Brains Over Brawn: This Junior Oil Explorer Understands Quality Over Quantity (ARWJF, BIR, CNQ)

Look out Canadian Natural Resource Ltd (NYSE:CNQ), and heads-up Birchcliff Energy Ltd. (TSE:BIR). There's a new kid in your neck of the woods, and it's finding oil left and right. Oh, it's also finding that oil without spending a ton of dough to get it - its operating costs are at or below the averages... even for the averages of the 'majors', who can easily spread costs around. Indeed, Birchcliff Energy, Canadian Natural Resource Ltd, and a few other big names in and around the area where its prospects are may be interested in acquiring this young company.... at a premium, of course.

The name of this junior explorer is Aroway Energy Inc. (PINK:ARWJF). It's not a household name, and bluntly, probably never will be. The company's made no bones about the fact that it's looking to be acquired by a bigger explorer, such as CNQ or BIR. Unlike most junior oil explorers that talk the talk about getting snatched up by a suitor for big bucks, Aroway Energy is also walking the walk. Oil output is steadily increasing. So are sales. So is the number of fruitful wells. And, so are operating profits. Translation: A bigger oil name would actually want ARWJF, because it's got something to offer.

Just for perspective, a little over two years ago when Aroway Energy began operating, its oil output has grown from zero barrels per day to an average output of 1020 barrels per day. The company's also done it the old-fashioned/right way - by scouting its own sites and drilling its own wells and doing its own geological studies. On the surface it seems like the hard way of doing it; why do the work yourself when someone else may be willing to sell you land or an existing well (or a source that hasn't been depleted yet, or land with likely reserves)? The reason is, anything somebody else is willing to sell you probably isn't worth owning. By doing its own work - the right way - and picking its drill-points one at a time, ARWJF has not only found success, it's created it without spending a ton of money on what will ultimately be worthless wells. The end result is a tremendous ROI on the capital the company lays out for new wells.

You can thank an experienced management team for that. CEO Chris Cooper has been around the oil exploration block a few times, and knows the difference between a long shot and an 'investment'; he focuses on investments... wells that fit a particular profile. He wants to drill holes that cost less than $500,000 to complete, if and only of it's likely that source will be able to generate at least 70 to 80 barrels of oil per day for several years. The payback period for these wells is measured in months, versus what is normally years.

His pickiness has paid off too. His average operating cost for a barrel of oil is right around $10.00 at most of the company's sites. That's on par with operating costs for big names like Helmerich & Payne (NYSE:HP), Atwood Oceanics (NYSE:ATW), Birchcliff, and Canadian Natural Resources. The wells Aroway Energy is currently developing fit the same cost/payback profile too. There are somewhere between four to seven wells being drilled and cased right now, and some of them could go into production in the foreseeable future. Cooper's target output of 1200 barrels per day is well within reach.

That target isn't just some random number either. That's the figure ARWJF needs to hit when Cooper expects suitors to come knocking, or when he can go out and start shopping the company to buyers.

Indeed, finding a buyer may be easier than he anticipates. All around the company's Peace River Arch (Worsley, Alberta) property are some of Canada's biggest explorers, like Birchcliff Energy Ltd., Crescent Point Energy Corp., Canadian Natural Resources Limited and Shell Canada. They're seeing Aroway's production ramp up, and if they don't know yet, they'll soon know the company's sitting on 369 million barrels of proven and probable reserves. That's $33 billion worth of oil, much of which has been recovered with a dirt-cheap capital outlay. Not bad for a $26 million company.

For more on ARWJF, visit the SCN research report here, or take a look at the stock's commentary and quote page here.