David Pescod's Late Edition July 24, 2006
“A Cheapie With A Chance”—A Mini Connacher?
Interview with Randy Buchanan
Watch Resources
(July 19, 2006)
We are here with Randy Buchanan and getting a good look at Watch Resources (WR), a relatively new company. So, Randy could you tell about the last six month history of the company?
Randy: All right David, but let’s go back a little bit further in time because Energy 51 was founded in early 2004 and at that time we put together a bunch of plays and were looking for some new prospects as well. Then in May of last year (2005) Energy 51 was fully funded by a group out of New York called Greenhill Capital Partners. What we did at that point in time, was try to zero in on the prospects and plays we had
in inventory plus companies that we had on our radar screen. One that we found that we liked immensely was Watch Resources.
We had no previous contact or connection with them what-so-ever, but Watch we found was an under-funded company with potential for a gas play and a large heavy oil resource play. They had acreage available in a fairly hot market that was potentially competition free, because of an arrangement with the Métis on the Métis Fishing Lake Settlement.
Energy 51 then worked up all the geology over the last few months (beginning a year ago) and did some seismic while concurrently buying land and completing Watch’s wells, which had been drilled and all of them were successful, but not completed and brought on stream because they ran out of money.
Everything worked successfully on the oil wells for us and we are very happy with the results we’ve had to-date. All the lands that were bought in 2005, which totaled about $1.75 million, were at 100% Energy 51’s expense (according to the original Watch/Energy 51 deal), but were shared 50-50 with Watch. So it was a huge benefit to a cash-strapped company like Watch to move forward like this with no cash outlay.
Energy 51 then drilled up some of the new oil & gas wells for the two companies at a 50-50 split and that gets us to this point in time where we have tied-in three gas wells and eight oil wells, plus we have purchased 26,080 gross acres (40 ¾ sections) of Oil Sands leases and PNG leases.
The split on those lands is 8,000 gross acres of oil sands and 18,000 acres of PNG leases, for a net position of 12,600 acres for Watch (20 sections) and that is a pretty huge start-up for a land position for a small company. The net on that for people who like to look at net numbers is 3697 net acres of oil sand leases and 8,960 acres of PNG gas leases.
David: For a person who is used to looking at a medium to large size companies, this is still a small chunk of land, but then on the other hand you have potentially a lot of locations from what you have done so far this year.
Randy: Very, very, much so! On the project that we are looking at we’ve just started delineating the first core area for heavy oil at Fishing Lake, which is about 7 ½ sections in size. We have seven producing oil wells to show for efforts so far with up to four producing zones in some or all of the wells. The lowest number of zones in one particular well is two and some of them have all four zones in them.
Our next round of drilling, which we want to complete later in 2006, should take in about 21 wells. That will fully delineate all the various zones over the lands in this first core area and then we would go for what’s called project status and ten acre down spacing approval to set up some 460 new ten acre locations.
So, that gives a person an idea of the scope of how big of a development this one core area on our Fishing Lake Métis Settlement can lead to.
David: Now this Fishing Lake area is surrounded by some pretty big players, I understand.
Randy: The core area is surrounded by CNRL and Husky, Crescent
Point is around there, Buffalo Oil Corp, a smaller operation that is run by Bill Trickett who used to run Morgan Hydrocarbons Inc. Bill is a very successful heavy oil player and a very knowledgeable engineer who seems to like the same play we are chasing for Buffalo.
They are right across the lake from us. So, if you circle our property on the Alberta side of the border, you would have some huge players that have already down spaced to ten acres and have developed some multi-hundred well pools in and around us geographically, but geologically all in the same zones.
David: Okay, now with this being heavy oil, how productive are these wells?
Randy: The wells that we’re trying to map out produce differently, depending on the number of zones you’ve got, their thickness, and the viscosity of the oil. So, we’re being a very modest forecaster on our production rates and decline curves so for our ultimate recoveries we look at 77,000 barrels from a single zone well and 117,000 barrels recoverable from a dual zone well and the wells that have
three zones or more we’re counting on 175,000 barrels of recoverable reserves over the life of the well.
Now, when you look at actual production that has gone on
for a longer period of time (compared to our wells that have
only been on-stream for several months now) you can see
wells that geologically look the same on well logs but have
produced since say 1985 and are at 320,000 barrels of recovered oil already and still producing 55 BOPD and look like they are going to achieve a good 400,000 to 500,000 barrels of recoverable reserves from one bore hole over the life of that well. So, there is plenty of up-side beyond what we’re forecasting for our pre-drill economic limit on these wells.
David: When you are talking up-side, boy you could get carried
away and dream of 400 wells doing 50 barrels a day, how
realistic?
Randy: Well, I think we have taken the geological risk out of
it already. We have enough well control on our properties
and surrounding our properties from other people’s older
wells to take most of the geological risk out of the play.
And, as I said earlier we will delineate the quarter section
spacing over the entire 7 ½ sections with the next 21 wells
and that will take all the geological risk out of the project.
But, you have to remember we do currently have well control
in and around the acreage as well as we have serendipity
working for us in the vertical sense because we do have four
sands to tap into. There are actually two other sands in addition to these four that we haven’t discovered yet on our acreage but do exist a mile to the south and a couple miles to the north as well as across the lake about four miles as the Crow flies.
So, we do have a couple of prospective zones that could
come out of no where on some of this acreage as we drill up
the next 21 wells, but to say you would ever drill an out and
out dry hole on these lands is pretty unlikely. We are hoping
that what we have mapped out as to the presence of the
sands is very conservative, to say the least.
David: Watch is a pretty small company and there are not
very many people watching it as of yet, but one or two of
those that do suggest that based on this business plan at
this point you are a perfect target for some Income Trusts.
Randy: Well, I think at the end of the 21 wells when we have
taken all of the geological risk out of these lands and we have set it up for 460 exploitation wells on this first block alone, we would be prime candidates for a major company or a Royalty Trust to look at us. They would want to put their money in the ground with basically zero risk and want to put themselves into an exploitation program as they would have the
capital up front and the man power to do this in a timely fashion whereas a little company like Watch is going to have a
hard time doing a project of this scope.
So I think we would be prime candidates for someone to
take a run at us after we drill this next round of wells, and whether they want to see them on-stream or not that is up to
them, but that’s what we would try and work towards - drill them by late 2006 and have them all pumping in the first quarter of 2007 and then say “here we are come and get us”!
David: Energy 51 got its name in an interesting way.
Randy: Yes, all the key principles were born in 1951, so all of us are turning 55 this year – all accept one young engineer who is only pushing 50 so we are all of the same ilk. We’ve all got 30 plus years of experience as a land man, geologist, and for myself as geologist/geophysicist.
So we do have some good experience and our Chief Financial
Officer is even a little older than that and has been around the oil patch for probably 35 to 40 years, so yeah we’ve got a fair amount of grey hair and a lot of experience and that makes it a little easier for us, I guess, to look at the bigger picture and be a little bit more patient for the long term.
David: Okay, but don’t you think that it is too early to pack it in though isn’t it?
Randy: Expect that my golf game needs polishing up a little bit, I don’t think any of us are looking to retire right now, that’s for sure.
It’s kind of the thrill of the hunt now. We have zeroed in on
this project and it’s getting very exciting to look at these wells coming on-stream and then starting to map out and drill up the fruits of your labor from the last year or so. As we work these locations up it is fun because its been multi-iterations of drilling, seismic, land acquisitions, more drilling and completions and we’ve now got it matured right up to where we think we are past the last land sale so we have our land spread now and we have all the seismic done we need to get done and we’ve done the risky drilling. So it’s kind of cherry-picking now and is a lot of fun to see what you can grow it into. I don’t think anybody is going to be walking out the door in the near future from our team, everyone is committed.
David: As far as money in the bank and shares outstanding.
Randy: There are just under 65 million shares outstanding and
Watch probably has about $2 ½ million cash in the bank right
now and is prepaid for the five new oil wells and two gas wells that we have done, so they are in good shape for the short term.
Energy 51 is about in the same position but not quite as much
cash in the bank, so both companies are well positioned to move forward with the preparations on the next 21 locations, but they will need money and need help to do the drilling and completions of those 21 wells. So I think, you will probably see us go to market place here in the next three months looking for probably around $10 to 12 million to fund these 21 wells.
David: Okay, is there anything else we should be asking Randy?
Randy: Well, the prices!! The one thing that people forget
about on the heavy oil plays is the prices and price forecasting is always anyone’s best guest - all you can ever say for sure is when you forecast a price you are going to be wrong, but in our case it is kind of an interesting scenario.
We had received in early 2006 $25 Cdn. a barrel for the oil
that we produced (that was for January/March production) yet
in May we got $54.40 Canadian a barrel. Now, some of that
swing is just based on pure seasonal usages of that kind of
heavy crude, but a lot of it is now structural. Most people
don’t understand that there has been an increase in the capacity from Alberta to Chicago for the heavy oil through the pipelines, and just recently a new line was built and opened up from Chicago to Cushing, Oklahoma which is called the Spearhead Pipeline, which carries heavy crude.
When you then get to Cushing, Oklahoma the biggest thing
that has happened for heavy oil is that they reversed the flow
of the Corsicana pipeline from Cushing to the U.S. Gulf Coast,
so that allows Canadian heavy crude to now get down to the
U.S./ Texas refineries where they have been handling Venezuelan heavy crude for years now. So the heavy oil differential that people saw in February of this year at $35 U.S. a barrel has slumped to under $15 U.S. a barrel. We are hoping (as are all the producers of this heavier type of crude) that this is a structural change and we are not going to be dependent upon just a few refineries that can handle this type of crude and be based on a seasonal thing. We hope this is going to be a year round thing and it is going to shrink that differential on a more permanent basis.
So, we are doing our economics at $36 Canadian at the
well-head right now and like I said we received $54 for the last April and May, so that’s a big, big swing and basically, expect for royalties paid, that all falls to the bottom line.
As I had mentioned earlier relative to the royalty break one
can get for the project status level on these oil sands plays,
you put all your capital costs into a pot and then you work the project down while you pay a flat 1% royalty until you reach payout.
So that is nice to get your capital back – even with lower
producing wells versus conventional crude as they are quite
capital intensive on a relative basis, because you have a little bit more handling of sand and things like that so it’s kind of a safe guard against your investment in making payout and showing a decent return in a timely fashion, rather than getting dragged out over the full life of the wells.
David: You only have one analyst who semi-officially covers you and he is hoping to see a $1.00 a share within six to twelve months, is that outrageous?
Randy: I don’t forecast share prices, but I don’t think that it is
outrageous as we are concentrated on the 7 ½ sections on land in
our one core area that we have drilled up, but we do have 3 ¾
sections about three miles south of that, that has had CNLR
drilled an oil well just off-setting it, but we haven’t drilled anything
yet on that acreage.
We might punch down one or two wells on that and hopefully
develop another pool. We’re not sure how many zones are there
and we are not sure what kind of productivity they are getting out
of that well, because the information is confidential at this point
in time, but we do own the acreage and we have many years to
exploit the acreage because the oil sands leases are 15 year
leases in this part of the world. And, then we have another project
a couple townships south and west of Fishing Lake called
Dewberry and we have a producing oil well and gas well on that
property all ready.
Now, it only has one zone in it for oil but it is a nice looking
sand and it is just starting to produce in the last couple of weeks
and doing quite well so we will see how it develops.
So, we’re looking to potentially develop three separate core area
pools in oil, but we are only bragging about the one that we’ve
got the seven producers on right now and we do have a couple of
Colony gas producers on our PNG leases on the Fishing Lake
Métis Settlement, that hopefully when they settle down they will
show us some pretty good revenue out of the colony sand for
gas. Also, the huge acreage spread that we have for P&NG
leases also covers the Second White Specks and Viking zones
which are smaller low pressure and lower producing gas plays.
These would be more like a coal bed methane play, in that it is a
blanket type sand that you probably drill three or four wells per
section after you down space but since there is good infrastructure
on this property you could get this gas economically to market
when gas prices rebound a bit. So, we are looking at that in
longer term too, but the biggest bang for our buck is going to be
the Oil Sands leases and the core area! Small companies like us
can only do so much and we don’t want to choke on what we bite
off. This is totally doable for us – drill 21 wells by year end, get
them on-stream in the first quarter of next year and then it becomes
a really good candidate to sell!
David: Okay, thank you very much for your time Randy. |
