For Canada’s bruised and battered upstream companies there is no escaping talk these days about their chances of fending off takeover bids.
Some may be inclined to wait for an acquisitor with bulging pockets to knock at the door.
Others like Legacy Oil + Gas, a leading player in the Saskatchewan Bakken, are taking the high road.
Bryan Gould, chief executive officer of acquisition-minded Aspenleaf Energy, said companies weighed down by debt, struggling with low market credibility and lacking access to capital are getting squeezed.
He said that no matter how good their asset portfolios are, there are few companies that can avoid an overriding question.
They are all faced with trying to determine “whether there is light at the end of the tunnel and how far out it is. Maybe there is great upside and greater value, but it’s a long ways off and there are a lot of hurdles between here and there.”
Legacy, rather than dwelling on the unknowns, is playing to its strengths.
Capital discipline
Having grown from 300 barrels of oil equivalent per day to what it hopes will be an exit rate this year of 27,300 boe per day (with a large chunk dependent on its trail-blazing contributions to waterflood recovery methods in Saskatchewan’s Midale play) it is outwardly brimming with confidence.
Chief Executive Officer Trent Yanko said his company is focusing on capital preservation and maintaining liquidity under reduced cash flows by shrinking discretionary spending and high grading opportunities.
He said that since fall 2013, Legacy has closely watched over its capital spending by living within and, since last year, underspending cash flow that has had the “positive effect of reducing our debt-to-cash flow ratio to 1.5 times or less.”
In addition, two takeovers last year of privately owned Corinthian Exploration and Highrock Energy (with combined production of 4,800 boe per day) have placed Legacy in a “position of strength to begin ramping up our growth profile through a combination of cost control,” Yanko said.
He said the acquisitions were primarily driven by the “upside” opportunity presented by the location of the assets, their associated drilling inventory and the “very high netback light oil which fits in perfectly with our strategy.”
As well the acquired companies came with “very little debt” which in turn reduced Legacy’s debt-to-cash flow, he said, adding: “So it was a very good strategy to pursue and we’d look at doing it again. We’re always primarily focused on our organic drilling program.”
Fracks and waterfloods
In the forefront of Legacy’s growth prospects is its Midale reservoir which offers a “new twist on an old play” that had produced in Saskatchewan and North Dakota for about 60 years, Yanko said.
“We’ve been able to go into areas of the reservoir that hadn’t produced very well with either a conventional vertical well or a conventional horizontal well” and applied the company’s expertise on innovation and multi-stage fracturing of horizontal wells to turn uneconomic wells into “very highly economic” producers, boosting the Midale output from 300 bpd to 7,500 bpd, he said.
Over three years, Legacy has had “superior well results,” increasing drilling locations from six wells to 350 and raised that target to about 500 from two new pool discoveries in 2014, he said.
“From an inventory standpoint we could dwarf any of our competitors and our expertise is allowing us to generate some stellar economics,” Yanko said.
On the waterflood front, Legacy has managed to utilize its skills to double recovery factors from many of its reservoirs, establishing a “very cost-effective, low-risk way of adding reserves and reducing the decline profile,” while applying the technique to resource-style plays it has fracked in the past, he said.
The end result is that Legacy believes it has “found a great way of adding a lot of value and extending the life of the company,” Yanko said.
2015 spending
On the cautious side, Legacy has set a capital budget for 2015 of C$238 million, down 40 percent in organic capital spending year-over-year, with 87 percent allocated to drilling, completions, equipping and waterfloods, targeting 94 gross (74.5 net) wells. Topping the list of plays is Taylorton/Pinto in Saskatchewan, which has a C$100 million budget, while Steelman will get C$37 million. It is currently awaiting approval for second waterfloods in both Saskatchewan and North Dakota.
The company has total current borrowing capacity of C$1.03 billion, including C$225 million of unsecured term debt that does not expire until 2017.
Legacy said that based on industry research and analysis over the past 40 years world oil prices “have generally averaged at or near the worldwide cost of reserves replacement” which is currently estimated at US$90 per barrel of West Texas Intermediate.
The company said it “expects oil prices to eventually return” to the US$90 level, but, setting that aside, it is prepared to use its high operating netbacks and high quality inventory to function through a “period of lower and volatile prices, preserving capital in anticipation of an eventual return to historical average prices.”
