Material Change Report / TIER III Portfolio
Beginning Cash Component $30,655.72
Gentry Resources
(Speculative) Buy $2.02
Purchased 2,200 shares $4,444.00
12-Month Target Price $2.80
Gentry Resources is a company transformation story. They have been around since the early 80’s.
One of the company’s primary objectives was to reach the production plateau of 1,000 boed and then take the necessary actions to proceed to the next level of operations. In 2000, a decision was made to expand Gentry into a full-cycle exploration and production company, with an ultimate goal of building a long-life gas-weighted asset base in Canada.
To begin, the company traded off their international assets in exchange for shares of Stratic Energy Corp. This was an important step for it eliminated the growing demand of capital requirements due to increased exposure internationally. It put Gentry in a position to fully pursue their primary growth objectives in Canada whereas prior, there was very little capital available after expending internationally. Gentry still carries 10.1 million shares of Stratic, representing 19.4% of the outstanding shares. Although a non-core asset, Gentry believes there is long term value in the holding.
In March 2001, the company amalgamated with Sloane Petroleum. The company owned 37.35% of Sloane and by virtue of the combination, acquired the remaining 62.65% of Sloane. The acquisition provided interests in the Provost East/Red Willow area, located in Southern Alberta and brought 2 mmcfd aboard in terms of production.
The next order of business was to increase Gentry's gas weighting and improve the capital efficiency by balancing the existing long reserve life assets with shorter reserve life assets. This was accomplished initially in Red Willow and then in Sedalia and Oyen. Gentry's second core area emerged out of a farm-in at Princess in 2001, which was later augmented by crown land acquisitions in nearby Tide Lake.
Having successfully established two growing production areas, Red Willow and Princess/Tide Lake, Gentry began assembling land at Whitecourt just over a year ago. Having increased its land position six-fold (to 42 net sections) and participating in 11 Whitecourt wells (9 were successful), the company is making substantial inroads in an area they feel will impact the company over the longer term.
Overview
Gentry's core strategic focus is Tide Lake, Whitecourt and to a smaller degree, Princess.
Princess and Tide Lake are adjoining properties and both have similar geology. However, potential for future activity and growth for Gentry lies in Tide Lake because of the two different type lands involved. Princess is located on Freehold Land, while Tide Lake is located mostly on Crown Land. Freehold Lands, unlike Crown Lands, do not revert back to the province when there are lapses in activity.
Major companies that have been relatively inactive in the area in recent years and have still been able to control the acreage. Given the tight land situation within Princess, newcomers are generally reliant on farm-ins, such as in the agreement that Gentry successfully negotiated whereas most of its working interest is between 25% and 50%. With the recent success at Princess, further farm in opportunities are being limited due to the incumbent company pursuing full working interests.
At Tide Lake, a joint venture agreement resulted in some 50% working interest lands, but more lands are being acquired at 100%. Gentry's average working interest in Tide Lake is 60%. Most of the shallow, low productivity gas horizons are held-by-production. However, there remains an abundance of open crown land in the deeper horizons.
Gentry has enjoyed excellent exploration success in Princess over the last two years. Since startup, the company has participated in 24 gross wells (12.6 net) at Princess and has enjoyed a 76% success rate. Although not optimistic regarding the potential for new farm-ins, future activities will focus on following up on past discoveries and exploiting its current land base.
At Tide Lake, exploration initiatives are just getting underway. In just over a year, the company has drilled 5 successful wells (2.3 net) and accumulated 33 sections of land at an average working interest of 60%. Gentry's land base continues to grow with much of the new land being wholly-owned. Three separate 3D seismic programs have already been shot, totaling some 33 square miles. Unlike most of the Princess lands, Gentry holds the rights to the Mannville on its Tide Lake acreage and this provides another valuable exploration horizon. With greater availability of land, higher working interests and drilling success, Tide Lake will surpass Princess in terms of reserves and production.
In the second quarter, Princess/Tide Lake accounted for just 209 boed. Today, production from this area is around 815 boed and by the second quarter of 2004, this is expected to increase to over 1,200 boed. In all, the company controls approximately 69 sections in the Princess (37) /Tide Lake (32) area.
Gentry's increased cash flow generation now allows acceleration of the company's Whitecourt program (specifically Goodwin,Windfall, Blueridge and Paddle River) where the company has amassed 42 net sections of land. Current production is just 100 boed but impacting upside potential exists and the company believes this multi-zone area will become their most important core area in terms of reserves and production over the longer term. The team hired to spearhead Gentry's full-cycle initiative was chosen in large measure for its expertise in this area. Management is convinced that the large amounts of expiring land, within close proximity to infrastructure, will allow Gentry to quickly acquire a strategic position in this area.
With Whitecourt in its early stage , the principal focus has been to accumulate land and prospects. From a standing start just over a year ago, Gentry has assembled 8,800 net undeveloped acres in the greater Whitecourt area. In order to test the maximum number of prospects, without putting undue constraint on the land budget, management is restricting per well exposure to 50%. This will be relaxed as the company achieves greater critical mass in the area. So far, the company has participated in 13 wells (4.6 net) - 11 were successful (3.6 net).
The Game Plan
In the past two years, Gentry has applied the cash flows from its original Saskatchewan and Manitoba unit interests to a full-cycle growth initiative on two fronts: Princess/Tide Lake and Whitecourt. Both of these areas can offer opportunities for production growth with reserve lives of approximately seven years+.
Sedalia, another new core area with a reserve life of just under three years, serves a different function — namely to generate cash flow as fast as possible. Rapid payouts have allowed Gentry to grow its Sedalia production, even while the bulk of cash flow was being redirected to other areas. While production from Sedalia may continue to grow over the near-term, this short-life production asset will ultimately be replaced by longer-life production in the other areas. Activity in this fourth quarter was encouraging at Sedalia with the company drilling 5 (3.8 net) wells, 4 (3.2 net) awaiting completion and infrastructure tie-ins to gathering systems. One well (0.6 net) was abandoned.
Drilling & Production
In the third quarter, Gentry drilled a company record high of 23 (10.4 net) wells, achieving a 70% success rate (67% net). Of the 23 wells, 7 were gas wells (4.1 net), 7 oil wells (2.2 net), 7 (3.4 net) abandoned and 2 wells are still under evaluation (0.8 net).
Nine of the 23 wells drilled in the third quarter were exploration wells, 8 of which were drilled in core areas. Five of the 9 wells intersected hydrocarbons and are currently being evaluated for production tie-in and development locations, the remaining four wildcats were abandoned.
For the nine months, they had drilled a total of 38 wells (18.4 net) with a success rate of 74% (73% net). Of the 38 wells, 19 were gas wells (10.5 net), 7 oil wells (2.2 net), 10 dry holes (4.9 net) and 2 wells still being evaluated (0.8 net).
Thus far in the fourth quarter, Gentry has drilled 15 (7.9 net) of its budgeted 19 wells and plans to drill the remaining four wells prior to year-end. These 15 wells resulted in an 80% success rate (80% net).
The bulk of Gentry’s drilling in the fourth quarter has been in the Princess area, with 8 wells (3.6 net) drilled, of which 6 wells (2.7 net) are awaiting completion, tie-in or temporary single well battery approvals. The remaining two wells (0.9 net) were abandoned.
A total of 5 wells were drilled at Sedalia, 4 (3.2 net) and are awaiting completion and infrastructure tie-ins to gathering systems. One well (0.6 net) was abandoned.
The remaining 2 wells (0.5 net) were drilled in Gentry's Whitecourt core area, with one well currently being tied in and the other awaiting completion.
Gentry expects to exit the year at, or slightly above, the current 2,440 boed as wells are completed, tied-in and battery installations completed.
Gentry's drilling forecast for the first quarter of 2004 includes 16 wells (10.1 net), with 94% of these wells operated by the company. Of the 16 wells, three (1.0 net) will be in Whitecourt, seven (4.0 net) in the Princess area, five (4.1 net) in the Sedalia area and one (1.0 net) well will be drilled to follow up a very productive 100% Gentry gas well in a non-core area.
Based on the company's highly successful Nisku gas well at Princess (2mmcf/d), Gentry is expecting to drill another well into this Nisku feature on its 100% lands during the first quarter of next year. The producing 10-22 well and several drillable locations are all covered by one continuous 3D seismic survey. Gentry currently has a 100% interest in two sections of land and a 100% interest in four sections of land that are subject to an overriding royalty convertible at payout to a 50% working interest. These six sections of land are contiguous and encompass the Nisku pool.
Gentry also anticipates continuing its aggressive exploration plans in the Sedalia area where the turnaround from capital spent to production is 80 to 120 days. Areas like Sedalia, with year round access and requiring modest capital programs, have the added advantage of access to existing but underutilized pipelines and facilities. Gentry expects these investment characteristics will continue to provide exciting opportunities and more importantly near term steady cash flow and production growth.
As a result of current success and plans for tie-in of wells by the end of the first quarter, Gentry has established an initial $15 million capital expenditure budget and anticipates averaging 2004 with production in 2,700-2,900 boed neighborhood with an exit rate in the range of 3,000-3,200 boed. I suspect Gentry will ramp up activity in the later half of the year to develop and prove up reserves where they were successful over the winter period in exploration plays. This will largely depend upon increased cash flow and the commodity pricing scenario which will be more clearly defined come next May and June.
Net debt is approximately $9 million on lines of $14 million. Year-end net debt will approximate $10.8 million. The resulting debt ratio to forecasted 2004 cash flow amounts to 0.9X.
The company has 27.3 million shares outstanding (30.0 million fully diluted) and insiders control 21% of the shares (25% on a fully diluted basis).
I like the story that is unfolding with Gentry. They are being transformed from a company with bits and pieces of non-operated production interests into an operational company who will be controlling their own destiny on lands that hold impacting upside in terms of reserves and production. Their initiatives will be supported with a well founded game plan as described above. They appear to have management in place to accomplish their immediate goals. 2004 shapes up as an interesting year for Gentry. As the story unfurls, there will be more coverage of the company and in turn, investors will begin to pick up notice of Gentry’s progress. I believe they have clearly established a firm growth platform to launch themselves into the next level of corporate development.
Ending Cash Component $26,211.72 |
