₪ David Pescod's Late Edition September 30, 2008
AN INTERVIEW WITH LORNE SWALM, PRESIDENT AND CEO WITH REECE ENERGY (As of September 22, 2008)
We are here with another veteran oil and gas guy, Lorne Swalm of Reece Energy and he’s survived the mayhem of the oil and gas
markets of the last while, courtesy of the financial crisis in the United States:
David Pescod: Lorne, I guess what people would have to ask you first is the financial situation. You have just raised a swack of cash, so you must be sitting okay financially.
Lorne Swalm: Yes, we are sitting in a very nice place. We have over $15 million available on our credit facility and we anticipate that facility we be expanded as results of our successes have been documented. In addition we are experiencing an annualized cash flow of around $50 million. This combination puts us in a powerful position to continue our high growth strategy.
D.P: Ok, now for a lot of people that follow Reece, there is this Bakken, which seems to be the in word these days in Saskatchewan and North Dakota. Could you explain to someone new to it, what exactly a Bakken Play is?
L.S: Yes, certainly. First of all I would like you to understand that we are focusing our E&P strategy on five oil resource plays in Saskatchewan. The most active area is in west central Saskatchewan near Kindersley in the Viking zone. One of the other oil resource plays that we are working on is the Bakken play in south east Saskatchewan. The Bakken is a name of an oil bearing formation. The Bakken in SE Sask. is part of the Williston Basin that has caught the attention of the industry and investment world. It has been known for many years that the Bakken zone holds many millions of barrels of light oil. Until very recent times this oil has been trapped in a very tight reservoir that was not profitable to produce due to the low production rates.
New technologies of horizontal drilling and multi-stage fracturing have now been developed to extract this resource economically. The new technologies combined with good commodity prices have made the Bakken play very valuable. Many companies are active and drilling has been ramping up over the last few years. Reece has been actively positioning itself with a land position and we are in early stages of exploration of those properties.
D.P: Now Bakken seems to be attracting a sense of greed in the oil and gas patch, but actually you are pretty well divided between low risk, medium risk, and high risk, right now between Viking, Bakken and other plays?
L.S: That’s correct. It is important to keep in mind that we have focused on several resource-type plays, the Viking oil play at Kindersley is one in which we are most active in at the moment. This project is in full development mode with little risk associated with it. As we are exploiting the Viking play we are also busy with land acquisition and exploration of our next opportunities. Utilizing this strategy we will offset our overall risk profile and should always have the next development play coming on stream as we finish up the last. The next plays coming up are in the Bakken, Souris Valley and Lower Shaunavon plays. These are valuable proven resource plays in Saskatchewan. It’s important to understand what a resource play is for your audience. A resources play is a relatively lower-risk development drilling opportunities that give predictable results as well as repeatable drilling results. This type allows for safer allocation of capital; it is a little like manufacturing oil rather than shooting for the big gushers with high risk.
D.P: Now I guess the one important thing to you and many others that have discovered the difference is, this is Saskatchewan, and suddenly it’s very much a desirable place to be?
L.S: That’s correct. For the longest time Saskatchewan had lagged behind Alberta particularly, and other places in the States and in the world because of the very collectivist nature of its government; they were trying to actually chase outside capital away and trying to develop it with their own government resources. They shunned outside investment and had royalty rates set quite high comparatively to the rest of the world, investment went elsewhere. More recently attitudes have changed in both Alberta and Saskatchewan. Alberta has moved to very high royalty rates making Saskatchewan’s royalty regime look quite attractive. A lot of capital is now being deployed in Saskatchewan and I expect that this will continue to ramp up unless attitudes change again.
I grew up in Kindersley Saskatchewan and it warms my heart to see that now Saskatchewan in getting a good share of economic benefits. For too long Saskatchewan’s people and resources have been left behind.
D.P: Now what has attracted a lot people’s eyes is Reece, which was a pretty small junior has had dramatic increases in production in almost no time from 600 barrels a day to 1500 barrels a day. How did you accomplish it, and what are you going to do next, what’s your target for year end 2009?
L.S: Reece has increased its production through the drill bit. We have successfully drilled many oil wells in the past months and will
more than double our production this year. After chasing gas in the early stage of our development, we now are full ahead adding
barrel after barrel of oil. The net backs on oil are great and we have been exploiting our reserves as fast as we can in this good environment.
We are going to spend around $66 million dollars of capital this year which is exceptional for a company our size. As mentioned
earlier we will continue the fast pace growth as long as the environment allows. We have enough opportunities to fuel our
aggressive drilling plans for the next two years; we are continuing to add opportunities routinely. We are targeting production rates
above 2,200 boe’s per day by year end and see no reason that we will not achieve a minimum of a 50% increase in production over
that rate for 2009.
D.P: Is there an exit strategy?
L.S: We think that if we spend our time developing our plays and increasing our cash flow and maintaining a nice inventory of drillable
prospects, at some point our door will be knocked down by bigger fish wishing to give us good value for our shareholders.
Until that time, we are quite happy doing our jobs and creating value through increased production and reserve adds. We are gaining
attention as we go along here quite nicely.
D.P: In the oil and gas business you have to have an idea of where you think oil and gas prices are going to be? I don’t know how
good your crystal ball is, most of them are pretty cloudy these days, but if you had to guess where oil prices and gas prices would
be Christmas of 2009 looking down the road, what would your guess be?
L.S: Well, I think as far as gas is concerned, I mean it’s probably more volatile than oil, and that is because it’s very difficult to predict
- what the liquid natural gas coming in off shore is going to be. I think it has an affect of about 10 per cent; it made up about 10
per cent of last years North American supply. There’s lots of natural gas coming on stream now from drilling in the States. So it’s a
very much a supply and demand and still more North American locked price than its probably ever been, so I suspect that we are not
going to be much different than we are now a year and a half from now, or the exit 2009. I would say we are going to be at $6.00 or
$7.00 Canadian, perhaps for natural gas. For oil, the biggest factor is how does the world economy come out of the current mess. I
tend to be optimistic; I think most people that are in the oil and gas business and particularly the ones that are out drilling have to be
optimistic. If you get into a tail spin of pessimism you’ll end up losing every time. So I am optimistic that the world will survive and
continue to grow. I think mankind and the amount of intelligence and opportunities that are out there and cash worldwide we will
continue to growth and energy will be in demand for a long time. So then it’s just a matter of balance. I am looking for high eighties,
low hundreds at the top end. I don’t think we are going to see much lower than $80.00 a barrel and at that rate we’ll do just fine in the
projects that we are doing.
D.P: Well that’s good to hear. Now there have been a lot of oil and gas stocks, good stories crushed in the market melt down. If you
had to buy one, other than your own, what would it be?
L.S: There’s a small company called New Lock that I like. In general I have been tending to stay away from stocks that are heavyweighted
in Alberta just because we still don’t know what impact the royalty change is going to have. I like companies that are in
Saskatchewan preferably, but that New Lock seems to be undervalued at the present time.
D.P: Congratulations on your efforts in the past year and we will be talking to you shortly.
L.S: Thank you very much. |
