MGM Energy close to fading

Describes NWT regulatory process as too complicated, unpredictable and costly for small company; NWT promises improvement

Gary Park

For Petroleum News

Paramount Resources has made its predicted move to reabsorb control of MGM Energy.

If the deal is concluded, it will consign one of the smallest and boldest explorers in Canada’s North to the history books and send a strong message to the Northwest Territories government to do as it has promised and accelerate regulatory approvals when the Canadian government relinquishes control over resource development to the NWT on April 1.

In what could be a parting message to the NWT, MGM President Henry Sykes said MGM’s downfall stemmed partly from complicated, unpredictable and costly processes, despite what he described as a “tremendous job” within his company.

Typical of the barriers confronting NWT explorers is a regulatory application filed by Husky Energy to drill four wells in the Canol oil shale of the Central Mackenzie Valley, subjecting itself to reviews by 40 different agencies, having so far invested C$160 million in the program.

Paramount’s takeover offer involves the 86 percent of MGM shares it doesn’t already own for the equivalent of 15 cents a share — one of its shares for 300 MGM shares — or a total transaction value of about C$47 million.

Clayton Riddell, chief executive officer of both Paramount and MGM, personally owns 31.6 percent of MGM and has agreed to support the deal.

MGM shares immediately fell 23 percent to 15.5 cents, less than half their trading value of a year ago.

Sykes, who has been president of MGM since it was spun off from Paramount in 2007, told reporters the development is the “most frustrating aspect of our time operating in the North,” which was initially spurred on by hopes of making enough natural gas discoveries in the Mackenzie Delta to become a significant shipper on the planned Mackenzie Gas Project pipeline.

Sykes and other MGM officials have repeatedly warned that delays in gaining approvals for exploration work are beyond the economic capacity of a small company.

They said that obtaining a permit for a horizontal well in the NWT was taking longer than a year and costing millions of dollars, a process that was extended by even more years if an environmental assessment was ordered.

Sykes told the Calgary Herald that delays in the natural gas sector made MGM’s gas reserves irrelevant and he is now concerned that if the United States makes the advances with unconventional oil that it has with unconventional gas the costly NWT oil will not be needed for a “significant time.”

MGM drilled one of its 11 wells in partnership with Royal Dutch Shell, but was forced to concede on Feb. 27 that it had failed to find a replacement partner, despite estimates that the Exploration License 466 held estimated oil-in-place of 625 million barrels.

When an application by the MGM-Shell partnership to drill a horizontal well on the license was referred for an environmental assessment — even though MGM had already drilled and tested a vertical well in the 2012-13 winter — Shell decided it was time to quit.

MGM had submitted a project description to regulators entailing more than 1,000 pages, listing all of the chemicals that would be used for hydraulic fracturing and outlining how the land and subsurface would be protected.

Overall, MGM had a positive working capital of C$11.2 million at the end of the third quarter 2013 and holds about 3,700 net hectares (9,140 acres) of NWT land, valuing the Paramount offer at about C$127 per hectare.

Sykes said that companies in the Canol play, led by Husky and ConocoPhillips Canada, have indicated the outlook is promising, but until the road to commercialization is opened up investors are not interested.

The one glimmer of hope, when regulatory control of the NWT’s onshore is transferred to the NWT government, is a commitment by the NWT to streamline reviews and approvals.

FirstEnergy Capital analyst Cody Kwong said in a research note that if the Paramount offer is accepted, MGM’s assets would be transferred to a “better capitalized company.”

Geoff Ready, an analyst with Dundee Capital Markets, doubts that a rival bidder will emerge because of the failed search for a joint venture partner.