Resource World Magazine

THE OIL PATCH REPORT Joe l C hury Oil & Gas juniors being frugal With dwindling amounts of available capital, junior petroleum companies can no longer afford to take the big risk for the big payoff. Cost-heavy operations, such as deeper wells and longer horizontal legs, are pricing themselves out of the junior's playbook. Management teams of small companies are being forced to use the baseball strategy known as "small ball" to stay competitive. Small ball relies on a strong defense that will not allow the other "In the oil and gas world, it means no longer can juniors afford to swing for the fences." team's score to get too high to overcome, and persistently doing whatever is necessary to obtain small victories at every turn. It's a matter of playing the percentages and knowing that slow and steady does, in fact, win the race. In the oil and gas world, it means no longer can juniors afford to swing for the fences. One big strikeout and they won't be getting another at-bat attempt. Running up an unserviceable debt can make the score insurmountable, and watering down stock leaves you without any pitchers left in the bullpen when you need the help. The problem is that juniors are running out of options, and have to overcome the adversity by playing smart. Gone are the days of just selling off assets to fund more prominent programs. "The only way left for a junior oil and gas company to capitalize their program and fund their growth is through internal generation of cash," says Brad Nichol, President and CEO of Edge Resources Inc. [EDE-TSXV; EDG-AIM]. Edge prides itself on its ranking as one of North America's top five low-risk, low-cost oil plays. Keeping costs low on developmental drilling and steadily increasing its internal cash generation is the method Edge believes will provide a substantial economic return. It's this strategy that has driven Edge Resources and some of its more prudent peers to pay close attention to their recycle ratio (profit to investment). This is the number that marks for every dollar that a company puts into the ground, how much a company gets back out. The average today is somewhere around 1.5, meaning that for every $1, companies are expecting to receive $1.50 back. In today's competitive world, that just might not cut it. For Edge's Eye Hill assets in Saskatchewan, wells are cheap, safe, and far exceed the industry norm for recycle ratio. They're the industry equivalent to singles and doubles to score more runs. 56 www.resourceworld.com RW December 2013.indd 56 "My profit to investment ratio is 3.5," says Nichol. "We're generating cash through investing. The more wells we drill, the more cash we generate to put back in. Our wells are paying for themselves within a five to six-month period." Nichol's team's numbers may be rare, but Edge is not alone in seeking sustainable growth. Other juniors, such as the recently refinanced Blackbird Energy Inc. [BBI-TSXV] and Petrichor Energy Inc. [PTP-TSXV] are wisely opting to keep costs down as they safely develop their assets. For Blackbird President and CEO Garth Braun, his team's small ball strategy is to replicate the success of Rock Energy Inc. [RE-TSX] in the Manville formation on its Mantario assets in Saskatchewan. Having picked up the 25-section land position for an impressively low $115,000, Braun and co. have been frugal to say the least. But the real steal of the deal is in the cost of drilling, completing, and tying-in of the upcoming wells that is pegged at around $700,000 per well. "We saw [Rock Energy's] success already on eight wells, which the equity markets had not recognized," says Braun on how he assembled the package. "That's when we started to acquire land based on their success in the Manville, which sits at a shallow 860 metres that's inexpensive to drill and offers a very quick payback." Blackbird is in the midst of drilling its first well in the Mantario as well as drilling two re-entry wells on its similarly economic Bromhead Project. Both projects are designed to bring about a dramatic value impact to the company. For Petrichor Energy, its biggest cost was in the acquisition of its land position in the Barnett Shale in Texas. Now its President and CEO, Joe DeVries, hopes to economically keep swinging away at its 66% interest on a 12,000-acre package that he first encountered 18 years ago. "The per-well cost of $900k to $1.5 million is one reason I fell in love with this play," says DeVries. "For short horizontals where we are, our interest only requires us to pay out $600k to $1 million per well, making our three-test-well program a very reasonable $3 million. We believe that this type of smaller production, lower cost strategy gives us the chance to see our capital return quicker without printing paper to finance the company." By re-entering previously successful regions, juniors like Blackbird, Petrichor and Edge shave down risk. Keeping an eye on costs, and steadily increasing production efficiently should allow companies like this to play small ball long enough to make it all the way to the ninth and final inning. n DECEMBER/JANUARY 2014 12/11/2013 6:12 PM Resource-W

• Cover