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Minnows battle upstream Canadian juniors favor oil over gas, B.C. over Alberta as they increase capital budgets; reposition operations to avoid royalty hikes Gary Park For Petroleum News
Dramatic shifts from natural gas to oil and from Alberta to British Columbia have become two of the most common prescriptions for the ills plaguing Canada’s junior and intermediate sectors.
Caught in the vise of plunging oil and gas prices, many – especially those with a foothold in the resource plays of British Columbia – are trying to lower risk by hiking their capital spending in 2008.
For those with restricted options, the likely outcome is being swallowed during a wave of consolidation that is predicted once commodity prices stabilize.
In a word, “not all producers are created equal,” said Chris Theal, managing director of research at Tristone Capital.
But, of those who are more equal than others, B.C. is opening up to companies that are able to turn vertical wells into horizontal wells, using multi-stage fracturing completion technologies.
Theal said that approach is lower risk, developmental and repeatable … a template for success.
In addition, hiking cap-ex over the second half of the year is essential to curtail taxes among companies that are flush with cash from robust commodity prices in the first half.
“That’s the driving force,” said CIBC World Markets analyst William Lee.” But with the pullback in commodities, I don’t think a lot of companies are in that position anymore.”
Birchcliff Energy, which posted second-quarter production of 9,583 barrels of oil equivalent per day, is a frontrunner, increasing its cap-ex by 47 percent to C$220 million because of its drilling success in the Peace River Arch of northwestern Alberta, where it concentrates on Montney-Doig gas and Worsley light crude.
It now forecasts 2008 production at 13,500-14,000 boepd, 1,000 boepd higher than its original forecast.
Bucking the trends, Birchcliff is also scooping up land in Alberta where prices are considerably lower than in British Columbia, said company chief financial officer Bruno Geremia.
Reacting to falling prices ProEx Energy, which operates exclusively in British Columbia, has pumped another 15 percent into its 2008 capital program, raising the total to C$190 million.
Chief executive officer Dave Johnson said ProEx can succeed at lower commodity prices because it controls risk.
In the resource sector, once land has been secured and technology has been proven, the emphasis is more on execution and cost control than exploration, he said.
That theory is already paying off on a vertical well drilled in 1999 that has grown from minimal gas flows to 2.2 million cubic feet per day after getting a 2,500-foot horizontal extension with six separate fracture stimulations, ProEx said.
The company has drilled 170 wells over the past four years since being spun off by predecessor Progress Energy and has acquired 86,000 acres this year on top of the 425,000 acres it already owned.
Others on the move in various ways include NAL Oil & Gas Trust, Breaker Energy and Storm Exploration.
NAL has boosted spending on oil to between 70 percent and 85 percent, said CEO Andrew Wisell. “We’re focusing on our oil opportunities for the rest of the year” to a greater extent than NAL has done before, he added.
Breaker chief financial officer Max Lof said his company, which had second-quarter volumes of 5,922 boepd, has directed an increasing chunk of its cap-ex to oil from 30 percent in the opening quarter of 2006 to 53 percent in the latest quarter, when oil accounted for 70 percent of cash flow.
“We can direct capital where we want it,” he said. “That shift has really paid big dividends.”
Rush from royalty hikes Storm, which had output of 6,130 boepd in the second quarter, will shrink spending in Alberta as much as possible because of the province’s royalty hikes in 2009.
CEO Brian Lavergne said Storm is resolved to have 80 percent of its production coming from British Columbia by the end of 2008.
Iteration Energy CEO Brian Illing echoes that sentiment, saying his company (which pumped 18,152 boepd in the April-June period) will increase spending in the westernmost province during the balance of 2008 at the expense of Alberta.
As well, he said a number of projects planned for the final quarter are not attractive at today’s prices and will be “put off to another time.”
Rocky road in markets Investor relations firm, Bryan Mills Iradesso – whose latest quarterly report covers 63 juniors (producing 500 to 10,000 boepd) and 24 intermediates (10,000-100,000 boepd) – said the juniors traded at a discount to their larger peers despite greater production growth, higher operating margins and lower debt ratios.
The firm’s president Peter Knapp said the market premium becomes even more intriguing given that juniors raised the average production growth in the quarter by 4 percent, while the intermediates were frozen.
In addition, juniors had median netbacks of C$38.08 per barrel of oil equivalent compared with C$37.43 boe for intermediates and had a net debt of 0.7 times cash flow against 1.3 times for intermediates.
Based on August 29 share prices, the average second-quarter enterprise value for juniors was four times annualized cash flow, compared with 5.8 times for intermediates. By dividing the share price by the cash flow per share, juniors traded at 3.2 times annualized cash flow per share and intermediates at 4.2 times.
Though TSX Venture Exchange (the springboard for emerging companies) has dropped about 45 percent this year, oil and gas juniors generated total returns of 37 percent in the second quarter.
But Knapp conceded that based on market performance “it pays to be an intermediate,” and he expects that to become even more apparent in a calmer commodity price world.
Mostly the tide moves because of commodity prices,” he said.
Knapp said price stability will be a signal for buyers and sellers to reach consensus on the value of assets.
If and when the wave of corporate and asset deal-making occurs, he suggested that today’s market may, on reflection, seem like a time to buy low and sell high.
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