₪ David Pescod's Late Edition April 23, 2007
Q & A with Kelly Ogle
President of Diamond Tree Exploration
(From April 13, 2007)
It’s been a tough time for the natural gas producers over the
last year, as costs for everything from rigs to equipment to man
power has gone through the roof and gas prices have retreated.
Maybe we are currently seeing a bottom…..One junior that
many analysts are talking about is Diamond Tree, so we were
lucky enough to find some time to interview Kelly Ogle, President
of Diamond Tree Exploration.
++++++++++++++++++++++++++++++++++++++++++++++++
David: There are small circles in the oil and gas field, we know
that, but you have spent years working together with Dick
Gusella, now of Connacher, and Abby Badwi now of Rally Energy
– we would appreciate any of your thoughts (at this time) on the
two companies that they run.
Kelly: Yes I know both Dick and Abby as each have been a mentor
and partner and both remain very good friends.
I have a little history with Connacher as I preceded Dick as
the CEO. The great successes of the company are attributable
to him however. I simply kept it alive when it was faltering
badly back in 2000 – 2001. I think that the diversified business
plan Dick has developed is a winner. We know the oil sands
need gas for fuel and refineries for marketing. He has accomplished
both with the purchase of Luke and the Great Falls refinery.
I also think that Connacher hiring the core group of Deer
Creek professionals to build the Great Divide project was a
stroke of genius. I think we will find that Connacher will enjoy
much lower development costs due to these people and the
modular development model. In the end however the “oil in the
sand” is where the rubber meets the road and from all indications
the core results keep getting better and better.
If you believe in oil sands then Connacher should be a piece
of your portfolio if only for the fact that at some point somebody
big will notice and take it out. Remember, with the certainty
associated with NI-51-101 the reserves are much more
quantifiable than in the past.
Rally Energy is a different kettle of fish all together. We
(Abby and Dick and I) actually looked at this project many years
ago when we all worked together at Carmanah Resources.
The environment was totally different then however.
Heavy oil technology and oil prices were much different.
This Egyptian project was actually developed by Angus
MacKenzie, the grand old man of Canadian International
deal making. Angus was the Chairman of Sceptre Resources
and both Dick and Abby worked for him.
I think the equity markets are finally waking up to the expansive
reserve base albeit in Egypt and Pakistan. Not withstanding
that and given my limited knowledge these are
world class resource plays. I think Rally also has some
more running room but will eventually be sold to someone
who has the cash resources to fully develop the reserves in
a timely manner.
David: We don’t think that we will have to do a tag day to
help you, but natural gas stocks such as your own have had
a tough year. What do you see as a future for natural gas
and gas prices over the next while?
Kelly: We are bullish mid to longer term (8 months to 2
years) for gas prices. This basin declines at around 30% per
year. If drilling utilization rates fall so do gas reserves and
gas production. Specifically, I think we will have $10 gas
mid winter.
David: Diamond Tree has had an interesting last year, actually
helped by Hurricane Katrina – what’s that story all
about?
Kelly: In September of 2005 the Provincial government of
Alberta rescinded the Maximum Rate Limitation (MRL) for oil
production. In effect high productivity wells which were
choked back to an approximate 50 bbl/d rate were allowed to
free flow. At Niton, in West Central Alberta we have an oil
pool that was MRL restricted to about 300 bbl/d, coming out
of 8 wells.
With the rescission we were able to produce the pool in
excess of 1200 bbl/d for the period September 2005 to December
31, 2005, at which time the MRL was reinstated.
This provided valuable excess cash flow for Diamond Tree
which we used to drill some of our higher impact locations
in Sinclair and Tupper.
It was a bit of a double edged sword however as we had
to compare lower production rates in Q3 and Q4 2006 to
higher performance in the prior periods. However, we were
also able to see the relative maximum performance of the
pool. We are currently waiting for the regulators to approve
our secondary recovery scheme which will allow us to increase
our oil rate at Niton. It will not go back to the rates in
excess of 1000 bbl/d however. We are hopeful to gradually
increase the rate for the pool to somewhere in excess of 600
bbl/d.
David: Currently you have two key areas in your company,
how excited should one be about those two areas?
Kelly: Yes, Dave we do. Basically, the majority of Diamond
Tree’s operations occur in West Central Alberta and Northwest
Alberta / Northeastern B.C. More specifically we have high deliverability
gas and oil production at Ferrybank, Willesden
Green, Niton and Garrington in West Central and high deliverability
gas production in Sinclair and Karr in Northwest Alberta.
Additionally we are mid way into an exciting exploration opportunity
in the Tupper area of Northeastern B.C., just across the
border from our Sinclair area. We have a number of additional
drills in West Central slated for the second half of the year as
well as quite a few new ideas which should reach fruition in
early 2008. Suffice to say we have a very solid production base
providing cash flow to drill some exciting opportunities in West
Central.
In the Arch and B.C. the picture is the same. In the winter of
2005-2006 we drilled some very good sour gas wells in the Sinclair
area. We were optimistic about how soon we could
achieve production due to our reliance on third party infrastructure.
We were confident we would get this production on late
spring of 2006. that didn’t happen and we didn’t reach full production
until February of 2007. This hurt our 2006 performance.
On the good side though, we have had additional drilling success
in Sinclair this past winter and have more inventory for the
remainder of 2007. Infrastructure is the key. We will not predict
anymore when we can get these new wells on other than prior
to yearend.
At Tupper we farmed in on a large company in 2005 committing
to drill four wells on a 100 for 60 basis. Three of those
wells have been drilled. In the spring of 2006 we shot over 80
square kilometers of 3-D seismic data to more clearly define the
prospective targets. The farm-in agreement did not include all
P&NG right from surface to basement. After interpreting the
seismic we spent the second half of 2006 accumulating those
deeper rights where we saw opportunity. By December of 2006
we had purchased at Crown land sales in excess of 5,000 acres
which has given us upwards of six locations for the deeper opportunities.
We will drill the first of those in early summer.
David: What are the forecasts for production that you are currently
looking at?
Kelly: We are projecting a range Dave. An average rate of 3,100
to 3,400 boepd and an exit rate of 3,500 to 3,700 boepd with a
mix of approximately 70% gas and 30% oil and liquids.
David: Rumors persist that there are 50 or so public and private
companies in trouble these days in the oil and gas patch and
almost 100,000 barrels a day of production that could be for
sale, do you see opportunities here?
Kelly: Both those numbers are high in my opinion. However it
has become a buyer’s market. Diamond Tree has been solely
constructed via the drill bit during a time when cheap capital
was chasing too few opportunities.
Now the cost of capital, largely as a result of the new trust legislation,
has become expensive for juniors mainly due to lower
valuations. More importantly and evident even the past few
weeks are asset deals occurring in the $10 to $20 per barrel of
2P reserve values. We are evaluating numerous opportunities
which fits well with my past business history. Most of the
value creation I have the good fortune to be part of has been
via the merger or acquisitions route. Unfortunately, you have
to look at 100 from a high level, to discern 10 to diligently review,
to hopefully close one.
David: Several analysts follow Diamond Tree and their forecasts
are all over the board, are there any of them that might
be right?
Kelly: Well the low one was wrong. We have achieved that call
of $3.40. Honestly Dave the market is very efficient. I believe
the premiums given to certain companies are earned by performance.
We performed very well in 2004 and 2005 and not
very well in 2006 when our production bottomed at 1,560
boepd in the third quarter. Since then we have regained over
50% of that rate. We need to continue to print quarter or quarter
production increases thereby adding to cash flow, earnings
and reserves. If we do that – and I’m confident we will – then
the highest analyst’s target of $5.00 or higher is achievable.
David: What are your predictions for both oil and gas prices
down the road?
Kelly: Earlier I said we would see $10 gas mid winter. Oil
should stay around $60 WTI for the foreseeable future. Get
your clients access to Henry Groppe’s material on prices, demand
and supply it is very interesting and stands the test of
time.
David: We need you to picks some stocks that could make an
honest guy a couple of honest bucks and if you got two or so
picks we would appreciate them. Needless to say doubles
would be appreciative.
Kelly: Sure Energy run by Jeff Boyce. Jeff is a proven winner,
Vermillion and Clear Energy are prior successes. A little
known fact, in his youth Boyce was one of the five best fastpitch
softball pitchers in the world. He actually came to Alberta
to pitch for Dome Petroleum’s ball team. They put him in
the land department and the rest is history.
I also like Result Energy. Bill Matheson has patiently
plugged along while at the same time has access to and is
drilling some more sizeable impact wells.
David: Thank you very much for your time, Kelly. (And we
promise…….we won’t tell anyone what Dick Gusella says
about your golf game……!) |
