₪ David Pescod's Late Edition June 13, 2007
AN INTERVIEW WITH CRAIG NIEBOER
CFO, BRAZALTA RESOURCES
(As of June 5, 2007)
We are with Craig Nieboer who is Chief Financial Officer of Brazalta Resources, which is operating in Brazil of all places, and I don’t think a lot of Canadians have a lot of experience in Brazil for oil and gas Craig. Why don’t you give us some background about operating in Brazil? We do note that Business Week recently ran a piece comparing two national operators – PeMex in Mexico and PetroBras in Brazil. The Brazilians operator came up much ahead … So your thoughts on operating in Brazil?
Craig: I think one of the reasons we haven’t heard much about the on-shore oil gas business in Brazil is that up until 1997 the Brazil oil and gas business was the sole and only domain of PetroBras, the company that you just mentioned in comparison to PeMex in the Business Week article.
PetroBras is the National Oil Company of Brazil, it also is a public company that trades in New York and it trades on the Brazilian Stock Exchange. It is one of the largest oil companies in the world and in fact I think it is now in the top 12 by reserves and production in the world.
It had the sole responsibility for developing, finding and exploring reserves for oil and gas in Brazil onshore and offshore until 1997. In 1997, offshore was opened up to some international companies for opportunities and in 2000, onshore was opened up to some outside competitors to PetroBras.
So really, the industry is in its infancy. PetroBras is a great company, they are well run, safety is paramount, they follow international standards and because they have been operating offshore Brazil and internationally around the world, they really have a high international standard of doing business, which is different from some of the other national oil companies around the world. Why there is a big opportunity for a junior explorer like us in this environment is probably best described in the analogy we make (and it’s not a slight on any company) but can you imagine what opportunities would still be left here in Western Canada today, if say a company like PetroCanada had been the only explorer for the last 40 years.
The reality is, and it’s been proven in various basins around the world, that larger companies are going to focus on larger assets and leave a lot of very viable and very economic assets behind because those assets are not their focus. And so that’s really what we are looking at from an opportunity stand point.
In addition I would say that Canadians like to consider South America one place. It’s not. It’s a collection of different countries and they are all at a different stage of their growth and development, economically, socially and politically. And Brazil is really going the other way from some of its notorious neighbors. The oil and gas industry previously was all nationalized, it’s not a situation where there are a bunch of International companies that the local people feel have taken resources from them. The Brazilians look at it and say, well our national oil company is not necessarily the best maximizer of resources and let’s bring in some other participants.
Dave: Scott McGregor of Acumen is one of your fans that you have at Brazalta and he suggests that you are now in a sweet-spot after a few years of hard work getting things together. Now drilling starts and Brazalta has very small production, but it’s on the verge of a drilling program that could move that significantly higher.
Craig: I think that’s a good summary of where we are at. International projects always take a little bit longer than ones domestically because you are dealing with logistics and you are dealing with some different infrastructure and obviously there is a different regime that you have to become accustomed to. BrazAlta only signed its joint venture agreement in January 2006, so it really has only been operating on the ground in Brazil for almost a year and a half.
In that time we have acquired more than 1800 kilometres of exploration lands, in addition we have 45 square kilometers of development land all of which we acquired that land at roughly $2.00 an acre which is incredibly cheap compared to Western Canadian standards and we have seismic data over all that land. So we have been processing and picking drilling targets over that period of time. Additionally, we have melded together the joint venture with our local partner W.Washington Petroleo, a Brazilian private company that had the producing properties and together we’ve both put our exploration lands in together. We are at a small production point today, relatively speaking. The consortium is just under 400 barrels a day and we are at 47 ½ % working interest in that consortium and W-Washington has a 52 ½% interest and is the operator. We are beginning our drilling program on the development side and we will be begin our exploration program in the summer and so really the drilling season begins for us and we see lot of upside.
We are going to be chasing targets that we expect initial production rates of somewhere between 100 and 400 barrels a day and we are looking for pools with two to 10 million recoverable barrels of oil, so compared to what most juniors in western Canada would be chasing, these are significantly much larger resources.
Dave: These are not necessarily high risk plays at all as well?
Craig: There are no oil and gas operations other than the oil sands that don’t have geological risk associated with them. On the development drilling side, we have 3D seismic defining our targets, and offsetting producing wells, and as such we feel very comfortable with a high degree of certainty that we are going to have success. The more difficult question is how much success on the exploration side? We have a lot of targets, but exploration has much more risk to it. We are adjacent to producing PetroBras fields wherever we are operating, so it’s not rank exploration per se, it’s kind of more exploitation on trend, but we are going to have our share of dusters and disappointments, but we see ourselves having a lot of successes. The good thing for us is the exploration wells, in the basin are generally our shallower wells and so the costs for those are a little less. On balance, we think we have a relatively low risk project compared to others.
Dave: What kind of hopes do you have? You are currently doing about 175 barrels a day net, and you hope to have almost 10 times that within 12 months. Is that realistic? Is that optimistic or baseline?
Craig: I think that’s realistic, but we have been careful about making too many projections to date because we do have quite a bit of exploration planned and that could be significantly higher than that, but unfortunately, there is always the risk they could be lower than that. Our feeling is that it’s a very reasonable target for us by June 2008 (around the 1500 barrel a day mark net to us) but once again, we feel there is upside that can be much greater than that.
Dave: You are also not just an explorer. You also own some rigs which I believe in many areas of the world, even Brazil these days that is something very valuable.
Craig: It’s hard sometimes to conceptionalize because when you operate in Alberta, everything is just a phone call away and it’s a matter of hours not days or weeks to get something. When you go into these more remote locations and our team has got international experience in lots of different places, sometimes you have to bring your own kit. Brazil is no different.
Most of the major services are there because they have been there to service PetroBras onshore, but because PetroBras had diminished its onshore drilling activity, there was not a lot of iron in the country and the iron that is in the country was tied up, so Brazalta made the strategic decision last year to form its own service company.
It is 100% owned by Brazalta, and we brought in our first drilling rig last fall. The rig was not quite capable enough to efficiently drill our deeper development wells, so while we were still defining our exploration program, we put it out to lease with PetroBras on a short-term contract and they were so impressed with the performance of our rig, and our Brazilian Crew, that they asked us to propose some long-term rig contracts to them. So we brought in a second drilling rig for ourselves, and in that process we also signed four long-term drilling projects with PetroBras and we are in the process of bringing in four refurbished rigs for them that we expect will operate over the next four to six years. So we have ensured that we have the iron that can complete our capital program without delay, but we’ve also built a service company with a solid customer, that’s going to cash flow as soon as all of the rigs are operating for us. The service company will provide an underlying safety net in the investment.
There is some risk on the E&P side, there always is, but we’ve got a cash flowing business underneath on the service side that will help fund the E&P side and if we have any hiccups in the program, we are going to have a safety net that will take care of the cash flow in the short term.
Dave: As far as the management team, you yourself are new to Brazalta which frankly, is a relatively new company, so can you tell us a little bit about the management team?
Craig: The leadership team is incredibly important and especially on an international play. You need to have people that have done it before. I will start with our President and Chief Executive Officer David Mears. He has a track record of growing a junior oil company in Western Canada and sold it with success. He started Semper Energy Ltd. which merged with Val Vista Energy and was sold to Avenir Income Trust, and he is also the Chairman of another junior called Sierra Vista Energy Ltd. ,and he’s involved with some others in Western Canada.
I think the interesting thing for Brazalta is that David spent a number of years in his youth actually in Brazil. So he has learned Portuguese, he has learned the customs and cultures and so he is able to connect with the locals on a different level than a lot of other Westerner’s are and he understands how the country works.
It was that ability that allowed him to find W.Washington and he basically searched out all the junior operators in Brazil and chose to partner with W.Washington for all the assets and attributes it had.
Our Chief Operating Officer is Peter Pelensky, a guy with tons of experience in the oil and gas business in Western Canada, but also a guy who has operated in foreign jurisdictions such as Albania and the North Sea and so he has learned how to take proven western Canadian concepts and ideas and apply them in different arenas and he is the right kind of guy. He is very experienced and he is more a “jack-of-all-trades”, and master of no one specialty in particular, so that’s the kind of breath and broadness of experience that you need to bring to the table in these places.
The key guy on the exploration side is Trevor Borden, who is the Chief Geophysicist with 18 years experience in different projects in both Canada and International and he has a very practical approach to analyzing the massive amount of seismic data we possess, and has honed in on some great plays.
On the service side, we’ve managed to attract some top notch people there as well. James Howdle is our Chief Operating Officer who comes to us from Saxon Energy Services.
He has worked everywhere in the world where rigs have worked, from the Middle East to South Asia, to South America previously. So a great depth of experience.
Dave: What about yourself?
Craig: I spent over 10 years in Russia and Central Asia and I don’t think there is a tougher place in the world to do business. There are great assets there, but it’s a very difficult business environment. I think when I looked at the BrazAlta opportunity, all the check marks were there for an operation to have success internationally.
Dave: Oil and gas in general…it’s been one heck of a bull market the last few years. What do you see for the next few years?
Craig: I leave that for the experts, so I think we’ve looked at what the experts are calling for and they are all see the price for oil north of $60 for West Texas and for Brent. With Natural Gas there is lots of debate, but with the slow down in activity in North America, you have to think gas prices will come back.
For us, the focus is on oil price because that is what we are producing in Brazil. We are pretty bullish on it. At the same time, based on the robustness of the assets, our project is going to make sense even if oil was less than $30, but at $60 or $65, we are going to make a very good return on our investment in Brazil.
Dave: There is some analyst coverage, despite the fact Brazalta is a relative junior. What are they saying?
Craig: David Mears comes out of the investment banking community so he is able to attract a lot of great institutional following, so our stock is held roughly 65% by larger institutions which are long-term holders. The investment houses that do follow us have got us rated between $1.45 and $2.05 for a target price for the next 12 months. They see lots of upside on the E&P side, and they like the safety net of the service company.
Dave: I guess if a person wants to know more about the company, you recently did a presentation of SEPAC and it’s available for public perusal, I believe?
Craig: It’s on the CNW Website and the link is: newswire.ca and find the Brazalta presentation there and as well, we will have a link on our website and our website is www.brazalta.com that should be up in the next day or two.
Dave: We usually end these interviews asking experienced oil and gas guys to pick one stock, other than your own, to be watching or purchasing for good performance for the next while. One that you don’t have any conflicts of interest in.
Craig: An interesting one that I’ve seen recently is Cirrus Energy Corporation. Offshore in the Netherlands and onshore in Trinidad. They have a very interesting play that they are following offshore in the Netherlands and a really good fiscal regime there. And they are just about to start the execution of that. So it’s pretty good international play with some good upside, I think.
Dave: Thank you for your time, Craig!
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