₪ David Pescod's Late Edition December 10, 2007
PRESIDENT AND CEO OF VERO ENERGY
(As of November 30, 2007)
We are with Doug Bartole who runs Vero Energy, which is one gassy oil and gas stock that many of the analysts still gush over. But we’ve had many changes in the royalty regime in Alberta and much has been said about these royalty regime changes.
David Pescod: Doug, seeing as you are leading one of the most efficient finders of natural gas in the business, what are your comments on the royalty changes so far?
Doug Bartole: I am kind of confused with what the government thought they were planning on doing. In the end I think they hit the small and intermediate producers the hardest and really, these are companies that have been finding the smaller reserve pools that are dominant in this Province, searching for these pools are fairly capital intensive. I think the oil sands guys in the end got off fairly easy and I think you’ll see that as you move forward – you’ve seen it in this week’s land sale. It was the smallest take that they’ve seen since 2002, so I am going to have a tough time seeing how they expect to get $1.4 billion more come 2009. They are already making excuses, they are already saying – well it’s gas prices. I’m sorry, but it’s not all gas prices.
D.P: The big question is, with high service costs, drilling costs and roll-back prices the talk is that we are going to see half the natural gas producers disappear.
D.B: You are correct. There’s going to be some major consolidations.
In reality, that’s the best thing for what I would consider some of the most efficient and effective operators in this basin. We are going to see a lot of opportunities that were tougher to get our hands on prior. There are going to be companies that definitely won’t be able to survive. It will be very interesting to go through the first quarter, people having to get their reserve reports done, get their year ends out and then have to deal with their banks going forward.
D.P: I guess if a person is looking for a positive, as long as they get out of their natural gas stocks now, this might be setting speculators up for a good run next year?
D.B: Natural gas has changed so much. It has become a lot more global a lot quicker than anybody predicted and the fundamentals aren’t as easy to predict. In the end, it really still is a demand product that demand is going to dominate the supply and demand curve. We need a couple of surges in that demand. Everything will find a new level of valuation parameters. Whether that’s now or later, at that point in time, you start looking for stocks that have performed well in the last two years. There will be a turn. There always has been, there always will be and then there will be buying opportunities when things do turn around. Costs are coming down and they will come down, they have to come down. There will be a lot of product or iron sitting idle and it’s a lot better for the service industry to keep the utilization up as much as possible and the only way to do that is to have more competitive pricing.
D.P: The analysts who follow love Vero but, how do you survive this and survive down the road?
D.B: The biggest thing is controllable costs for sure. When you have low controllable costs, it’s by far the best hedge with the volatility in the commodity price. We have a netback about $4.00 per barrel better than the average of our peer group. Our operating costs of $6/boe versus industry at $9/boe and our G&A costs less than $2/boe versus the industry average over $3/boe, so that goes right to the bottom margin. That’s first and foremost, no doubt about it. With all of these changing factors the reality of this is the companies that can actually find the oil and gas are going to be the ones that come out ahead.
D.P: You had mentioned that you are seeing a record amount of deals cross your desk these days, or a record amount of opportunities?
D.B: That’s correct. We’ve seen some and they have pulled them back because they haven’t been getting what they would consider “acceptable bids” and also we’ve been hearing in some case, no bids. I think these deals are going to get even better for consolidation, probably worse for the seller as we move forward.
D.P: There is a suggestion out there that with cash payments for gas in Calgary now about $5.75 Canadian, most gas producers are breaking even at best. Is that true?
D.B: Some of the firms with high costs I would say are breaking even. I think the low cost firms are still making money. The next question is, are you returning on the money that you are investing? I would suggest that there are a lot of break-even scenarios out there for sure.
D.P: Are you strategically trying to make moves outside of Alberta, or are you just trying to just grab assets that have to be sold by others in Alberta?
D.B: Both. We are looking outside the Province, but of course that product is still holding a premium because of its location now. In the near term there will probably be some better deals to be had in Alberta. At Vero it looks like we got lucky with the governments deep well, gas royalty relief in their new royalty proposals and we will be one of the biggest benefactors of that where we are drilling in our largest area at Edson. We are drilling wells here with measured depths of 2400-3600 meters and this project is capital intensive so we will get some relief. We would like to continue to find opportunities like that and use our expertise drilling these deep, long, horizontals. If we can find those opportunities in Alberta, we would continue to do that. But we are looking elsewhere. We are just trying to stay away from some of the hot plays that are quite popular right now and generally over priced .
D.P: Would a rebound next winter be too optimistic? Or with high depletion rates, could it happen that soon?
D.B: I think things can change a lot quicker than we’ve seen in the last little while. You are looking at companies like CNQ that just came out this week with their 2008 budget and they are expecting a drop in their gas production of 200 million cubic feet per day from the 2007 average, and that’s just one company. One big company, but that’s one company expecting 200 million and right now we are already down about 700 million cubic feet per day from 2006 at this time as shown by current pipeline receipts. So, you have one company that’s close to 25% of what we’ve seen so far this year. You could see depletion really start to hit home here in the next little while. You’ve got the oil sands projects that are going to be up and running in the next year so you have a little bit of a “made in Alberta” increase in demand. I think the rule of thumb is 1 barrel of oil requires 1 giga joule of natural gas; so again, it will increase demand before you even leave the Province. The final issue is the high level of drilling in the States and where are the LNG’s going. Currently they are going to Europe as the prices there are 40% higher than North America.
D.P: Now it looks like the Province has just made an absolutely stupid move with what they’ve done. They are going to have the worst of all possible situations. Revenues are going to be down, not up. What would you have done?
D.B: Bluntly, as I previously mentioned I think that big oil got off very, very easy. Five days after the Province put out their new plan, the Feds put a proposal to start cutting corporate taxes. Well, that doesn’t really affect the small oils too much. It affects the big oils. I think Alberta has handled the growth of conventional oil and gas quite well throughout its whole history and I know the infrastructure and everything has been taxed in the last 3-4 years (it’s been dominantly taxed by the oil sands) and the oil sands and a lot of their royalty regimes started when oil was $20 a barrel. Costs have climbed because of their activity. I think they got off quite easy in the long haul and the small producers are taking the brunt of it. The statistics are all there that the conventional reserves per well are getting smaller and smaller in this Province. And it’s not the big guys looking for those – it’s the small and the intermediate producers that are looking for those smaller reserves per well. In Vero’s case, in our first two years, we spent double our cash flow ($60 mm in cf versus $120 mm in capital spent) in capital spending in this Province and about half of that has been raised externally, outside of this Province. This is the not the case with the big guys as they have so many opportunities and they will go after those opportunities. Those companies will not be spending their capital on conventional oil and gas assets in Alberta.
D.P: Okay, usually we like to end these interviews asking people if they could only buy one oil and gas stock (other than your own) what would it be?
D.B: I’m a technical guy and I like the companies that have done well in the past two years which have been tough years. I like the technical companies and I think that will be a bigger factor as we go forward. I’m a big fan of Storm Exploration. I think the Celtics will continue to do well. Companies like Galleon, etc.
D.P: You named three! If you could only own one?
D.B: I would stick with Storm. Again, I think they are like us. They have a lot of gas, they are very efficient finders and if you are going to put your money in something and don’t want to lose it in the next year, but you want to be there for when the gas cycle comes around, that’s a good company that you can hedge your bets on that it will be solid through the year and will be there for when things turn around.
D.P: Thank you very much Doug! |
