Atikwa Resources, a micro-cap in the Spearfish and Bakken plays of Manitoba and Saskatchewan, has delivered a tough message to its peers: The world has changed and is capable of turning messy, if not downright ugly.
So messy and ugly that impatient shareholders and one-time partners can bring about the ouster of management and launch lawsuits.
For the last year, Atikwa has been bogged down in its efforts to pursue strategic alternatives to enhance shareholder value, despite contacting more than 300 industry and financial partners who showed potential interest in the company’s claim of a multi-billion barrel prospect in the Spearfish formation.
The conclusion, according to Sean Kehoe, departing president and chief executive officer, is that the “junior oil and gas market has fundamentally changed.”
“The old model used to be to go out and discover a new resource, drill a few good test wells, and then sell the infill drilling locations based on a discount to the projected return that a producer could receive over and above its cost of capital to bring those wells on production,” he said in a letter to shareholders.
These days, Kehoe said, the “talk is all about guaranteed yield, with the acquiring parties now saying ‘you put the capital into drilling the wells, when they are on production, we will buy that production and pay a significant premium to what you might have received under the old model. But you have to drill the wells.’”
He said Atikwa has done all of the heavy lifting, spending time and capital to learn how to complete the wells.
“We can now say definitively we own a very significant light oil resource property with drilling locations and reserves that represent a significant amount of oil in place,” Kehoe said, pointing in particular to properties in Saskatchewan and Manitoba, where he claimed Atikwa developed completion techniques for horizontal wells “that are now common throughout the area.”
In a voice of despair, he said the company has been in a holding pattern for the past year, hoping someone will pay a reasonable price for the assets. But there is “no one on the buy side,” he conceded.
Small acreage position
The result is an uncertain new beginning for Atikwa, particularly as it tries to make a success out of a mere 1,900 net acres in the Spearfish formation (which extends from southwestern Manitoba to north-central North Dakota).
That’s a tough slog for the second smallest of 10 producers in the Manitoba segment of the Spearfish, overshadowed by Suncor Energy with 98,000 acres, Legacy Oil & Gas 78,000 acres, Penn West Energy 75,000 acres and Hess Corp. 35,000 acres,
All are attracted by the prospect of horizontal drilling and multi-stage fracturing bringing life back to play where oil was originally discovered in the 1950s and has recently seen initial well production rates of more than 300 barrels per day.
The revival prompted Kehoe to deliver his version of a rallying cry. “Stop looking for oil,” he said. “Go to where you know there is oil and concentrate on improving recovery.”
At the peak of its optimism, Atikwa estimated it had 5 billion barrels of original oil in place. Estimated capital costs per well ranged from C$1.3 million to C$1.7 million, with the estimated ultimate recovery at 70,000 to 115,000 barrels of oil per well.
But Atikwa did not have the size to attract capital, or the production to sustain its operations program.
In late July it entered into an amalgamation and reorganization with privately owned Hansar Energy — whose primary focus is on the Three Forks Bakken zones in Manitoba, under a team that sold Manitoba assets for C$100 million in 2012 — a deal which it said met the criteria of a fundamental acquisition.
As part of the reorganization, Atikwa said it planned to work with financial and industry partners to put the company in a better position to raise additional capital to concentrate on drilling and building its production of light oil assets, while expanding “through acquisitions of undercapitalized companies owning complementary assets.”
New president, CEO
The first move in the new direction occurred on Aug. 30 when four directors nominated by Hansar where elected at Atikwa’s annual general meeting, with Andrew Watts named as future president and chief executive officer.
But the meeting turning heated when several attendees were evicted amid charges of an improperly constituted meeting, followed by an allegation of possible irregularities.
Kehoe said a Vancouver-based group of dissident shareholders argued their votes should be counted despite the announced cut-off dates for proxies and voting.
He said that was akin to insisting touchdowns that were scored after the final whistle in a football game should count.
The concerned shareholders refused to comment after the meeting, but Kehoe said the amalgamation with Hansar offers Atikwa its best hope of surviving.
“In these times where junior oil and gas companies are having a lot of problems raising capital ... we have to be able to find new ways to move forward. Growing, getting strong — it’s through amalgamation.”
Atikwa said in a news release that Hansar plans a 12-well drilling program for the Atikwa properties.
Dissidents unhappy
Before the annual meeting, John Chodzicki, one of the dissident group, said there was unhappiness with the way Atikwa was performing.
“That’s the problem with the small-cap business in Calgary,” he said. “A few years ago investors were putting their money into small-cap stocks, penny stocks, and the stocks turned out to be one-fifth of the investment value.”
The dissidents said Atikwa has not made progress over the last three years in developing its tight oil properties, driving down the share value from 17.5 cents in February 2010 to 1 cent.
They said the company has failed to generate any new production since 2011, but has maintained high overhead with general and administrative costs of C$1.44 million in the year ending Feb. 28, 2013, including C$715,534 in salaries and consulting fees.
Claim by JV partner
Atikwa’s joint venture partner has filed a claim against the company for C$2.5 million plus interest and costs for damages allegedly resulting from wrongdoing on the part of Atikwa as operator, including a failure to carry on all operations lawfully, diligently and in a good workmanlike manner in accordance with good oilfield practices, failing to pay all accounts related to operations as they became due and payable and incurring expenses and issuing invoices for amounts that were improper, excessive, unreasonable and otherwise not permitted under the farm-out agreement.
The group also claimed that some contractors have filed claims against the company over non-payment of accounts.
It said in a news release seven leases expired on the Porcupine Hills property representing 3,754 net acres and one lease expired on its Windfall property representing 1,728 net acres with no compensation, reducing the net worth of the company.
The lands were categorized as exploration and evaluation assets and the write-down impairment was estimated at C$7.31 million on Porcupine Hills and C$273,349 on Windfall properties.
