₪ David Pescod's Late Edition April 11, 2007
Q&A with Dick Gusella, President of Connacher Oil & Gas
We’ve been following the Connacher story since $0.60 when Kerry Sully, ex-Ranchmen’s Resources suggested this was a story one had to be into. He’s been proven right. Recently we were lucky enough to join a tour of their facilities at Fort McMurray and they are truly inspiring. You can keep up-to-date on their progress by simply checking into Connacher’s website at www.connacheroil.com and see construction first hand.
But when you are there on site and seeing how excellent the modular construction has been – the building of the pieces in Edmonton, Calgary and elsewhere and fitting them together on site, you realize how important successful engineering so far has been for Connacher. It compares significantly to other oil sands projects. We have a son who was working with a crew on one of those megaprojects where the whole crew for two days on 12-hour shifts simply sat and waited to be sent somewhere to work. There’s a stark contrast.
While Dick Gusella, the President of Connacher is theoretically on vacation in Maui with his family, we caught up with him looking for updates and he was most obliging.
David: Back in February, when we interviewed Dick Gusella, the suggestion was that steam could be generated by the Great Divide Project, any time from as early as April to as late as August, depending on construction progress. Have we been able to narrow this date down any further Dick?
Dick: We have consistently said it would take 300 days from start of the plant to startup of the steam injection and then up to ninety days to get meaningful volumes of bitumen. We are on schedule.
We were delayed from the order in council date by bureaucratic issues and we had to move more dirt than originally expected to get the suitable plant site you saw when we visited in February. I am still looking at an August commissioning and startup. Can’t give you the exact day but I will when I know it.
David: With all the data given out on the Great Divide, the expectations for Pod 1 have been pretty precise at 10,000 barrels a day. Would you not feel more comfortable saying something like 8000 to 10,000 barrels a day? Or 8000
to 12,000 barrels a day?
Dick: I think concerns in this space are a bit unfair. We have worked the data and we have an EUB authority to produce up to 10,000 barrels per day plus GLJ’s estimates, which are conservative. We did extensive simulation work reviewed by the Board and by GLJ. We have 15 wells forecast to produce at an average rate of 700 bbl/d by simulation studies. We have Jacos Hangingstone analogue offsets from similar or inferior reservoir that have hit 1500 bbl/d per well with a fast 3 month ramp up. Regardless, we can produce an average of 10,000 bbl/d from our project under license. Not much else to say.
David: How far are we along on work for Pod 2 or what is involved in taking the next step and looking forward
down the road?
Dick: We are well advanced with corehole and 3D coverage on Pod Two to the point where we announced that subject to final Board approval, we intend to apply for development of Pod Two to the regulators, likely this month, for another 10,000 bbl/d small scale commercial project which can be “fast tracked” compared to mega projects.
Accordingly we hope to have it underway by year end to early 2008 and on-stream 300 days after to take us to 20,000 bbl/d from Great Divide by early 2009. Not too shabby and nice to grow in 10,000 bbl/d increments.
We have most of the financing in place arising from our term ‘loan b accordion feature’ but we will need more capital for the pipeline requirements if we choose to go it alone and for possible expansion of our refinery to keep it aligned with our productive capacity.
We are evaluating all of these things as we go, obviously. But Pod Two looks good although more complicated than Pod One’s reservoir, but such is life. It also contains the best core holes we have yet drilled with great looking thick reservoir so there is always a tradeoff.
David: Petrolifera has been a huge success story over the last while, but now it seems to have topped with concerns that the reserves might be shorter life. Anything additional we should know about Petrolifera? Particularly about their plays in Peru?
Dick: Petrolifera is a great success with more to come. We are drilling a few infill wells before embarking on the drilling of new bumps from our 3D program over Rinconada and Puesto Morales.
We will have three rigs going by mid year. We have further infill drilling to do at Puesto Morales, facilities to finish, gas to drill for and bring on-stream, new lands at Salinas Grande and Gobernador Ayala II to evaluate, new blocks in Rio Negro we bid on and are awaiting the outcome, plus Peru plus Colombia now. So shareholders have good fundamentals, real current cash flow, high earnings, more sustainability than given credit by the jealous naysayers and the big bang in Peru.
We are doing aeromag over 107 and geochem over 106 and EIA’s for our new seismic this summer, followed by drilling late this year but most definitely early next year, looking for Trillions of cubic feet of wet gas with lots of liquids potential and oil on 106 (including maybe light oil deeper).
How good is that – from a company with growing cash flow, no debt, up to US$60 million of pending available credit, no financing since the new issue and a great new land spread to explore and exploit. That’s as good as it gets and we don’t have expensive wells until we get to Peru.
David: Connacher has an unusual list of shareholders in that there are almost 40,000 shareholders, meaning the average shareholder is a small, retail investor. How would you explain that and how come there are not more
institutions following this stock?
Dick: We do have some considerable institutional shareholders including AGF, the recent Oil Sands Fund – Charles Oliver of AGF just talked about us in the FP last week or so. Also we have people like Trapeze – big money manager in Toronto which has been very successful – and Norrep for their flow through funds – and others so we are not doing too badly and we like the people that own us or Petrolifera or both. We like shareholders who average up and stay with us. Those are the real investors. We also did some flow through financing so that brings a certain tax-driven shareholder into the mix.
David: You’ve got a pretty good track record in picking some stocks along the way, as Abby Badwi, your former compatriots and his Rally Energy (RAL) has flown. If you had to pick one stock today, what would it be? And by the way, we wouldn’t mind your predictions for oil and gas prices and if they’ve changed at all.
Dick: I am happy for Abby who has done a great job with an under managed and underexploited asset and built a team of professionals to do the job. Good for him!
I still like Diamond Tree (DT) which got whapped here recently but will be a good long term investment – because of Don Copeland and Kelly Ogle who are proven money makers. Good luck to them. What a buy at $2.70 recently.
I have a hard time recommending other stocks when CLL and PDP have such good visible potential. Buy PDP for international diversified and high potential exposure backed by good fundamentals – it compares quite favorably to Antrim (AEN) or Oilexco (OIL) or other internationals you like – we have real substantial current cash flow and earnings and $60MM in the bank and no debt and US$60million of credit capacity. Pretty good in year two of being public from a running start with limited initial value raising money at $0.30 with a full warrant in 2004!
With CLL you get a sustainable growth pattern with expansion potential using a cost efficient modular approach to the oil sands suited to our assets, with a risk mitigation from our natural gas up north and our refinery in Montana, with most of Pod 2”s financing already in position once we get our approvals through our earlier term loan financing and with more to come from our 4 township acreage holding in the area.
We will have real production and cash flow from the oil sands shortly, not in ten years or something like that. We have real reserves and a plant ready to come on-stream. We have managed risk. We have a great future in my opinion.
On pricing, I like $60 US for WTI and US $7.50 for NYMEX gas for the year.
David: Thank you very much for your time, Dick.
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