley. Ekho No. 1
in the region. The independent estimate of
deep test well, 45 miles northwest of TVC’s
reserves for the Ekho No. 1 is 133 million
Bakersfield, California headquarters, was drilled
barrels of oil and 162 billion cubic feat of gas
to a total depth of 19,085 feet in 86 days with
per 320-acre unit.
shows of exceptional quality oil and gas. The
lower zones are undergoing production testing
Ekho number one was worked and a hydraulic
at this time.
fracturing carried out. However, it did not result
in commercially viable production rates of
hydrocarbons. The Company still believes there
is a great potential in the Vedder sands and has
yet to decide the next course of action. The
Company is investing in research on the Vedder
and retains the areas estimated to hold billions
of barrels of high quality oil and gas in the tight
sands.
Page 78 of 134
Picture 24: Ekho Project
Source: Company Website
Now owned by Tri-Valley, the 66X-3 was
of flow. Once the Ekho No. 1 is completed, Tri-
drilled to 18,880 feet in 1975 and produced
Valley expects to nominate a location for the
about 10,000 barrels from the Vedder Sand to
Ekho No. 2 as the next step of the three-well
claim the record as North America’s deepest
program
producing oil well before down hole problems
approximately 26 miles long and four to five
not understood at the time caused the well to be
miles wide below 15,000 feet.
abandoned. The 66X-3, along with the Great
In November 1998, a well being drilled by
Basins 31X-10 drilled to 21,640 feet about
another company on the northwest flank of
2,300 feet to the west southwest, became the
Project Ekho, blew out at an estimated 100
data wells for Tri-Valley’s 19,085 foot Ekho
million cubic feet per day and was not
No. 1.
controlled for six months. Of interest is the fact
to
test
a
mapped
structure
that during the blow out, the strength of the flow
The Ekho No. 1 logs and cores show about
did not decrease. Tri-Valley is playing the other
2,500 feet of "pay" in four zones, each of which
side of the syncline on what it believes is an
is "tight" and will require hydraulic fracturing
even bigger, more prospective structure.
and other stimulation to obtain commercial rates
Page 79 of 134
Data from all three wells, including core from
Current Status
In
June
2006,
Tri-Valley
Corporation
announced plans to apply modern technology to
the wells in the Ekho property when it
hydraulically fractures the McClure Shale in the
Tenneco Union GBR 66X-3 well some 1,320
feet north of the Company’s Ekho No. 1 deep
well.
the Ekho No. 1, suggests all four deep
formations totaling more than 2,500 feet of
gross interval of oil and gas rich zones could
potentially contain 1 MMBOE in place per acre
using conventional oil industry factors; in this
case, 400 BOE per acre foot in-place, common
for the area.
Picture 25: Ekho Project Area Map
Source: Company
Page 80 of 134
APPENDIX 14: SUNRISE – EXPLORATION PROJECT
The Company found very large amounts of gas
on the Sunrise Natural Gas Field. The Sunrise
2002 News:
Mayel No. 1, drilled near the City of Delano,
The well #1 is found to have 300 feet of pay in
California, revealed approximately 300 net feet
shale. Using exclusive and proprietary data
of gas saturated McClure Shale. Independent
derived earlier from Tri-Valley's conventional
reservoir analysis firms have postulated 80
vertically drilled well, independent engineering
billion cubic feet of dry natural gas in place in a
firms have calculated that the surrounding 160
160-acre
mapped
acres could hold 80 billion cubic feet of dry
approximately 6,600 acres of possible closure.
natural gas in place. The Company has mapped
The formation is tight and will require
about 6,600 acres of formation closure in its
horizontal drilling, hydraulic fracturing, and
8,300-acre lease block. If the calculations hold
may require additional formation treatment to
true, it could contain upwards of three trillion
obtain commercial flow rates.
cubic feet of gas in place an amount yet to be
area.
Tri-Valley
has
proved.
Picture 26: Sunrise natural gas Property
Page 81 of 134
APPENDIX 15: MOFFAT RANCH GAS FIELD PROPERTY
carry hydrocarbons throughout the ranch. To
The Moffat Ranch gas field is to the west of
Madera, California. Tri-Valley has in its
possession close to 6,900 acres in this gas field.
Reworking was carried out on two old wells, to
restore modest production from one of the
several zones on the property. Moffat No. 2 was
out of production since 1960 before the rework
ended in December 2005 and natural gas was
flowing in the well. The well was choked back
evaluate these zones, the Company also intends
to drill a 10,300 foot well for the appraisal of
other zones that produce in the neighboring
properties.
Tri-Valley already has agreements in place with
California Energy Exchange Corporation, for
pipeline access for the three wells. They will be
connected to Pacific Gas & Electric Company’s
main lines to reach the final consumers.
and flowing 200,000 cubic feet per day in
December 2005. A third well, which was drilled
and left untested will be taken up next by TriValley, as the Company believes it should be
completed for production.
Production Facilities and Plans
The wells currently produce from a tight 100
feet in a shallow zone. Tri-Valley experts have
identified eight distinct zones, which potentially
Picture 27: Moffat Ranch Property
Page 82 of 134
APPENDIX 16: SACRAMENTO VALLEY – RIO VISTA AND DUTCH SLOUGH
GAS FIELDS
California’s largest dry gas field, Rio Vista Gas
Tri-Valley Corp. re-completed its Martins-
Field was discovered in 1936. Tri-Valley owns
Severin No. 3 natural gas well, originally drilled
the 42-acre Hanson Lease, which sits on the
in 1990, during November. 2005. The high
crown of the Rio Vista Structure and still
initial flow rate of over 1 million cubic feet per
produces modest amounts of high quality gas.
day from the Nortonville formation was choked
back to produce at 250,000 cubic feet per day
Nearby, the Sacramento Valley program is a six
and it is planned to increase the rate gradually to
well program that has produced more than 22
the optimum rate.
billion cubic feet of high quality gas from the
unit set up by Tri-Valley and Phillips Petroleum
Company. Tri-Valley took over Phillips’ interest
in the partnership during 2000.
Page 83 of 134
APPENDIX 17: CHOWCHILLA RANCH GAS FIELDS
The Company purchased approximately 6,670
under-exploited and plans to re-enter, re-
acres of mineral rights, covering what was the
complete, and further infill drill the leasehold
Chowchilla Ranch Gas Field in Madera County,
position.
California. This land position is held by a single
approximately 7,500 additional acres offsetting
producing gas well. Tri-Valley believes this
the 6,670-acre Chowchilla property.
Tri-Valley
has
also
leased
land position to be very under-developed and
Page 84 of 134
APPENDIX 18: COMPANY MANAGEMENT
F. Lynn Blystone
graduated with a B.A from Whittier College,
President and CEO of TVC and TVPC, CEO
California, and has done graduate work at
of TVOG
George
Lynn Blystone holds the positions of President
organization management.
Williams
College,
Illinois,
in
and Chief Executive Officer of Tri-Valley
Corporation (TVC) and its wholly owned
Thomas J. Cunningham
subsidiary,
Chief
Tri-Valley
Power
Corporation
Aministrative
Officer
&
Vice
the
Chief
(TVPC). He is also the CEO of Tri-Valley Oil &
President, TVC, TVOG and TVPC
Gas Company (TVOG), another wholly owned
Mr.
subsidiary of TVC and other subsidiaries, Great
Administrative Officer and Vice President of
Valley Production Services LLC and Great
Tri-Valley Corporation (TVC), and its wholly
Valley Drilling Co. LLC.
owned subsidiaries, Tri-Valley Oil & Gas
Cunningham
works
as
Company (TVOG) and Tri-Valley Power
Mr. Blystone, who held the position of a
Corporation (TVPC) and GVPS and GVDS. He
director of Tri-Valley Corporation since 1974,
is also executive director of Tri-Western
assumed the role of Company President in
industrial minerals joint venture.
October 1981. Apart from directorship in TriValley, he has served in institution management,
Mr. Cunningham has worked as Tri-Valley
venture
management
Corporation’s treasurer and CFO since February
functions for a mainline pipeline contractor,
1997 and accepted the position of Corporate
including the Trans-Alaska Pipeline Project. He
Secretary in December 1998. He has over 25
founded, managed and sold companies in
years of experience in the fields of corporate
several
finance, public company reporting, shareholder
capital
fields
and
various
including
Learjet
charter,
commercial construction, municipal finance and
relations,
land development. He also holds the position of
Cunningham has held prior positions such as
president of a family corporation, Bandera Land
Plant Property and Equipment Supervisor,
Company, Inc., with real estate interests in
corporate
Orange County, California. Mr. Blystone has
Controller and Assistant Secretary for Tucker
and
wide,
employee
for
benefits.
Tesoro
Mr.
Petroleum,
Page 85 of 134
Drilling
Company,
and
Executive
Vice
Certified
Public
Accountant,
Certified
President and Chief Financial Officer for Star
Management
Resources. Recently, he functioned as a
Financial
Management Consultant in finance, marketing,
experienced in acquisitions and divestitures,
and human resource matters including employee
both of which Tri-Valley is becoming more
benefit plans. Mr. Cunningham has received his
active in pursuing. He is current with the
education
business
recently enacted Sarbanes-Oxley regulations for
administration from Angelo State University,
publicly traded companies such as Tri-Valley,
San Angelo, Texas.
and has venture capital investing and capital
in
accounting
and
Accountant
Manager.
Mr.
and
Certified
Evans
is
also
formation experience.
Art Evans
Chief Financial Officer, TVC, TVOG and
TVPC
Joseph R. Kandle
Mr. Art Evans is presently engaged as the Chief
President and Chief Operating Officer of
Financial Officer of TVC, and its four
TVOG
subsidiaries, TVOG, TVPC, GVPS and GVDC.
President and Chief Operating Officer of Tri-
Art Evans possesses a full range of accounting
Valley Oil & Gas Co., a wholly owned
and financial management experience spanning
subsidiary
several industries including oil, gas, and mining,
Bakersfield, California and GVPS and GVDC.
of
Tri-Valley
Corporation,
and with Fortune 500 companies as well as
independents like Tri-Valley. His experience
Mr. Kandle has been the Vice President -
also includes functioning as the controller for
Engineering of Tri-Valley Oil & Gas since June
Getty
educational
1998 and moved on to become its President in
qualifications include a Bachelors of Science in
February 1999. Mr. Kandle holds a B.S. degree
Accounting from Weber State University in
in Petroleum Engineering from the Montana
Ogden,
Business
School of Mines and has 42 years of experience
Administration in Finance from Golden State
in drilling, production, and operations. Mr.
University, Los Angeles and a Master of
Kandle commenced his professional career with
Science in Systems Management from the
Mobil in 1965 where he specialized in deep
University of Southern California, Los Angeles.
drilling and holds North American records.
He has worked in various designations such as
After his tenure with Mobil, Mr. Kandle held
Oil
Company.
Utah,
a
His
Master
of
Page 86 of 134
positions of V.P. & Chief Engineer of Great
Basins Petroleum, V.P. - Engineering of Star
Resources and V.P. - Engineering of Atlantic
Oil Company.
Board of Directors
Tri-Valley Corporation’s Board of Directors
consists F. Lynn Blystone, and independent
directors Dennis P. Lockhart, Milton J. Carlson,
Loren J. Miller, Henry Lowenstein, William
Dr. Henry J. (Rick) Sandri
"Mo" Marumoto, and G. Thomas Gamble.
President Select Resources and Tri-Western
Minerals LLC
Dennis P. Lockhart
Dr. Sandri who has approximately 25 years in
mineral
production
exploration,
in
various
development,
management
and
and
consulting positions is currently employed as
the President, Select Resources. His key
strengths include global experience in a wide
range of mineral commodities, especially in the
areas of financial analysis, due diligence, and
strategic planning. Dr. Sandri previously served
in executive positions with INCO, Meridian,
and other companies. His consulting positions
included roles with Price WaterHouse, Booz
Allen, Behre Dolbere and the World Bank. Dr.
Sandri has a Ph.D. in mineral economics from
the Colorado School of Mines. He is also a
director of Select’s industrial minerals joint
venture, Tri-Western Minerals LLC, which is
expected to provide a base operating cash flow
to Select.
Professor,
Georgetown
University,
Washington D.C
Mr. Lockhart is a professor of International
Business at Georgetown University. He was
previously
Managing
Partner
of
Zephyr
Management L.P., an international private
equity
investment
fund
sponsor/manager
headquartered in New York. He remains a
partner in this firm. He is also (non-executive)
Chairman of the Small Enterprise Assistance
Funds (SEAF), a not-for-profit operator of
emerging markets venture capital funds focused
on the small and mid-sized company sector. He
is a director of CapitalSource Inc. (NYSE) and
SMELoan Asia/Maveo Systems (private, Hong
Kong based). In 2002 and 2003, he was an
Adjunct Professor at the Johns Hopkins
University School of Advanced International
Studies. From 1988 to 2001, he was President
of Heller International Group Inc., a non-bank
corporate and commercial finance company
operating in 20 countries, and a director of the
Page 87 of 134
group’s parent, Heller Financial Inc. From 1971
Treasurer and CFO, Jankovich Company,
to 1988 he held a variety of international and
San Pedro, California
domestic positions at Citibank/Citicorp (now
Mr. Miller has served in a treasury and other
Citigroup) including assignments in Lebanon,
senior financial capacities at the Jankovich
Saudi Arabia, Greece, Iran and the bank’s Latin
Company since 1994. Prior to that, he served
American group in New York. In 1999, he was
successively as vice president and chief
Chairman of the Advisory Committee of the
financial officer of Hershey Oil Corporation
U.S. Export Import Bank. He is a graduate of
from 1987 to 1990 and Mock Resources from
Stanford University and The John Hopkins
1991 to 1992. Prior to that he was vice
University School of Advanced International
president and general manager of Tosco
Studies. He also attended the Senior Executive
Production Finance Corporation from 1975 to
Program at the Sloan School of Management,
1986 and was a senior auditor the accounting
Massachusetts Institute of Technology. Mr.
firm of Touche Ross & Company from 1968 to
Lockhart is an independent member of the board
1973.
of directors.
production,
He is experienced in exploration,
product
trading,
refining
and
distribution as well as corporate finance. He
Milton J. Carlson
holds a B.S. in accounting and a M.B.A. in
Investor, Kalispell, Montana
finance from the University of Southern
Mr. Carlson is retired as the former corporate
California.
He is chairman of the audit
secretary of Union Sugar Company, a unit of
committee.
Mr. Miller is an independent
Sara Lee Corporation. Since 1989, Mr. Carlson
member of the board of directors.
has been a principal in Earthsong Corporation,
which, in part, consults on environmental
Henry Lowenstein
matters and performs environmental audits for
Director, Dean, School of Business and
government agencies and public and private
Public
concerns. Mr. Carlson attended the University
University, Bakersfield
of Colorado at Boulder and the University of
Dr. Lowenstein was appointed to the board of
Denver. Mr. Carlson is an independent member
directors in August of 2005 and is an
of the Board of Directors.
independent member of the board of directors.
Administration,
California
State
He has had a full career in business, public
Loren J. Miller, CPA
administration and academe having served in
Page 88 of 134
such business positions as vice president and
chief executive officer of his own retained firm,
Director of Education for Dominion Bankshares
The Interface Group, Ltd. During this, he was
Corporation, Director of Corporate Education
named to the Global Top 200 Executive
for Kemper Group Insurance/Financial Services,
Recruiters
executive vice president of American Furniture,
professional awards and recognitions.
Inc.
He served in the U.S. Office of
served three years as presidential aide in the
Management and Budget and the executive
Nixon White House and prior to that was
office of the President of the U.S. His many
assistant to the Secretary of Health, Education
posts in academe include instructor, assistant
and Welfare. In 2002, President George W.
professor
Bush appointed him to the Advisory Committee
and
Chairman,
professor
worldwide
He
Economics and Public Administration for
the Performing Arts. A graduate of Whittier
several universities, to his present Deanship of
College, he was honored in 1991 by his alma
the
mater
Business
Business
other
of the Arts of the John F. Kennedy Center for
of
of
Management,
several
and
school
Divisions
of
and
and
Public
for
the
Distinguished
Alumni
Administration and professor of Management at
Achievement Award as well as the Alumni
Cal State University, Bakersfield. He is the
Service Award in 1978.
Vice Chair/Chair Elect of the California State
University Association of Business Deans. A
G. Thomas Gamble
graduate of Virginia Commonwealth University,
Rancher and investor, Napa, California
he holds an MBA from The George Washington
A graduate of UCLA, Mr. Gamble is a
University and a Ph.D. from University of
successful
Illinois.
current active investments in agriculture, food
rancher
and
businessman
with
processing, educational services, oil, gas, and
William H. (Mo) Marumoto
minerals. In 2003, the California State Senate
President and CEO, Asian Pacific American
proclaimed
Institute for Congressional Studies
Gamble, which produces critically acclaimed
Currently the president and chief executive
wines in California’s Napa Valley, its Green
officer of the Asian Pacific American Institute
Entrepreneur Of The Year, and in 2005,
privately
owned
Davies
for Congressional Studies, Mr. Marumoto has
over 30 years experience in the executive and
personnel search profession as chairman and
Page 89 of 134
and
Mozarella Fresca, the nation’s premier producer
stable and growing careers in the California
of fresh Italian cheeses, of which he is a director
health care industry.
and original investor, received the Certificate of
independent member of Tri-Valley’s board of
Special Congressional Recognitioin as business
directors
Mr. Gamble in an
of the year. He is also a director and original
investor in Boston Reed College which provides
educational opportunities to busy adults seeking
Page 90 of 134
APPENDIX 19: RECENT EVENTS
Tri-Valley’s Shareholders Overwhelmingly
Support Company Management
Tri-Valley Unit Announces The Signing Of
October 31, 2006
An Exclusive Agreement To Evaluate 200
Industrial Minerals Properties In Nevada
Bakersfield, California - Shareholders of TriValley
Corporation
(AMEX-TIV)
gave
October 26, 2006
management an uncommon measure of support
with 99.85% of the 19,531,852 shares voted.
The
Company
outstanding
has
that
are
23,294,317
widely
shares
held
by
approximately 5,000 stockholders and about
Bakersfield, California - Select Resources
Corporation, a wholly owned subsidiary of TriValley Corporation (AMEX TIV) has recently
has signed an exclusive agreement with the
Trabits Group granting the exclusive right to
84% of the shares voted.
evaluate up to 200 industrial minerals properties
With more than 200 shareholders attending the
within Newmont Mining Corporation’s property
meeting held in the Petroleum Club of
portfolio. The bulk of these properties are
Bakersfield, California, an extensive question
located along Nevada rail corridors leading into
and answer period was carried on by the
California and Arizona.
stockholders and the management and technical
staff of the Corporation and its subsidiaries
before voting. Primary interest was centered on
the new oil producing properties now being
developed, the new production and drilling rig
subsidiaries
inventory
Shareholders
and
of
the
the
were
expanding
mineral
treated
property
subsidiary.
to
a
visual
presentation of the properties and projects of
Tri-Valley Oil & Gas Co., Select Resources
Corporation, Great Valley Production Services,
LLC, and Great Valley Drilling Company, LLC.
The commodities within this property package
cover hundreds of square miles and include
high-grade silica, calcium carbonate, barite,
clays, aggregates, and zeolite. The proximity of
these properties along active rail lines provides
the potential for low cost bulk transportation to
industrial consumers. The agreement includes
the ability to bring deposits into production
under simple royalty agreements.
A large
portion of these lands are associated with the
former Santa Fe Pacific Gold Corporation which
was acquired by Newmont, and were under the
Page 91 of 134
previous ownership of the Santa Fe and
approximately one square mile in Elko County.
Southern Pacific Railroads.
This property has experienced limited copper
production that dates back to World War I, with
no modern exploration focus. Select Resources
Tri-Valley Unit Announces The Addition Of
Two Copper Properties To Select Resources
is a joint venture participant in the Delcer
property.
Portfolio
October 25, 2006
Tri-Valley’s Second Temblor Development
Select Resources Corporation, a wholly owned
subsidiary of Tri-Valley Corporation (AMEX
Well Taps Oil Sands
October 18, 2006
TIV) has recently has added two copper
properties to its base metals exploration
Tri-Valley Corporation (AMEX-TIV) has cut
portfolio. Both properties are located in mining
100 gross feet of oil-saturated Tulare Sand and
friendly Nevada.
an additional 30 feet of Etchegoin Sand while
drilling its second development well on its
The first property, the FARJK claims, target
oxide copper, exposed over a large area which
has received minimal past exploration. The
claims cover outcrops with visible malachite,
azurite and chalcocite. Numerous samples have
been collected that have assayed in excess of
Temblor Valley West property adjoining the
prolific South Belridge Oilfield some 40 miles
west of Bakersfield, California. These intervals
are about 100 feet high to the first well which is
3,200 feet to the east and the cuttings are
dripping oil when broken.
one percent copper. The Nye County claim
position covers roughly one square mile and can
The crew is preparing to take a core in the
be expanded. Select Resources controls 100%
Diatomite zone, which is now penetrated.
of this claim block.
Meanwhile, the first development well is almost
cleaned up from the hydraulic fracturing of the
The second property, the Delcer prospect
contains
visible
copper
mineralization.
Diatomite interval and the Company will move
to complete it for production shortly.
Malachite, azurite and chrysocola, occur along a
one-mile
trend
and
the
claims
cover
Page 92 of 134
Both the Etchegoin and Diatomite typically
Encouraged by finding even more oil saturated
have low Ultimate Recoveries (UR) of the oil in
intervals than targeted in its first Temblor
place. Tri-Valley uses 13% UR and 11% UR
Valley well, the Lundin-Weber D-350-30, Tri-
respectively in making its estimates of potential
Valley
recovery. However, even a 1% increase in the
commenced operations on a step out well some
UR for the estimated oil in place in the
3,200 further west to expand field limits.
Corporation
(AMEX-TIV)
has
Diatomite alone would potentially add another
five million barrels on the Company’s recovery
model for the Temblor property.
Targeting a total of 260 feet of oil saturated
intervals in the Tulare, Etchegoin and Diatomite
formations, the L-WD-350-30 found about 450
feet and the well is being prepared to
hydraulically fracture the Diatomite zone as
Tri-Valley Drills Second Temblor Valley
Development Well
October 9, 2006
Tri-Valley Corporation (AMEX – TIV) is
moving quickly in its Temblor Valley West
development drilling campaign and is drilling
the second vertical well with the primary
objective being the Diatomite formation.
Located some 40 miles west of Bakersfield,
California on the western flank of the billion
barrel South Belridge Oilfield, Tri-Valley’s 700
soon as the Halliburton frac unit comes
available sometime this month.
Tri-Valley’s Rig No. 103 is moving over to the
next location to begin drilling the second well
through the same three zones into the Diatomite
section which is becoming a major producer in
the South Belridge Oilfield that Temblor Valley
adjoins.
Tri-Valley Commences Operations on Its
Pleasant Valley Oil Property
September 12, 2006
acre lease sits high to the main oilfield structure.
Tri-Valley Corporation (AMEX:TIV - News)
Tri-Valley Commences Operations On
Second Temblor Valley Oil Well
September 21, 2006
has commenced operations to drill its first
development well in what is planned as a fullscale development project in this field.
Page 93 of 134
From studies including reports by the State of
A report by the State of California indicates as
California Division of Oil, Gas & Geothermal
much as 500 feet of pay in the Upper Vaca Tar
Resources, an independent engineer and Tri-
Sand section and up to 200 feet in the lower
Valley's own technical staff, the Company
Vaca interval. Several additional light oil
estimates more than 100 million barrels of oil in
formations are projected down to 8,500 feet.
place in multiple formations for exploitation.
The Upper Vaca zone will be the primary target
Old, conventional recovery methods have
of the initial test well which will be drilled by
typically recovered in the range of 25% in the
the Company's own just-acquired rig number
heavy oil interval and new methods suggest
105.
double that or more may be achievable
according to experts.
Tri-Valley Drills through 375 Feet of Oil
Saturated Diatomite Formation
Tri-Valley Drills through 25
Etchegoin Sand in Temblor Well
Feet
of
September 5, 2006
September 7, 2006
Tri-Valley Corporation added a second oil
In what it terms a major boost in the already
saturated sand section to its Lundin-Weber D-
generous upside potential for re-exploitation of
352-30 well as it drilled through 25 feet of the
its Temblor Valley West oil property, Tri-
shallow Etchegoin interval according to mud log
Valley Corporation nnounced it had drilled
indication.
through 375 feet of oil saturated upper
anticipations
Diatomite formation in its Lundin-Weber D-
confirmation of the previously estimated oil in
350-30 well.
place on the Temblor Valley property.
The company encountered the hydrocarbon
The Company notes that, in addition to the 49
zone from 700 feet through 1,075 feet and notes
wells already on the Temblor property to
that offset wells in adjoining leases have been
produce the Etchegoin, the neighboring South
completed and produced in the Diatomite as
Belridge Oilfield has thousands of wells to
deep as 4,000 feet.
provide an immense amount of downhole data
This is in line with Company
for
the
target
and
begins
for mapping and the L-WD-352-30 is further
Page 94 of 134
confirmation of Tri-Valley’s mapped area of
Belridge Oilfield some 40 miles west of
closure.
Bakersfield, California. The Lundin-Weber D352-30 will be drilled with Tri-Valley’s own
Tri-Valley Cuts 50 Feet of Oil Sand in
Temblor Well
Rig No. 103 to a depth of 4,000 feet with cores
taken at each of the multiple oil bearing zones
September 1, 2006
on the way down. Once the optimum zone is
Tri-Valley Corporation has drilled through fifty
identified, it will be hydraulically fractured for
feet of oil sand, slightly more than targeted, in
production
the shallow Tulare formation in its Lundin-
envisions scores of subsequent wells will be
Weber D-352-30 well offsetting the billion
drilled to build production and revenue.
barrel
South
Belridge
Oilfield.
completion
and
the
Company
Located
approximately forty miles west of Bakersfield,
California on the west boundary of South
Belridge, Tri-Valley’s 700 acre lease is high to
the main producing structure.
With tens of thousands of wells drilled, the
South Belridge Oilfield is the third highest
producing oilfield in the 48 contiguous states
and properties on its flank have achieved
thousands of barrels of oil per day production
Code named Temblor Valley during the
rates after intensive infill drilling. Tri-Valley
acquisition phase, the lease is known to have at
believes its lightly drilled property is similar and
least three oil bearing formations and for
has mapped an extensive trend of oil bearing
various reasons, has remained lightly drilled and
zones for exploitation through the lease block.
under exploited for over 80 years. Tri-Valley
brings modern recovery techniques and its own
rig fleet to develop the acreage.
Tri-Valley Commences Drilling Campaign
August 10, 2006
Tri-Valley Confirms Ekho Test
Jul 12, 2006
Tri-Valley Corporation confirmed that it had
resumed testing its Ekho No. 1 deep well some
40 miles northwest of Bakersfield, California
after the resulting flare from estimated 750,000
Tri-Valley Corporation has commenced its
drilling campaign on its 700 acre Temblor
Valley property adjoining the prolific South
cubic feet per day initial rate of produced gas
could easily be seen from Interstate Highway 5
three miles to the east.
Page 95 of 134
While the Ekho No. 1 discovered large amounts
Now owned by Tri-Valley, the 66X-3 was
of high quality oil and gas, it is locked in so
drilled to 18,880 feet in 1975 and produced
called "tight" formations and, so far, the
about 10,000 barrels from the Vedder Sand to
Company has not been able to achieve
claim the record as North America’s deepest
commercial rates of production as Tri-Valley
producing oil well before down hole problems
continues to apply latest technologies to the well
not understood at the time caused the well to be
to overcome this obstacle.
abandoned. The 66X-3, along with the Great
Basins 31X-10 drilled to 21,640 feet about
Performing the west coast's deepest hydraulic
fracturing of the Vedder Sand at 18,000 to
18,500 feet in February 2005, Tri-Valley did not
2,300 feet to the west southwest, became the
data wells for Tri-valley’s 19,085 foot Ekho No.
1.
get immediate increased flow rates and shut the
well in until yesterday. In preparation for further
Data from all three wells, including core from
research activity, the well was opened up with
the Ekho No. 1, suggests all four deep
encouraging flows compared to earlier rates
formations totaling more than 2,500 feet of
demonstrating
behaving
gross interval of oil and gas rich zones could
differently than before. No stabilized rate has
potentially contain one million barrels of oil
occurred and pressures are dropping, a common
equivalent (BOE) in place per acre using
trait of tight formation production.
conventional oil industry factors; in this case,
that
the
well
is
400 BOE per acre foot in-place, common for the
Tri-Valley
to
Accelerate
Ekho
Project
Evaluation by Fracing Companion Well
June 13, 2006
area. However, the formations are dense which
currently inhibits the flow of the super high
quality oil and gas discovered and Tri-Valley is
treating these zones with modern techniques in
Tri-Valley Corporation has announced plans to
an effort to stimulate flow at commercial rates
apply modern technology to North America’s
and thus capture a bonanza reward for its
deepest oil producer when it hydraulically
shareholders and project investors.
fractures the McClure Shale in the Tenneco
Union GBR 66X-3 well some 1,320 feet north
of the Company’s Ekho No. 1 deep well.
Tri-Valley Updates Plan Execution for Its Oil
Producing Properties and Stock
Page 96 of 134
June 2, 2006
Tri-Valley Corporation stock has experienced
Tri-Valley Begins Asset Exploitation
above
May 11, 2006
average
volatility
without
any
accompanying event over the past two weeks.
The Company had previously advised that it had
Tri-Valley Corporation has begun exploitation
successfully procured six production rigs for its
of its Temblor Valley oil property in preparing
new subsidiary to workover its growing
location for the first test well and moving
inventory of oil and gas wells and that it had
production and drill rigs to the property next
launched a program to exploit recently acquired
week. All this activity is designed to rapidly
oil properties it believes have exceptional
build production and revenue from investment
upsides that can be tapped with modern drilling
the Company made earlier.
and recovery technology.
The production rig will workover 17 idle
Blystone noted that one of the Tri-Valley’s
stripper wells before beginning workovers on 25
newly acquired production rigs had begun a
currently
program of reworking 17 idle wells on the
production from all existing well bores. These
Company’s Temblor Valley property flanking
wells all produce from the shallow Etchegoin
the giant South Belridge Oilfield, the third
formation at only 750 feet.
producing
wells
to
maximize
highest producing oilfield in the 48 contiguous
United States. A second rig is onsite to drill
new wells and multiple drilling locations are
being built for the 2006 drilling campaign on the
property.
After studying the field, the Company believes
greater potential of new, flush production lies in
the deeper diatomite zone beginning at 750 feet
where it expects to encounter 28 gravity free
flowing oil.
After getting the Temblor Valley workover and
drilling program underway, the Company plans
to also begin drilling its Pleasant Valley
property in Ventura County, California to
confirm a substantial oil deposit as suggested by
wells surrounding the property and various
independent engineering estimates.
Tri-Valley has filed notice to drill four LundinWeber wells, which will be cored to examine all
formations up to 4,000 feet. The wells will
likely be completed in the diatomite section and
then
hydraulically
production
and
fractured
provide
data
to
to
enhance
design
Page 97 of 134
subsequent horizontal wells usually capable of
which it will acquire with the exercise of its
producing at several times the rates of vertical
option to purchase expected on or before April
wells.
14, 2006. Great Valley Drilling will acquire the
drilling equipment of Fallon, Nevada based
Equipment 2000. The rig is rated for 8,000 feet
Tri-Valley Unit Fills Out Production Rig
Fleet
May 8, 2006
Great Valley Production Services LLC, a
subsidiary of Tri-Valley Corporation (AMEXTIV), has successfully filled out its initial fleet
goal of at least five workover rigs giving it
capability to work on the shallowest wells from
a few hundred feet up to 18,000 feet with 2 7/8
inch tubing.
with 4.5 inch drill pipe and 10,000 feet with 3.5
inch drill pipe.
Great Valley Drilling joins its sister subsidiary,
Great Valley Production Services, Inc., which is
acquiring a fleet of workover rigs to service TriValley’s growing inventory of producing wells
and the drilling of a number of shallow
horizontal wells to re-exploit its properties with
modern technology to ramp up production.
Great Valley Drilling may also utilize the rig on
some of Tri-Valley’s California properties that
This enables Tri-Valley to work continuously on
have experienced extensive delays in contractor
its growing inventory of existing wells while
rig availability as well as continuing to service
drilling new ones on its properties to ramp up
Nevada projects.
production this year. Two of the rigs are also
capable of drilling vertical and horizontal wells
of 5,000 to 8,000 feet.
The Company can now service its own growing
inventory of producing wells on a timely basis
independent of contractor rig availability, and it
believes internal ownership of the rig fleet
positions the Company as a preferred bidder for
Tri-Valley Forms New Drilling Subsidiary
March 31, 2006
Tri-Valley Corporation has formed a new
Delaware subsidiary, Great Valley Drilling
the other properties whose owners may wish to
sell because they have increasing difficulty in
properly servicing their production or drilling
new wells.
Company LLC, to operate its first drilling rig
Page 98 of 134
Tri-Valley Unit Announces Results of 2005
the bottom of the Democrat Mine pit area. QFP
Drilling On Richardson Project
is the main host for gold mineralization at this
area of the property. Two holes tested the Camp
March 14, 2006
Pit area; five holes were drilled in the Democrat
subsidiary
of
Tri-Valley
Corporation
has
Mine area and one hole in the Democrat Pup
area.
received results for its late-2005 Richardson
Gold
Property
drilling
program.
The
Richardson Gold Property is located about 65
Tri-Valley Relocates to Larger Offices
miles southeast of Fairbanks, Alaska along the
March 3, 2006
Richardson Highway.
In November 2005, Select Resources announced
that its 2005 geochemical soil survey had been
undertaken along the Richardson lineament, a ±
1-kilometer wide, WNW- zone that includes the
historic Democrat Mine area. The soil survey
identified a zone approximately 8 kilometers
long (5 miles) and approximately ½ to 1½
kilometers
wide
with
anomalous
gold
concentrations, typical of intrusive related gold
systems
of
the
Tintina
Gold
Province.
Intrusive-related gold deposits of the Tintina
Gold Province include the multi-million ounce
Donlin Creek, Pogo and Fort Knox deposits.
Tri-Valley Corporation announced today that it
has moved its headquarters to the sixth floor of
the building formerly occupied by Arco Oil &
Gas Company at 4550 California Avenue in
Bakersfield, California.
All other contact
information remains the same.
The move also includes its wholly owned
subsidiaries, Tri-Valley Oil & Gas Co., Great
Valley Production Services, Inc., Tri-Valley
Power
Corporation,
Corporation,
and
Select
the
Resources
accounting
and
administrative functions of Select’s 50-50 joint
venture, Tri-Western Resources, LLC.
Late in the season, Select Resources completed
an eight-hole, diamond drilling program totaling
3052 feet, testing altered quartz-feldspar-
Tri-Valley Unit Begins Industrial Mineral
porphyry (“QFP”) hosted gold targets over a
Production
segment of the Richardson lineament, including
Page 99 of 134
March 1, 2006
Tri-Valley Reports Big Jump in Proven Oil
Reserves
Tri-Valley Corporation announced that an
February 24, 2006
industrial mineral mining joint venture of its
Select Resources Corporation subsidiary has
Tri-Valley
begun production on a cinder deposit in the
announced that its total proven reserves had
Mojave Desert east of Bakersfield, California.
increased from 160 barrels in 2004 to 218,000
Cinder is used primarily for manufacture of
barrels based on independent engineering
building blocks, decorative stone in landscaping
analysis under reserve re porting rules of the
and roadbed material, all in high demand in
U.S. Securities and Exchange Commission. The
California's burgeoning economy.
increase
Corporation
came
from
just
(AMEX-TIV)
one
of
three
development properties acquired last year,
Once final Mojave Air Quality District permits
are received for additional equipment needed to
which is the only one of the properties with
producing oil wells currently online.
mine a companion basalt deposit, the Company
expects those operations to commence as well.
Another
The basalt will be processed to make granules
recoverable barrels in the proven undeveloped
suitable for manufacturing specialty-building
category
by
materials. Both deposits are nearby the huge
standard
formulas
U.S. Borax mine north of the City of Boron and
conservative old technology extraction method.
Edwards Air Force Base, where the space
However, until it is put into production through
shuttle lands.
rework of existing wells and new wells are
property
is
given
independent
based
six
engineers
on
the
million
using
most
drilled to re-confirm reservoir characteristics
The Company forecasts that profitable cinder
operations will be attained in the second quarter
and expects profitable operations in the basalt
and production rates, the Company is not
allowed to include any volume or value in its
filings.
mining to be achieved in the third quarter
pending receipt of the equipment permits.
Another natural gas property presently has only
a single old well with current modest production
and the Company believes the entire 21 square
miles are prospective for multiple additional
locations for new wells.
Page 100 of 134
Tri-Valley Forms Great Valley Production
largest shareholder, G. Thomas Gamble of
Services, Inc.
Yountville, California, has been elected to the
board of directors to maintain its number of six
February 8, 2006
outside directors.
Bakersfield, California. Tri-Valley Corporation
(AMEX-TIV)
has
formed
Great
Valley
Production Services, Inc. as a wholly owned
subsidiary to operate its growing fleet of
Gamble is a rancher and a businessman with
current active investments in agriculture, food
processing, educational services, oil, gas and
minerals.
production rigs to work on its own oil and gas
producing properties.
Gamble is a director and original investor in
Boston
The acute rig shortage has made it more difficult
to schedule rig availability at a time when we
have just acquired another 65 wells needing
Reed
College,
which
provides
educational opportunities to busy adults seeking
stable and growing careers in the California
health care industry, Tri-Valley said.
rework throughout the year. "We had the
opportunity to buy enough rigs at favorable
prices and can now assure Tri-Valley’s ability to
service our projects," said Joseph R. Kandle,
president of Great Valley as well as the
operating subsidiary, Tri-Valley Oil & Gas Co.
Tri-Valley Takes Possession of Temblor
Valley Oilfields and Moves to Increase Oil
Production
January 3, 2006
Tri-Valley Corporation has taken possession of
the
850-acre
Temblor
Valley
producing
Tri-Valley Corporation elects G. Thomas
properties and is moving immediately to expand
Gamble to its board
production by reworking existing wells while
applying new technology in drilling new wells.
January 11, 2006
BAKERSFIELD, Calif. Tri-Valley Corporation
(AMEX:TIV) announced on 10 January that its
The purchase price was $2,850,000 cash.
Comprised of two separate properties, the
Temblor Valley Projects will be developed
Page 101 of 134
through a joint venture with Tri-Valley managed
degrees
Opus I Drilling Program LP to rapidly rework
Georgetown University, both in Washington,
existing wells while drilling new horizontal
D.C.
wells.
positions in major mining and transportation
from
several other prospective zones in addition to
University
and
Sandri has held mid and senior level
companies
Tri-Valley's technical staff believes there are
American
as
well
as
independent
and
consulting firms active in mining, transportation
and utility operations in numerous countries.
the traditional producing zones and they will
drill an appraisal well to evaluate those
Tri-Valley formed Select a year ago to house its
opportunities further. The Company envisions a
growing inventory of gold exploration projects
combination of deeper vertical wells amongst
and to operate an industrial minerals joint
the shallower horizontal wells to fully exploit
venture. During this time, Noyes assembled a
the many producing and prospective intervals.
world-class team of consultants to focus on
precious metal opportunities while Sandri
handled the start up industrial minerals joint
Dr. Rick Sandri Promoted to President of
venture
Select Resources; Noyes Resigns December
16, 2005
Tri-Valley
Transfers
Richardson
Gold
Claims to Its Subsidiary Select Resources
(AMEX: TIV) announced that Henry J. "Rick"
Sandri, Ph.D. has been promoted from executive
December 15, 2005
vice president to president of the Company's
mining
subsidiary,
Select
Resources
Corporation, a position vacated by Harold J.
Noyes, Ph.D. who resigned his officer and
director positions for family reasons.
(AMEX: TIV) will transfer its Richardson,
Alaska gold exploration project claims into its
wholly owned subsidiary, Select Resources
Corporation. With the recent buyout of royalty
Dr. Sandri holds a doctorate in mineral/energy
burdens on the primary claims, the transfer will
economics and engineering minor from the
enable Select to arrange the financing to
Colorado School of Mines and undergraduate
advance its portfolio of gold exploration
Page 102 of 134
projects in Alaska and the Klondike area of the
working over the well that had been shut in
Canadian Yukon territories.
since 1960 on its Moffat Ranch East property
near Madera, California. In addition to the
Some 65 miles south of Fairbanks on the all
year Richardson Highway, the entire 42 square
mile claim block is on mining friendly State of
Alaska lands. The database includes physical
gold in samples at 60 locations along a 20-mile
swath, which the Company's technical staff
believes suggests the possibility of a very large
sanded up well bore, the Company found
extensive debris, which had to be fished out
before 80 feet of zone could be re-perforated.
The well is choked back as a caution to sanding
up and is flowing a steady 200,000 cubic feet
per day through a 10/64 choke prior to hydraulic
fracturing.
system. Recent interpretations also suggest the
Richardson claim area may be an offset of the
After several days or even weeks of measuring
Pogo Gold deposit trend, which has been
draw down pressures as well as any tendency to
relocated by movement along the Shaw Creek
sand up the well bore, the well flow may be
fault.
increased until an optimal production rate is
reached and/or the producing formation has
The claims are not in a wild or scenic area, do
been foam fractured.
not drain into sensitive streams and have no acid
rock characteristics according to numerous
Tri-Valley is now completing a work over on a
surveys and bulk sampling since 1987. A power
second well, the MMR No. 8-12, that also
line runs through the claim block and ample
contains extensive debris and has essentially
water and fuel are available and is within
been shut in for over 10 years, to see if it will
commuting
flow again.
distance
of
work
force
and
equipment depot towns.
Tri-Valley Finalizes Agreement for Oil
First Moffat Workover Flowing Natural Gas
Production Purchase
December 14, 2005
December 8, 2005
Tri-Valley Corporation announced that the
Tri-Valley Corporation has finalized agreements
Moffat No. 2 is now flowing natural gas after
with the parties and will close on the purchased
Page 103 of 134
of the oil producing properties of Brea Oil
Tri-Valley
Company in western Kern County, California
Exploration Project Royalties
Completes
Buyout
of
Gold
for $2,850,000 cash it was announced today.
While negotiating the purchase, Tri-Valley
codenamed the property Temblor Valley as it is
located on the Central Valley side of the San
Andreas Fault Zone in line with several huge
oilfields.
54 wells adjoining the South Belridge Oilfield,
the third highest producing oilfield in the lower
48 states and is located approximately 40 miles
of
(Amex: TIV) has completed purchasing the
royalty and carried working interests of the
primary mineral leases in its 120 square mile
The primary property consists of 740 acres with
west
December 6, 2005
Bakersfield,
California.
Current
production on this portion of the Temblor
Valley purchase is a modest 50+/- barrels of 20
gravity sweet oil per day with many wells idle
or shut in, and the Company will move
immediately to rework a number of wells to
boost basic production.
A smaller 160-acre parcel with seven wells also
producing 50+/- barrels of oil per day comes
with the Temblor Valley purchase and is located
some 15 miles east of Tri-Valley's Bakersfield
headquarters. The Company will rework some
of those wells to enhance production, while
determining what new and deeper prospects
might be available.
gold exploration project area of mutual interest
at Richardson, Alaska. In all, some 480,000
unregistered restricted shares valued at a total of
$3,716,500 were used over the past three years
to acquire several layers of royalty interests
from the original claim owners, various
financing parties and the estate of the geologist
who brought the property to Tri-Valley.
Comprised entirely of mining-friendly Alaska
State lands, the 42-square mile claim block is
located some 65 miles south of Fairbanks on the
year round Richardson Highway, and has ample
power, water and fuel available, does not drain
into sensitive streams, is not a wild or scenic
area, has no acid rock characteristics and is near
work force towns. Tri-Valley has explored the
property since 1987 and has found physical gold
in samples from 60 locations along a 20-mile
swath, which it believes, suggests a very large,
gold system in place. Diamond core drilling and
soil auger sampling last summer around the socalled Democrat Dike suggests the target may
Page 104 of 134
be a much larger geologic feature, and the
accredited investor. The transaction was made
Company is awaiting assay results by the end of
after the market closed at $9.97 on November
the year to see if the gold extent is similarly
18, 2005 and was for 100,000 shares at $10.00
greater.
with two year warrants on 33,333 unregistered,
restricted shares.
Approval for the sale is pending from the
Tri-Valley Joins List of Top 100 U.S.
Petroleum Companies
American Stock Exchange and the Company
will file an 8-K with that proviso. The company
is getting its industrial mineral joint venture
December 5, 2005
ready for production status, and aims to increase
With nearly $25 million in assets and a market
its revenue and the intrinsic value in its stock.
capitalization exceeding $200 million, TriValley Corporation ascended another 15 places
to number 100 on the Oil & Gas Financial
Journal list of the top 200 U.S. petroleum
Tri-Valley Unit Enhances Land Position at
Richardson Project
companies in its November 2005 issue.
November 23, 2005
Ranking all companies by assets has been the
custom of the Oil & Gas Journal for decades
and its financial supplement now tracks
subsidiary of Tri-Valley Corporation (Amex:
companies by quarter rather than annually.
TIV) has increased its land position at its
Richardson
Property,
Alaska,
by
staking
approximately 920 acres of additional claims on
Tri-Valley Makes Private Placement of Its
Common Stock
state land. The claims provide an expanded land
position along the projection of a multi-element
soil geochemical anomaly identified through a
soil sampling program conducted during the
November 23, 2005
2005 field season. The anomaly contains
Tri-Valley Corporation advised that it had
negotiated
a
private
placement
of
its
elevated
antimony,
values
and
of
gold,
bismuth,
silver,
an
arsenic,
association
unregistered, restricted common stock to an
Page 105 of 134
commonly found with intrusive related gold
position to be filled when the Board meets in
mineralization. Select now holds approximately
December. Another director, Harold J. Noyes,
27,240 acres at its Richardson Property.
now president of the Company's mining
subsidiary, Select Resources Corporation, is
conflicted out of the Committee on Personnel
Marumoto Joins Tri-Valley Board; Hoffman
and Compensation and will be reassigned. At
this time, the committee members are Dr. Henry
Resigns
Lowenstein and Marumoto.
November 18, 2005
(Amex: TIV) continues its board expansion with
the addition of William H. "Mo" Marumoto of
Washington D.C. to its board of directors where
Tri-Valley Unit Commences Operations on
Monarch Calcium Carbonate Deposit
November 16, 2005
he will serve on the committee for personnel
BAKERSFIELD, Calif. Tri-Western Resources,
and compensation.
LLC, a 50-50 joint venture managed by Select
Currently the president and chief executive
officer of the Asian Pacific American Institute
for Congressional Studies, Marumoto has over
30 years experience in the executive and
personnel search profession as chairman and
chief executive officer of his own retained firm,
The Interface Group, Ltd. During this, he was
Resources
Corporation,
a
wholly
owned
subsidiary of Tri-Valley Corporation (Amex:
TIV), announced commencement of operations
to mine the Monarch calcium carbonate deposit
in eastern Kern County, California, after
receiving approval of its mining plans by the
U.S. Bureau of Land Management today.
named to the Global Top 200 Executive
Recruiters
and
several
other
worldwide
With a beginning resource of 15 million tons of
high chemical grade, high white calcium and
professional awards and recognitions.
calcite marble mineralization as calculated by an
Marumoto
will
replace
Director
Chase
Hoffman, 82, who is resigning for health
reasons. Hoffman was chair of the Board's
independent registered geologist, Tri-Western
aims to begin mining at an annual production
rate of 150,000 to 200,000 tons.
Committee on Personnel and Compensation, a
Page 106 of 134
administrative structuring of Tri-Valley as it
expands personnel and projects.
Tri-Valley Names New CFO and New CAO
in Support of Growth
November 15, 2005
Tri-Valley Unit Discovers Two New Drill
Targets at Richardson Property, Alaska
(Amex: TIV) has hired Art Evans, CPA, CMA,
November 10, 2005
CFM as its chief financial officer to succeed
Tom Cunningham, who is promoted to vice
BAKERSFIELD,
Calif.
Select
Resources
Corporation, a wholly owned subsidiary of Tri-
president and chief administrative officer.
Valley
Corporation
(Amex:
TIV),
has
analysis
of
Evans has a full range of accounting and
completed
financial management experience in several
geochemical analyses from a soil survey
industries as well as oil, gas, and mining and
conducted this season on its Richardson
with Fortune 500 companies as well as
Property in Alaska. The Richardson Property is
independents like Tri-Valley. He holds a
located about 65 miles southeast of Fairbanks,
bachelors of science in accounting from Weber
Alaska along the Richardson Highway. The
State University in Ogden, Utah, a master of
survey was successful in characterizing the
business administration in finance from Golden
nature of the gold mineralization and in
State University, Los Angeles and a master of
identifying new drill targets.
a
preliminary
science in systems management from the
University of Southern California, Los Angeles.
His professional designations include Certified
Public
Accountant,
Certified
Management
The soil survey was designed to test for lode
gold mineralization along a northwest-southeast
trending
structure
passing
through
the
Company's Democrat Prospect, where previous
Accountant and Certified Financial Manager.
drilling and sampling have demonstrated lode
After nine years of progressive responsibility,
gold mineralization. A total of 556 soil samples
including the positions of secretary, treasurer
were collected from an irregularly shaped zone
and
about
chief
financial
officer,
Thomas
J.
Cunningham will oversee the organization and
8
kilometers
long
(5
miles)
and
approximately 1/2 to 1.5 kilometer wide, with
Page 107 of 134
samples collected on a grid with a nominal
and acidizing the zones has still not enabled the
spacing of 50 meters by 200 meters. Preliminary
test wells to flow at commercial rates.
analysis of the results indicates that the known
prospects along the trend clearly show a pattern
of
element
associations
intrusive-related
gold
consistent
deposits
with
currently
recognized in the Tintina Gold Province of
Interior Alaska, such as the multimillion-ounce
Donlin Creek, Pogo, and Fort Knox deposits.
Key elements in this association include gold,
Battelle, which operates the nuclear laboratories
at the Hanford Works in Washington and the
Oak Ridge, Tennessee facilities, and other
research facilities at other locations, is also
charged by the U.S. Department of Energy to
find ways to reduce U.S. dependence on foreign
oil and ways to enhance exploitation of heavy
oil reservoirs. They have an enormous array of
silver, bismuth, and arsenic.
highly skilled scientists, technical personnel and
ultra sophisticated analytical equipment to apply
to technical engineering problems and Battelle
Tri-Valley
Joins
With
Battelle
Pacific
Northwest National Laboratory for High
works
on
both
government
and
private
contracts.
Impact Oil and Gas Research
Tri-Valley Restores Gas Well Production
November 9, 2005
November 8, 2005
(Amex: TIV) has signed an agreement with a
Tri-Valley Corporation (Amex: TIV) has re-
unit of Battelle Memorial Institute based in
completed its Martins-Severin No. 3 natural gas
Richland, Washington to conduct advanced
well in the Sacramento River Delta with an
research on low permeability oil and gas
initial flow rate of more than 1 million cubic
formations commonly referred to in the industry
feet per day from the Nortonville formation. The
as "tight" zones and heavy oil reservoirs.
well will be choked back to begin production at
a rate of about 250 thousand cubic feet per day
Tri-Valley has made two very large discoveries
with the pay being in tight formations and not
and gradually increased to an optimum rate to
avoid sanding up the well bore.
able to flow at commercial rates. Conventional
industry treatment such as hydraulic fracturing
Page 108 of 134
Drilled in 1990, the No. 3 is part of a six well
capacity of 500,000 tons per year on a single
program that has produced more than 22 billion
shift basis.
cubic feet of high quality gas from the unit put
together by Tri-Valley and its then co-venture
partner, Phillips Petroleum Company. TriValley bought Phillips' interest in 2000.
Tri-Valley
Unit
Reports
Positive
Gold
Results at Shorty Creek
September 26, 2005
BAKERSFIELD, CA - September 26, 2005 --
Tri-Valley Unit Announces Initial Production
and Sales
September 28, 2005
subsidiary
of
Tri-Valley
Corporation
(AMEX:TIV), today announced initial results
from soil sampling at its Shorty Creek program
On Tuesday, September 27, 2005 Tri-Western
in Alaska’s Tintina Gold Belt.
Resources, LLC, a 50-50 joint venture operated
by Select Resources Corporation, announced
that the Company has now initiated its mining
operation with the ripping of 20,000 tons of
basalt in preparation for crushing and screening
at its Boron, California Basalt Quarry and begun
product sales.
The company recently completed a top-ofbedrock soil auger sampling program covering a
2.3 square kilometer (approximately 0.89 square
miles) portion of the project where past
exploration efforts
had
discovered
highly
anomalous gold and copper mineralization. A
total of 566 soil samples were collected on a 25
The quarry processing site has been prepared,
meter by 100 meter (approximately 80 X 330
the jaw and cone crushers are being placed and
feet) grid. Initial results from 222 of these soil
the stackers / conveyers are being upgraded and
samples from the southern portion of the grid
arranged. The three Mid-Western screens, cones
have returned highly anomalous gold, silver,
and storage bins, and other material handling
arsenic, bismuth, antimony, tellurium and
equipment used in sorting crushed rock will be
tungsten values.
arriving within the next two weeks so that the
facilities can begin operations within a month
with revenue beginning in the fourth quarter of
the year. The Boron Quarry has an initial
Anomalous gold and pathfinder elements from
this grid cover an area measuring 1,700 meters
NE-SW by 900 meters NW-SE (approximately
Page 109 of 134
5,600 X 2,970 feet). Gold, arsenic and bismuth
life. Tri-Valley’s technical staff has also
values are highly anomalous over the entire area
identified eight separate zones to basement,
of the grid from which samples have been
which are believed to be prospective for
received.
hydrocarbons throughout the 5,283-acre Ranch.
Tri-Valley
Commences
Operations
to
Produce Moffat Ranch Gas Wells
Tri-Valley Unit Acquires Valley Sand &
Gravel Assets
September 23, 2005
September 19, 2005
Tri-Valley
Corporation
(AMEX-TIV)
has
executed an agreement for pipeline access for its
three Moffat Ranch Natural gas wells with
California Energy Exchange Corporation and is
commencing operations to place the wells on
On Tuesday, September 13, 2005 Tri-Western
Resources, LLC, a 50-50 joint venture operated
by Select Resources Corporation, the minerals
subsidiary
of
publicly
traded
Tri-Valley
Corporation (AMEX: TIV), agreed to acquire
production.
the majority of the operational assets and
The procedure invoices cleaning out the wells
equipment of Valley Sand & Gravel, located
that have been shut in for 10 years and
near Trona, California, the transaction being
fracturing the productive section to stimulate a
completed on September 19, 2005 with the
greater flow rate. The wells will then be hooked
transfer of funds.
up
to
the
California
Energy
Exchange
Corporation system, which connects with the
Pacific Gas & Electric Company main lines for
delivery to the ultimate customer targeting
The Valley Sand & Gravel operational assets
and equipment include two gravel processing
operations, including one dry and one wet
(wash) plant, mobile mining equipment, stacker
revenues beginning in the fourth quarter.
/ conveyer sets, diesel generators, work offices,
The wells currently produce from the Howard
work-shop
Sand, a tight 100 feet overall shallow section,
capable of producing 250 tons an hour.
and
Tri-Valley
expects
production,
and
other
assorted
equipment
while
somewhat modest, could have considerably long
Page 110 of 134
Select Resources Corporation Announces
Initiation Drilling Program at Its Richardson
Select Resources Corporation Announces
Gold Property, Alaska
Initiation Drilling Program at Its Richardson
September 1, 2005
Gold Property, Alaska
September 1, 2005
TIV), today announced commencement of an
exploration drilling program at its Richardson
Property in Alaska. The program anticipates a
total of several thousand feet of diamond core
drilling in three or more core holes to evaluate
potential gold mineralization at the Democrat
Prospect and related prospective areas within
the approximately 40 square mile Richardson
Property. Preparations are being made to secure
appropriate permits and mobilize the drill rig to
the property, with drilling expected by mid-
TIV), today announced commencement of an
exploration drilling program at its Richardson
Property in Alaska. The program anticipates a
total of several thousand feet of diamond core
drilling in three or more core holes to evaluate
potential gold mineralization at the Democrat
Prospect and related prospective areas within
the approximately 40 square mile Richardson
Property. Preparations are being made to secure
appropriate permits and mobilize the drill rig to
September.
the property, with drilling expected by midDrilling will be focused along a structural zone
September.
that is interpreted as a favorable conduit for
gold-mineralizing
fluids.
The
Democrat
prospect is one target along this zone for which
previous drilling identified gold mineralization
associated intrusive rocks. Select’s consulting
team has compiled and reviewed work from
previous
programs
and
determined
that
additional, more comprehensive work is merited
at the Democrat Prospect and at several other
locations along the structural zone.
Drilling will be focused along a structural zone
that is interpreted as a favorable conduit for
gold-mineralizing
fluids.
The
Democrat
prospect is one target along this zone for which
previous drilling identified gold mineralization
associated intrusive rocks. Select’s consulting
team has compiled and reviewed work from
previous
programs
and
determined
that
additional, more comprehensive work is merited
Page 111 of 134
at the Democrat Prospect and at several other
of directors of this American Stock Exchange
locations along the structural zone.
listed company.
Chosen because of his broad background in
business, academe and public service, Dr.
Tri-Valley Adds Technical Staff
Lowenstein has served several universities as
August 19, 2005
instructor, assistant professor, and professor in
Tri-Valley Corporation (AMEX TIV) has added
two geologists and an engineer as part of a
larger build up of technical staff related to its
expanded drilling and production opportunities.
management, chairman of divisions of business
and economics and public administration. In
business he has been executive vice president of
American Furniture, Inc., vice president and
Director of Education at Dominion Bankshares
Company’s
Corporation, and director of education for
operating subsidiary, Tri-Valley Oil & Gas Co.,
Kemper Insurance and Financial Group. He
as consultants, geologists Paul Hacker and
served in the U.S. Office of Management and
Myron Tiede and engineer Ron Brown have
Budget and the Executive Office of the
converted to employees making them eligible
President.
After
previously
serving
the
for the Company’s benefit plan including stock
options.
Tri-Valley Commences Operations on Second
Stage Frac of Ekho Well
Tri-Valley Taps Business Dean for Board
Seat
August 10, 2005
August 5, 2005
Tri-Valley
Corporation
(AMEX
TIV)
announced its subsidiary, Tri-Valley Oil & Gas
Tri-Valley Corporation (AMEX TIV) has added
Co., has commenced operations to perform a
Henry Lowenstein, Ph.D. and Dean of the
second stage hydraulic fracturing of the Santos
School of Business and public administrator at
Shale, an approximately 500-foot hydrocarbon
California State University, Bakersfield as the
saturated interval between 17,500 and 18,000
sixth outside director on a seven-person board
feet in the Company’s Ekho No. 1 well some 45
Page 112 of 134
miles northwest of its Bakersfield, California
has yielded about 21 million barrels since its
headquarters.
1983 discovery by junior explorer Northwestern
Petroleum.
A key consideration is that the Ekho No. 1 is
only 2,200 feet away and 300 feet up dip from
the Great Basins Petroleum 31X-10 drilled in
Tri-Valley Acquires Admiral Calder Calcium
1973 which temporarily flowed 1,000 barrels
Mine from Sealaska
per day through a crack in 300 feet of lap
cement before down hole problems forced
abandonment. After further study, it is now
thought the oil in the 31X-10 may have come
from the Santos Shale.
July 18, 2005
Tri-Valley Corporation through its wholly
owned subsidiary Select Resources Corporation,
Inc. has purchased the Admiral Calder Calcium
Carbonate Mine and associated assets from
Tri-Valley Completes Nevada Oil Well
Sealaska Corporation and SeaCal, LLC.
July 25, 2005
The property is located on the northwestern
Tri-Valley
Corporation
(AMEX
TIV)
coast of Prince of Wales Island, part of the
announced today that its operating subsidiary,
Alexander Archipelago in southeast Alaska
Tri-Valley Oil & Gas Co., has elected to run
between Juneau and Ketchikan. The Mine,
pipe for completion on its Midland Trail Oil
deposit and local geographic features are named
Prospect 90 miles southwest of Ely, Nevada.
after Rear–Admiral Robert Calder, a British
naval officer who served under Horatio Nelson
“We’ve encountered a 100-foot section of
Devonian limestone with mud log oil shows and
favorable electric log readings about 100 feet
high to our initial mapped target that encourages
a completion,” said Joseph R. Kandle, TVOG
and fought a number of successful actions
against the French during the Napoleonic Wars.
Select will be calling the Mine and operation the
“Admiral”, representing its history and maritime
location.
president.
The Midland Trail Prospect is developed as a
look-alike structure on trend with the prolific
Tri-Valley
Commences
Moffat
Ranch
Operations
Grant Canyon Field some 11 miles north which
Page 113 of 134
long Madera natural gas corridor whose fields
June 3, 2005
have given up 150 billion cubic feet of gas. The
Tri-Valley Corporation announced that it is
commencing operations on its 3,000-acre
Moffat Ranch East Prospect to re-open two shut
in natural gas wells and drill a 10,250-foot
vertical exploration test well to basement.
Located
35
California,
miles
the
northwest
5,400-acre
of
Moffat
Moffat Ranch Gas Field itself has yielded 12
Bcf since discovery in 1943 and will start
producing again when existing shut in wells are
reworked with modern techniques and turned
back on. Tri-Valley will initiate a development
Fresno,
program to further boost production.
Ranch
leasehold is on the southern end of the 25-mile
Page 114 of 134
APPENDIX 20: DCF EXPLANATION
Discounted Cash Flow Analysis (DCF) values a
company today, based on projections of how much
cash will be generated from a company in the future.
A DCF analysis assumes that a company is worth all
of the cash that it can make available to investors in
the future. It is called a "discounted" cash flow
because cash in the future is worth less than cash
today, and therefore must be discounted to today.
For example, suppose someone asked an investor to
choose between receiving $100 today and receiving
$100 in a year. Chances are the investor will take the
money today, knowing that he can invest that $100
now and have more than $100 in a year's time. In
simple terms, the amount that the investor would
have in one year is worth $100 dollars today - or the
discounted value is $100. We make the same
calculation for all the cash expected to be generated
by a company in the future to get a valid measure of
the company's value today. As seen in the table
below, the present Value of $100 reduces as the
number of years forecasted increase.
Table 18: Present value of $100
Amount
($)
100
100
100
100
100
100
100
100
100
100
Discount Rate
(r)
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
Year
(n)
1
2
3
4
5
6
7
8
9
10
PV
(Amt/(1+r)^n
90.91
82.64
75.13
68.30
62.09
56.45
51.32
46.65
42.41
38.55
We use a Discounted Cash Flow Analysis (DCF) to
forecast future cash flows to determine a fair value
range for a given stock price.
depreciation) to net income after taxes. Cash flow
can be attributed to a specific project, or to a
business as a whole.
We normally forecast cash flows during a five-year
period from the Income Statement, which requires
additional forecasting inputs. We focus on the
Present Value of Future Cash Flows to compute a
target price. The Cash Flow Statement is as an
accounting statement that shows the amount of cash
generated and used by a company in a given period,
calculated by adding non-cash charges (such as
Free Cash Flow (FCF) represents the cash that a
company is able to generate after spending the
money required to maintain/expand its asset
base. Free cash flow is important because it allows a
company to pursue opportunities that enhance
shareholder value. Without cash, it is difficult
to develop new products, make acquisitions, pay
dividends and reduce debt.
Page 115 of 134
Free Cash Flows Computation
The table below demonstrates how we calculate FCF for a company.
Table 19: Free Cash Flow Calculation of XYZ Company
Figures in $'000 unless specified
Y0
Y+2
Y+3
Y+4
Y+5
Net Cash from Operations
CAPEX
Net Debt Additions
2.07
(24.00)
19.20
20.37
(77.00)
61.60
55.42
(169.40)
134.90
129.01
(372.68)
278.94
241.43
(614.92)
430.34
397.98
(901.89)
585.99
(2.73)
4.97
20.93
35.28
56.84
82.08
Free Cash Flows Equity
The theory behind the DCF model is that investors
are willing to pay for a stream of future cash flows.
Future cash flows are discounted with a present
value formulation to determine a fair stock price
today, given what we know and how we forecast the
future. Present Value (PV) is the value in today's
dollars assigned to an amount of money in the
Y+1
future, based on our estimate rate-of-return over the
long-term. In this analysis, rate-of-return is
calculated based on annual compounding. A given
amount of money is always more valuable sooner
than later since this enables one to take advantage of
investment opportunities. Because of this, present
values are less than corresponding future values.
Our key input is the rate used to discount future cash
flows to their present values. Most firms have a
well-defined policy regarding their capital structure.
Therefore, the Weighted Average Cost of Capital
(WACC) (after tax) is appropriate for use with all
projects. Present value is additive. The present value
of a quantity of cash flows is the sum of each one's
present value.
1.
There are three main steps to calculating a DCF
2.
First, we calculate the stream of cash
flows in the five-year forecast period.
Then we discount these cash flows
back to the beginning of the first
forecasted fiscal year. The method we
use to discount back to the present is
the Present Value Method where we
discount the free cash flows of the
company by the WACC.
The second step is to determine the
company’s value at the end of the
Page 116 of 134
3.
forecast period. This is the Terminal
Value. The Terminal Value is then
discounted back to the beginning of
the first forecasted fiscal year. The
method we use to discount back to the
present is the Perpetuity Growth
Model. The Perpetuity Growth Model
accounts for the value of free cash
flows that continues into perpetuity in
the future, growing at an assumed
constant rate. To determine the
present value of the terminal value,
one must discount the Terminal Value
by a factor equal to the number of
years included in the initial projection
period. If N is the fifth and final year
in this period, then the Terminal Value
is divided by (1 + r) ^5.
The final step is adding these two to
determine a fair value today based on
what we know about the future.
For the most part, free cash flow is a trustworthy
measure that cuts through much of the arbitrary
"guesstimates" involved in reported earnings.
Regardless of whether a cash outlay is counted as an
expense or turned into an asset on the balance sheet,
free cash flow tracks the money left over for
investors.
DCF analysis treats a company as a business rather
than as a ticker symbol and a stock price. It requires
us to think through all the factors that will affect the
company's performance. DCF analysis really gives
the investor an appreciation for what drives stock
values.
Five years of forecasting in the Income Statement
must be forecasted for the complete 5 year forecast
timeframe. We analyze prior year’s data to aid in
making better forecasts.
An important decision in using Present Value
models is deciding what cash flow or earnings
stream will be forecasted and eventually discounted
to compute an evaluation. We forecast Free Cash
Flow which requires more input than simply using
EBITDA
(Earnings
before
Interest,
Tax,
Depreciation and Amortization) .
A simpler method for discounting cash flow
forecasts is using EBITDA (not a GAAP reporting
required item). EBITDA can be defined as gross
cash flow. This method of discounting is appropriate
when EBITDA forms the basis of evaluation for the
company. This method works well with small
companies that have yet to post positive earnings.
For all other companies, it is a good idea to examine
at how the valuation methodology is applied.
DCF is a more involved forecasting method because
it calculates the forecasted Free Cash Flow. The
method requires forecasting of items such as the
Operating Margins, tax rates, capital expenditures
and changes in working capital. In addition, Debt is
not subtracted from the discounted Free Cash Flow
since Free Cash Flow is, by definition, net of the
debt payments.
Page 117 of 134
Terminal Value
Since we cannot estimate cash flows forever, we
generally impose closure in discounted cash flow
valuation by stopping our estimates of cash flows
five years (Y+5) in the future and then computing a
terminal value that reflects the value of the firm at
that point.
The Terminal Value is the forecasted value of the
stream of cash flows the company will have at the
end of the forecast period. We base this on the
company’s prospects at that time. We assume that
the cash flow in year five (Y+5) will continue at a
stable growth for five more years. Since this is too
Value.
far in the future to accurately forecast, we do not
attempt to forecast the individual line items that
compute cash flow. We use the Long Term
Sustainable Growth Rate as the primary
determinant
of
the
Terminal
Therefore, our DCF computes a value for the
company in year five. We have found that
calculating the terminal value using the stable
growth method provides more accuracy because of
the multiple or sum of years method we employ.
multiple. Our sensitivity index is defined as “A
technique for determining the outcome of a decision
if a key variable (discount rate) differs from
projected one.” This makes empirical sense. When
the perception of growth prospects change for a
company, the stock typically reacts strongly. These
graphs objectively quantify such a strong potential
reaction to the upside or downside.
The Terminal Multiple is an important component of
equity valuation. This is the value one expects will
be the growth rate at the end of the forecast time
period, Y+5. Since it is difficult to accurately
forecast this, it is common to use the Long Term
Growth Rate as the proxy for the Y+5 growth rate.
As analysts, we can experiment with Terminal
Multiples that are appropriate for the company in
which we are analyzing. We normally forecast a
long term growth rate in the middle of this range.
Our output graphs then describe the range of target
prices based on a range of assumed growth rates.
When studying the target price output, one quickly
sees the target price sensitivity to the terminal
We use the Gordon Growth Model to determine
Terminal Value.
This method assumes that the company is a
perpetual entity and will continue to generate
positive cash flows throughout its life. However, on
reaching maturity, the growth rate of the company
slows down. Hence, we assume that the company
will grow at a average constant rate for the rest of its
life.
The terminal value is calculated using the
following formula
Page 118 of 134
The formula simplifies the practical problem of
projecting cash flows far into the future. However, it
rests on the significant assumption that the cash flow
of the last projected year will stabilize and continue
at the same rate forever. This is an average of the
future growth rates, not a single rate expected to
occur every year into perpetuity. Some growth will
be higher or lower, but the expectation is that future
growth will average the long-term growth
assumption. This formula uses the final year’s
projected cash flows (Y+5), and multiplies it by a
long-term nominal growth rate. This is further
discounted by the difference between the discount
rate used for Present value calculation (WACC) and
the assumed long term growth rate.
Table 20: DCF Analysis With Terminal Growth Rates
Figures in $'000 unless specified
Net Cash from Operations
CAPEX
Net Debt Additions
Free Cash Flows Equity
PV
Y-0
2
(24)
19
(3)
(3)
Y-1
20
(77)
62
5
4
Y-2
55
(169)
135
21
13
Discount Rate
The Discount rate is an important determinant in
using PV calculations for equity valuation. We
display the assumed discount rates used in the
valuation output tables and charts. We can use two
different discount rates; one for the five year forecast
period and another for the terminal value. Normally
we use the same discount rate throughout the
valuation model.
To better understand the discount rate, let us
compare the Present Valuation formulation to
financing a house. The interest rate on the mortgage
is analogous to the discount rate, whereas the
monthly mortgage payments are analogous to the
cash flows. The PV of the Cash Flows is analogous
to the face value of the mortgage. To analyze a
company we first forecast the cash flows (mortgage
payments) with the income statement. To determine
the current value of these future cash flows, (face
value of the mortgage), we use a discount rate
(interest rate). In setting up a mortgage payment, the
Y-3
129
(373)
279
35
18
Y-4
241
(615)
430
57
23
Y-5
Terminal Value
398
(902) Range of Terminal Growth Rate
586
3%
4%
5%
82
592
630
672
28
71
76
81
interest rate is the starting point to compute the
mortgage payment. For a stock valuation, we
forecast the future cash flows and need to apply an
appropriate discount rate to equate a current value.
There are methods to calculate Discount Rates,
Cost Of Equity Or The Required Rate Of Return
For Equity Holders
Unlike debt, which the company must pay at a set
rate of interest, equity does not have a concrete price
that the company must pay. However, that does not
mean that there is no cost of equity. Equity
shareholders expect to obtain a certain return on
their equity investment in a company. From the
company's perspective, the equity holders' required
rate of return is a cost, because if the company does
not deliver this expected return, shareholders will
simply sell their shares, causing the price to drop.
Therefore, the cost of equity is what it costs the
company to maintain a share price that is satisfactory
Page 119 of 134
(at least in theory) to investors. The most commonly
accepted method for calculating cost of equity
comes from the Nobel Prize-winning capital asset
pricing model (CAPM), where:
Rf - Risk-Free Rate - This is the rate obtained from
investing in securities considered free from credit
risk, such as government bonds from developed
countries. The interest rate of 10-year U.S. Treasury
bills or the long-term bond rate is used frequently as
a proxy for the risk-free rate. If the Risk Free Rate
is assumed to be higher in a DCF calculation, the
projected share price will be lower, all other metrics
being assumed as equal.
the returns investors expect, over and above the riskfree rate, to compensate them for taking extra risk by
investing in the stock market. In other words, it is
the difference between the risk-free rate and the
market rate. It is a highly contentious figure. Many
analysts argue that this metric rises due to the
concept that holding shares has become a riskier
proposition. If the Equity Market Risk Premium is
assumed to be higher in a DCF calculation, the
ß - Beta– The Beta measures how much a company's
share price moves against the market as a whole.
A Betaof one, for example, indicates that the
company moves in line with the market. If the Betais
in excess of one, the stock price is more volatile than
the market's movement; less than one means the
share is more stable. Occasionally, a company may
have a negative Beta(e.g. a gold mining company),
which means the share price moves in the opposite
direction to the broader market.
If the Betais
assumed to be higher in a DCF calculation, the
(Rm – Rf) = Equity Market Risk Premium The equity market risk premium (EMRP) represents
A company's WACC is a function of the mix
between debt and equity and the cost of that debt and
equity. On one hand, in the past few years, falling
interest rates have reduced the WACC of companies.
On the other hand, corporate disasters such as those
at Enron and WorldCom have increased the
perceived risk of equity investments.
An appropriate discount rate is computed
quantitatively using historical rates to assume and to
equate the time value of money of future flows. For
a stock, we compute a rate adjusted for the shares
Weighted Average Cost of Capital (WACC)
The WACC is the weighted average of the cost of
equity and the cost of debt based on the percentage
of debt and equity in the company's capital structure.
The percentage of debt is represented by
Debt/Value, a ratio comparing the company's debt
to the company's Total Value (equity + debt). The
percentage of equity is represented by
Equity/Value, a ratio comparing the company's
equity to the company's total value. We calculate the
WACC by using the following formula:
outstanding to compute a stock price. It is important
for the analyst to be comfortable with the discount
rate used. Important parameters to consider are
1) Is the cost of equity is greater than the cost
of debt?
2) Is the equity risk premium today different
from the long term average?
3) Is the historically based Beta indicative of
the future volatility in the stock price?
4) Does the discount rate accurately reflect the
required rate of return for the stock?
Page 120 of 134
Table 21: Example of WACC Method
WACC
Cost of Equity
Risk free rate
Risk premium
Beta
Cost of Equity [A]
Weight of Equity [B]
Cost of Debt
Cost of Debt [C]
Weight of Debt [D]
WACC {(A*B)+(C*D)}
5.25%
7%
1.0
12.25%
80%
7.87%
20%
11.37%
What If Analyses
As analysts, we can change the quarterly estimated
data for future quarters depending on a company’s
prospects. A company may have revenue targets or
margin guidance that can be used. If management is
adopting a different growth strategy, changes to
capital expenditures and working capital may be
appropriate. We can change the discount rate to
analyze the sensitivity to it.
Any changes in margins, revenues, tax rate,
depreciation, including tax rate, CAPEX and
working capital inputs will be reflected in the our
valuation charts. This occurs because our analysis is
sensitive to changes in any of these parameters. Such
changes in our inputs allow us to select an
appropriate range of terminal multiples.
Page 121 of 134
Table 22 Sensitivity Analysis with Discount Rate
Range of
PV of Free
Discount Rates Cash Flows
Y-0
20%
(2.57)
22%
(2.55)
24%
(2.54)
26%
(2.53)
Y-1
3.90
3.82
3.73
3.66
Y-2
13.68
13.17
12.68
12.21
Y-3
19.22
18.19
17.23
16.34
Y-4
25.81
24.03
22.40
20.90
Y-5 Terminal Value
31.06
102.17
28.44
86.13
26.08
72.82
23.95
61.72
Table 23: Sensitivity Analysis with Growth Rate
Discount Rate
Terminal Growth
Shares O/S
Sum PV of FCFE
Add: Cash
Equity Value
Value Per Share (in $)
23%
3%
24.69
210.31
21.81
232.12
9.40
23%
4%
24.69
214.84
21.81
236.65
9.59
23%
5%
24.69
219.88
21.81
241.69
9.79
23%
6%
24.69
225.52
21.81
247.33
10.02
23%
7%
24.69
231.88
21.81
253.69
10.28
Page 122 of 134
Optimistic Case, Base Case, Pessimistic Case
As analysts, we form our own estimates about the
company’s financials based on certain information
provided by the management and our own
understanding of the company’s business model. We
generally create three scenarios, the Optimistic Case
Scenario, the Base Case Scenario, and the
Pessimistic Case Scenario.
The Optimistic Case is a bullish outlook of the
company’s value while the Pessimistic case is a
conservative view. The Base case scenario illustrates
our expectation of the Company’s value under
normal circumstances .
This analysis allows us to create a wide range of
forecasts and compare implied target prices. We
always need to adjust our forecasts as a company
grows.
For the Optimistic Case, Revenues and Margins may
be stronger, along with the same or higher CAPEX
and Depreciation. For the Pessimistic Case,
Revenues and Margins will normally be weaker,
Debt may increase, CAPEX and Depreciation may
decline.
If we wish to make changes to the Base Case, we
can go back to the forecasting of the Income
Statement.
Page 123 of 134
Net Cash Flow from Operations (NCFO)
Top-Down Cash Flow
Net Cash Flow from Operations (NCFO) analyzes
the flow of cash through the enterprise, using
income statement and balance sheet data items to
reconstruct how cash is generated and used. We
start with revenues, adjusting for the change in
receivables to determine Gross Cash Collections.
Cost of goods sold, net of depreciation and SG&A
expenses, are aggregated to determine Total
Operating Expenses. We then look at the changes in
the working capital accounts that represent operating
activity, to determine how much cash was used or
generated while managing operations (current assets
and liabilities). Receivables are excluded here since
they have already been used in calculating gross
cash collections, and cash is excluded here since
cash is our resultant. Change in working capital
accounts is calculated as an expense item such that a
negative value is a generation of cash. We derive
the NCFO by adding the working capital cash
requirements/generation with operating expenses
and then subtracting from Gross Cash Collections.
Since the NCFO is the actual cash generated from
the core business, it is a very good barometer of the
health of the business. It is a report card on how
well it is managed. NCFO interest coverage and
NCFO interest and capital expenditure coverage
indicates how well interest payments and capital
expenditures can be covered by ongoing business
operations. One negative value after a string of
positive values does not necessarily mean that debt
or lines of credit need to be used. Prior cash
balances may cover outflows. Trends and values are
important. The reasons for a change in the trend
may be is apparent from examining the line items in
our NCFO calculations, especially in working
capital accounts.
Traditional Bottom-Up Cash Flow
The financial community primarily uses the
traditional method for calculating cash flow.
Beginning with net income, non-cash charges are
added back. This typically includes depreciation,
amortization and changes in deferred charges.
Trends and values are important when analyzing net
cash flow and free cash flow. We define net cash
flow as the amounts of cash being received and
spent by a business during a defined period of time.
It includes cash flows from different streams such as
operating activities, investing activities and
financing activities.
• Operational cash flows: Cash received or
expended as a result of the companies core
business activities.
• Investment cash flows: Cash received or
expended by making capital expenditures
(i.e. the purchase of new machinery), the
making of investments or acquisitions.
• Financing cash flows: Cash received or
expended as a result of financial activities
such as receiving or paying loans, issuing
stock, and paying dividends
Page 124 of 134
Table 24: Comparing NCFO to Traditional Bottom Up Cash Flow
Page 125 of 134
Free Cash Flow to Assets
A very useful analysis is to compare the free cash
flow back to the asset base that generates the cash.
The value of this ratio is related to the type of
business.
A trend analysis is a very good indicator of whether
the company is creating value or not. When
FCF/Assets is increasing, management is receiving
higher returns for every dollar invested. If this
metric is decreasing, the company is receiving lower
returns on their investments. Quarterly data can
fluctuate and be seasonal, so the trend of the LTM
data series is more important. When a company is
going through a peak or trough in its business cycle,
the trend of the quarterly data is typically volatile.
Such inflection points are a sign of change.
A
change in the LTM data is more descriptive of
changing fortunes, but it can also fluctuate towards
the end of a business cycle change (trough of peak).
If a company’s assets do not generate adequate free
cash flow over time, that company might very well
be a short sale candidate or at worst, a bankruptcy
candidate. This would indicate that the company
might be in the wrong business.
We find that the trend in the FCF/A is highly
correlated to the movement in the stock price for
many different companies over time. That is, when
increasing, the stock will tend to rise and vice versa.
This presumes the stock price is not ahead of itself.
Another caveat is that the FCA/A needs to be
consistently positive (negative) over an extended
period of time as related to share prices.
Page 126 of 134
Glossary Of Terms
1. Net Cash from Operations(NCFO): The
analysis uses
future free cash
flow
NCFO method traces the flow of cash
projections and discounts them (most often
through the company in the manner that
using the weighted average cost of capital)
cash actually is generated and used
to arrive at a present value, which is used to
evaluate the potential for investment.
2. CAPEX:
Funds used by a company to
acquire or upgrade physical assets such as
5. FCF: A measure of financial performance
property, industrial buildings or equipment.
calculated as operating cash flow, minus
This type of outlay is made by companies
capital expenditures. Free Cash Flow (FCF)
to maintain or increase the scope of their
represents the cash that a company is able to
operation. These expenditures can include
generate after laying out the money required
everything from repairing a roof to building
to maintain/expand its asset base. Free cash
a brand new factory. These expenses are
flow is important because it allows a
deducted
company
from
the
cash
flows
while
calculating the DCF
to pursue
opportunities
that
enhance shareholder value.
3. Working Capital: A measure of both a
6. Terminal Value: The value of an investment
company's efficiency and its short-term
at the end of a period, taking into account a
financial
specified discount rate.
health.
It
is
calculated
by
subtracting current liabilities from current
assets. Positive working capital means that
7. WACC: A calculation of a firm's cost of
the company is able to pay off its short-term
capital in which each category of capital is
liabilities. Negative working capital means
proportionately
that
unable
sources - common stock, preferred stock,
to meet its short-term liabilities with its
bonds and any other long-term debt - are
current assets (cash, accounts receivable,
included in a WACC calculation. This is
inventory).
generally used to discount the cash flows in
a
company
currently
is
weighted.
All
capital
a DCF calculation.
4. DCF: A valuation method used to estimate
the
attractiveness
of
an
investment
8. Discount Rate: Discounting is the process
opportunity. Discounted cash flow (DCF)
of finding the present value of an amount of
Page 127 of 134
cash at some future date. The rate (usually
11. Optimistic Case, Base Case, Pessimistic
WACC) used in determining the present
Case: The Optimistic Case is a bullish
value of future cash flows is known as the
outlook of the company’s value while the
discount rate.
Pessimistic case is a conservative view. The
Base
9. Present Value: The amount that a future
sum of money is worth today given a
case
scenario
illustrates
expectation of the Company’s value under
normal circumstances.
specified rate of return.
RS/Cohen Independent Research Group
10. Sensitivity
Analysis:
A
technique
our
for
determining the outcome of a decision if a
key prediction turns out to be wrong.
Page 128 of 134
Disclaimer:
This report/release is for informational purposes only. All information contained herein is based on public information. Ethical Standards: Cohen
Independent Research Group complies with securities laws. regulations and ethical standards as related to our legal and compliance requirements. Certain
securities regulations are cited and disclaimed in our Disclaimer. Ethical standards as related to our firm are the foundation of those securities laws and
regulations we follow. Our firm is not a member of any association for other research providers. Our firm's policy is to comply with any new securities laws
and regulations that might be promulgated in the future. Cohen Independent Research Group (CIRG) is a registered investment advisor that distributes
contracted third party independent research purchased from outside third party contracted securities analysts. CIRG issues two types of reports:
fundamental research reports that contain securities recommendations, and statistical data reports from The Cohen Financial and Valuation Model, and other
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Page 129 of 134
Recommendations: BUY 98%, SELL 2%
Page 130 of 134
Notes:
Page 131 of 134
Notes:
Page 132 of 134
Notes:
Page 133 of 134
Notes:
Page 134 of 134

tri-valley corp. - Paul Cohen`s Marijuana hub

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