Circle Star Energy Corp. (OTC:CRCL) is an oil and gas exploration & production company garnering exposure to high large scale oil & gas properties on a royalty, operated, and non-operated basis. The company is building a base of low-risk, strong-return working interests in producing wells located in Crane, Scurry, Victoria, Dimmit and Zavala, Grimes and Madison, Robertson, and Fayette and Lee Counties, Texas, some of which are already generating revenue fort his recently-formed corporation. The organization has most recently begun to develop opportunities outside of Texas. Specifically, the Fort Worth-based company is now developing prospects in Kansas.

Domestic Oil Opportunity Analysis

The opportunity and need for domestic (U.S.) production of oil and natural gas has become convincingly clear over the past five years, though it’s still becoming more pronounced on a near-daily basis. In November, Saudi Arabia’s state-owned oil company Aramco announced it was canceling a planned $100 billion expansion of its production. Though it never actually happened, the mere threat of closure of the Strait of Hormuz (through which 35% of the world’s oil supply passes) a few weeks ago spooked the oil market into a sharp rally. The bombing of a Nigerian oil pipeline owned by Italian company ENI, along with threats to bring the country’s oil production to a screeching halt, are a proxy of the oil-based unrest in Africa. And China, regardless of how well or poorly its economy is doing, continues to ramp up oil consumption.

Against the backdrop of rising global demand for oil – to the tune of about 1 million barrels of it per day – all of these forces along with several other minor ones point to a need for new domestic sources of oil.

It’s only been recently, however, that domestic production of oil and gas has cleared its biggest hurdle. Now, domestic support for more at-home production of oil in the United States is as strong as it’s ever been.

In other words, the majority of U.S. citizens have given the proverbial green light to new drilling methods, and have quietly approved the installation of wells in places that were previously off limits.

All that being said, that approval wasn’t an overnight occurrence. Slowly, since oil prices skyrocketed between 2005 and 2008, domestic production of energy sources has been ratcheted upward. As evidence, a few years ago the U.S. imported 60% of its crude oil. That figure has fallen to 49% as of last year. U.S. crude oil production increased by an estimated 120,000 barrels a day last year over 2010’s numbers, and current domestic production of about 5.6 million barrels a day is the highest since 2003.

The potential oil-production capacity of the United States has barely been touched though, which brings budding exploration companies like Circle Star Energy into focus.

While Texas has largely been viewed as ‘the’ nation’s key oil producing state, with its fading reserves, drillers are now looking for – and finding – newly-discovered resources in areas that had never been considered as opportunities before. Kansas is one of those pleasant surprises, with Oklahoma not much further down the oil opportunity scale.

Kansas ranks among the top ten states in crude oil production, and that ranking may rise in the foreseeable future. Indeed, the opportunity there and in nearby Oklahoma is strong enough for major oil company Sandridge Energy to make a major investment there. . Sandridge paid $400 million for 20 million acres Western Kansas ‘Mississippian’ area about five years ago, and started drilling with 37 wells. Now it’s got over has 250 horizontal wells in the Mississippian play, and is reporting the area’s oil offers the company’s highest rate of return compared to all of its other resources. Better still Sandridge doesn’t think it the play will reach peak production until 2019.

That Kansas crude oil reserve isn’t just benefiting Sandridge Energy though. Several other outfits have staked a claim in the area, and are poised to produce just as much success as Sandridge has. Count Circle Star as one of them.

Circle Star Energy Operation and Overview

The company’s assets include producing and non-producing oil and gas mineral interests, royalty interests, and non-operated working interest located throughout the western south central states. The distinctions are key ones for investors to understand.

• Non-Operated, Unconventional Portfolio – mineral interest, royalty interest, and non-operated working interest operated by an established, prudent E&P company;
• Operated, Conventional Portfolio – operated working interest in low-risk fields that are well-understood and contain substantial, proved reserves.

Circle Star Energy’s producing areas include:

• Hilltop Bossier Field (Robertson County, Texas) – Deep Bossier
• Madisonville Woodbine Field (Madison/Grimes, County, Texas) – Woodbine
• Pearsall Field (Dimmit/Zavala County, Texas) – Austin Chalk , Eagle Ford Shale
• Permian Basin (Scurry/Crane/Glasscock et. al. County, Texas) – Wolfcamp, Clearfork, Spraberry, Fusselman, Cline Shale

As was noted already, however, the Mississippian area in Kansas holds a massive amount of promise via its two recent acquisitions in the area.

• Kansas Acquisition I is an outright land and mineral rights purchase of 7,500 acres in the “original Mississippian” play with an effective Net Revenue Interest (‘NRI’) of approximately 93%
• Kansas Acquisition II is an oil & gas lease of 64,000 acres in the “Mississippian extension” prospect lands with an effective NRI of approximately 81% to the company

Texas Details

Circle Star Energy owns and/or operates eight distinct properties in Texas. Among them are the highly touted Eagle Ford shale prospect, the Permian Basin prospect, and the Gulf Coast opportunity. All of those, along with the others, look very promising.

Take the Gulf Coast project for instance. In a recent U.S. Geological Survey assessment of undiscovered, technically recoverable oil and gas resources in Tertiary strata of onshore lands and State waters, estimated total mean values of undiscovered resources for the Frio and related formations were 172 million barrels of oil (MMBO), 9384 billion cubic feet of natural gas (BCFG), and 542 million barrels of natural gas liquids (MMBNGL).

The Woodbine Formation is another good one. The source rock for the oil in East Texas is the lower-lying Eagle Ford Shale. The East Texas Oil Field covers 140,000 acres and parts of five counties, and hosts 30,340 historic and active oil wells; it is the largest oil field in the United States outside of Alaska, both in extent and in total volume of oil recovered since its discovery in 1930.

And of course, the Eagle Ford shale area needs no fanfare or explanation. The region’s output just exploded in 2011, running from 308,000 barrels of crude in 2009 to 4.3 million barrels in 2010 and a stunning 30.4 million barrels in 2011. The number is on course to be even bigger in 2012, however, as drillers and explorers continue to setup new and rekindle old sources in the area. Eagle Ford has already been named the nation’s sixth largest oil find, but more reserves are identified in a fairly regular basis.

Point being, where Kansas is an attractive prospect, Texas already offers productive wells, and Circle Star Energy is driving real revenue right now with some of its Texas properties.

Kansas Details

Circle Star Energy Corporation has acquired 71,500 acres (to-date) of prospective oil and gas interests spanning several townships of western Kansas. The play’s primary targets are Mississippian and Pennsylvanian in geologic age. Circle Star has determined that there are numerous “missed opportunities” in several areas of the state and sees these underdeveloped interests as a means to significant corporate growth.

Many opportunities appear to lie between, and on-trend with, major structural and stratigraphic entities in the area. The uplift and basin adjacent to the trend offer little or no expression at the surface, hence their delineation and associated discovery of millions of barrels of oil are largely based on the results of successful subsurface exploration geology, including conventional seismic programs with 3-dimensional surveys, combined with pure wildcat drilling.

Today, an opportunity for exploration and company growth clearly exists during this period of sustained high oil prices as many news accounts and technical journals, analysts and other industry pundits are projecting that this economic condition may continue for a while.

A “foot in the door” to future successes in the area mandates that controlling large blocks of acreage, on-trend with large proven producing reservoirs, will be the key to becoming a major player and participant in the development of the new oil reserves in western Kansas.

To achieve this, diligent efforts are underway to acquire key blocks of acreage though the identification of certain key parameters including an understanding, and interpretation of reservoir closeology and analogous “show wells,” plus extensive reprocessing of seismic lines in conjunction with the utilization of conventional and unconventional subsurface exploration.

CRCL Outlook and Analysis

With a market cap of only $76 million and ten oil properties under its bell – some of which are already productive – CRCL is more than a little compelling. Though the company only generated revenue of $766K for the past three quarters, the vast bulk of its oil-production capacity has yet to be tapped.

That said, there’s still a recent example of the kind of deals Circle Star Energy Corporation can take on and turn into something very fruitful. In early January, the company sold JHE Holdings for $9.35MM in cash. JHE Holdings was acquired by Circle Star on June 15, 2011 and generated over $550,000 in cumulative cash flow from operations during the time it was owned by the Company. As a result of the sale, Circle Star realized over $3.4MM in net cash after debt and interest payments incurred during the same period. The sale boasts an internal rate of return of over 265% and a cash-on-cash return of nearly 150%, with the earnings being put back into strategic reinvestment pool to sustain the growth of the company’s oil & gas portfolio.

It may be a glimpse of what investors can expect going forward… taking underdeveloped and undervalued properties, turning them into something that bears fruit, and then selling them foe an amazing profit.

CEO Jeff Johnson said of the deal, “The sale of JHE Holdings shows that we can generate solid returns for our shareholders through the acquisition and participation in the growth of quality assets. We are focused on opportunities to capture real, tangible financial returns and will continue to execute our strategy to successfully identify and bring superior ventures into the Company. By nurturing our interests in quality development stage projects into revenue positive assets, our portfolio grows into an attractive mix of saleable opportunities positioned to generate significant returns for the company and, in turn, value for our shareholders.”

A ‘flip’ isn’t necessarily the only way CRCL can bear fruit for investors though. It may opt to develop and operate oil and gas leases too, which looks to the case with its recently-announced lease agreement that give Circle Star rights to 64,000 acres of lands prospective for oil development in Northwest Kansas.

That leasehold encompasses lands in both Trego and Gove counties in Kansas and is structured to deliver effective Net Revenue Interests (“NRI”) of approximately 81% to the Company. The area is located within a segment of the oil-rich Mississippian Limestone formation known as the “Mississippian Extension.” The transaction is for both Company common stock and cash valued at approximately $110 per acre.

The announcement follows a previously announced contract of an outright land purchase of approximately 7,500 acres prospective for the “Original Mississippian” formation in Southern Kansas. Combined, the Kansas land position totals approximately 71,500 acres worth of strong prospects.

Other properties also owned or leased by Circle Star Energy Corporation include 1,280 acres in the Glass Prospect operated by Apache Corporation, located in the oil-rich Permian basin region of Texas. Development wells on the Glass Prospect leases have so far focused on the Spraberry formation, which is ranked in the USA as third in proven reserves at over 10 billion barrels. It currently sits at seventh in total production. The project is also prospective for both Fusselmen and Cline Shale opportunities, with Apache actively drilling horizontal Cline shale wells in the same field as the Glass Prospect, where a recent Cline well drilled by Apache produced 8800 BOE in the first 30 days on-line.

Point being, the company is real, the prospects are real, and stock appears to be undervalued relative the revenue potential. Though the company has not offered revenue projections, or even estimated revenue ranges, the oil fields CRCL is tapping into are known reserves of hundreds of millions of barrels. The other fields without specific reserve projections are still viewed is prospects with hundred of millions of barrels laying in wait. With the price of crude steady above $100 per barrel, Circle Star could be more than capable of generating hundred of millions in annual revenue for many, many years.

While the company is a relative unknown now, that’s changing quickly. The stock started to trade in earnest in late February, but is already drawing a growing crowd of buyers. We anticipate more of the same kind of buying interest as Circle Star Energy Corporation continues to tell its story, acquires more property, and brings all of its properties closer to production (as it has already proven it can). Shares appear more than willing and able to make progress in advance of and as that news unfolds. Small cap speculators should consider taking on a position now.