CEO Interview - Hurricane Hydrocarbons (Long!)
Warning: Hurricane has already risen 220% since I first added it to the litter...
Ref: Message 14489745
Chart: 207.61.23.98
Please read no further if you are afraid of exposing your own portfolio to this type of downside. ;-)
Seriously, though, I can honestly say that this little guy could easily become the first 5-bagger in the Runts portfolio.
(Note to Slider: Precious Metals Quiz... If a two-bagger is merely a "golden hook", what is a five-bagger? <gg>)
Best regards,
Razor
-----------------
BERNARD F. ISAUTIER - HURRICANE HYDROCARBONS (HHLa.TO)
CEO Interview - published 08/21/00
The Wall Street Transcript
DOCUMENT # KAL620
BERNARD F. ISAUTIER was appointed Chief Executive Officer of Hurricane Hydrocarbons Ltd. on September 28, 1999, and Chairman of the Board and President on October 18, 1999. He has been a Director of Hurricane since March 19, 1996. He has a degree in Mathematics and Physics from the Polytechnique School of Paris, an Engineering degree from the Mining School of Paris and a Masters of Business Administration from the Institute of Political Sciences in Paris. Mr. Isautier is currently a Director of a number of companies, including Lafarge SA, Firan Corporation. From 1993 to 1995, he was President and Chief Executive Officer of Canadian Occidental Petroleum Ltd., and from 1990 to 1992, he was Chairman and Chief Executive Officer of Thomson Consumer Electronics Company, a French electronics company. Prior to 1990, Mr. Isautier served as President and Chief Executive Officer of Polysar Energy and Chemicals Corp. in Toronto, Canterra Energy Ltd., and Aquitaine of Canada in Calgary. Early in his career, Mr. Isautier served as an advisor to the French Minister of Energy and Industry, and as an advisor on uranium development to the President of the Republic of Niger. Mr. Isautier is a citizen of Canada and France.
Sector: Oil & Gas Drilling & Exploration
TWST: Could we start with some history and an overview of Hurricane Hydrocarbons Ltd., just to set the stage for the readers?
Mr. Isautier: Hurricane Hydrocarbons has operations exclusively in the Republic of Kazakhstan in the former Soviet Union. We are the largest private integrated oil company in Kazakhstan. As such, we are a large producer of crude oil in east central Kazakhstan and we also own a refinery, which supplies about 50% of the refined products that are consumed in Kazakhstan. We are the market leader for refined products.
TWST: How did a Canadian company end up operating oil in Kazakhstan?
Mr. Isautier: Hurricane was a junior oil & gas company in Canada. It originally started out with a number of Canadian oil & gas properties. Then in 1996, when the Kazakhstan government began privatizing numerous assets — one being a state-owned oil company operating the large Kumkol field — Hurricane was successful in acquiring it. This asset has become so important for Hurricane that we recently disposed of our Canadian assets.
TWST: What is the production in Kazakhstan?
Mr. Isautier: Current production is about 90,000 barrels per day.
TWST: What’s the outlook for production?
Mr. Isautier: The outlook is growth. We have experienced growth since we acquired this asset in 1996. In 1997 we produced about 45,000 barrels per day. The budget for the year 2000 is about 80,000 barrels a day. We may exceed this budget because we’ve recently established a new record of production at over 91,000 barrels per day. By North American standards, we would be a very significant oil producer.
TWST: What are your plans for that market in terms of additional drilling?
Mr. Isautier: First of all, we believe that we can increase production of our producing fields by just applying more modern western technology. With very little capital cost, we can increase production from the wells that are already drilled. Some wells are shut-in for various reasons. By applying more efficient production techniques, we can increase production. In addition, we are seriously considering the development of three fields that currently are not on production. This decision has not yet been made, but it’s likely to be made before the end of this year and it’s likely to be positive. That would bring an additional 120 million barrels of proved and probable reserves on production and these new fields could be connected by the third quarter of 2001. We also have exploration potential. Before the end of this year, we are going to drill two exploration wells. These wells are very inexpensive, costing approximately US$0.5 million each to drill. The reserve target of these exploration prospects is quite attractive. One of the prospects has a reserve target of about 30 million barrels. The second prospect has a reserve target of about 60 million barrels. To put it into perspective, 30 million barrels is about our current annual production. If these exploration wells are successful, it would represent a very low finding cost. If they are not successful, the cost to the company, would be negligible.
TWST: Are these just step-up wells from current production or are they new fields?
Mr. Isautier: They’re new pools, separate. However, these pools are closely located. One is about 10 kilometers from the existing central processing facility. The other one is about 30 kilometers from the existing processing facility, and would be inline with the pipeline that is likely to be built to connect the three proven fields that were mentioned earlier. The cost to tie in these exploration targets, if successful, would also be minimal. Maybe I should take advantage of this question to stress that we have extremely low finding and development costs. By North American standards our costs are really very low. For instance, regarding the three fields I mentioned earlier, the cost to bring them on-stream would be about US$1.20 per barrel.
TWST: Why is it so inexpensive?
Mr. Isautier: Because by North American standards our fields are big fields. They are shallow. The cost of labor in Kazakhstan is low. The nature of these fields is favorable with high permeability and good porosity. For a North American oilman, these fields are dreams.
TWST: Looking at Kazakhstan, what is the political situation?
Mr. Isautier: The political situation in Kazakhstan is very good. The leader of the country, the President, has been in charge for quite a few years already and has been recently reelected until the year 2006. The record of this President is quite consistent. He has the will to bring his country to the free-market economy. He is strongly in favor of foreign investment. Over the last number of years, he has gradually introduced modern legislation that in many cases was prepared by outside foreign advisors. The country has already made tremendous progress over the last number of years. You have a legislative framework that has become quite complete, comprehensive and of good quality. The country is well regarded by the international financial community and has raised debt in the international markets a number of times. The current credit rating for Kazakhstan is B-1. It’s important to observe that this country is rich in natural resources where oil and gas resources are first and foremost. There are many international oil companies that are investing in Kazakhstan. Virtually most of the major international companies are investing in Kazakhstan. Chevron was one of the first investors, but you also have Mobil, Texaco, Phillips, TotalFina, British Gas and Lukoil — just to name a few. The country’s oil production is increasing quickly. Part of the Caspian Sea is controlled by the Kazakhs, which is considered one of the most attractive exploration plays in the world where currently a number of consortiums are looking for huge oil reserves. Early indications are extremely encouraging, so the country is really booming on the oil and gas side.
TWST: Russia is plagued by problems of corruption. Is that an issue in Kazakhstan?
Mr. Isautier: No, we have not been exposed to these problems in Kazakhstan. It’s a country that is run with discipline. Russia and Kazakhstan are two different countries, two different structures and two different work and business methods.
TWST: There have been problems with enforcing contracts in most of Russia. What’s the story in Kazakhstan?
Mr. Isautier: Our experience is that we are always able to enforce our rights. You have to deal with the bureaucracy. Sometimes it takes a little while to get through the administrative process, but this country wants foreign investment and is committed to its contracts. The peculiarity of Kazakhstan is that in many cases you get the support of the Ministry of Justice when you have a problem.
TWST: As we look out over the next two or three years, what will be Hurricane’s strategy?
Mr. Isautier: Hurricane’s strategy is focused on the creation of value for shareholders. We see a wide range of opportunities to create value. In many cases we can create value without capital spending and this is a very nice situation to be in. In some cases, we need to spend capital, but as I said earlier, the capital requirements are modest as compared to the usual capital requirements of oil and gas companies. How do we create value? On the up-stream, by production first. Number one, it is better exploitation of our producing fields using western technology and I have alluded to that earlier. We see the potential to re-complete some wells, to put on-stream some wells that were shut down, to install pumps with modern technology, and although this is very simple to say, the results can be quite spectacular. So that’s number one — very little capital involved. Number two, the development of new fields that are proved or probable, but not on-stream. I have mentioned the three fields that we are contemplating to develop. Third, exploration. We will increase our exploration effort. We have a large acreage position and the exploration potential is virtually untapped. Fourth, we would look at acquisition of proved or semi-proven reserves in the area where we operate to further increase the reserves of the company. Another part of our upstream strategy is to improve the prices we obtain on our crude oil sales. We export a significant portion of our production but this export business is fairly recent. As we gain experience, we are getting better prices. We are more efficient in terms of logistics. We are doing more of the business ourselves, eliminating intermediaries. Also, our product is better known by the customers and they’re acknowledging the better quality of our product. Our crude is light oil, a premium crude to Brent, while most of the crude coming from this part of the world is a Ural blend which is a heavier and lower quality crude. As our product is better known in the market place, we get better value and better recognition of the quality. In addition, the export business, which is recent, is growing as a proportion of our total production and export netbacks are currently better than domestic netbacks. We’ll increase the proportion of exports in our total sales and that will also increase value for our shareholders without capital spending. Finally, although we have recently achieved some significant cost reductions, we believe we can continue to cut production costs even further. Operating costs are currently at about US$2 per barrel, including all G&A, which is a very low number by North American standards. In terms of organization, we are moving from the standard Russian type of organization. We were doing everything internally. The western way of doing business is to use specialized contractors for a number of services. We have moved 95% in that direction. We can now focus on our business, which is to produce oil and use specialized subcontractors for various services. That results in better efficiency, better services and lower cost. That’s the upstream strategy. Now for the downstream, the refinery. Our strategy is to undertake a number of capital projects that are relatively modest in terms of dollars, but that provide very high return. These projects fall into several categories. One category is energy-saving. We can save on internal consumption of energy that will increase the amount of crude for refining. We can increase the quality of our refined products and we have some projects that will allow us to improve the yield of higher-priced products. To be more specific, some investments will allow us to produce more gasoline and diesel and less heavy fuel oil. Gasoline and diesel attract better prices than heavy fuel oil. To be complete and to continue on the refinery, we have the opportunity to reduce operating costs by a more efficient use of our labor force. We can also improve the distribution system. The distribution system in Kazakhstan involves many intermediaries. By going directly to the customer we can capture a portion of the margin that is currently lost in the distribution network. It’s a very exciting situation. We see many opportunities for improving our returns with very little capital.
TWST: Where are you selling your product today?
Mr. Isautier: As far as refined products are concerned, we sell the bulk of our refined products in Kazakhstan, although we are also exporting some quantities of refined products into foreign markets. With regards to crude oil, we are exporting mainly to Europe. However, we just recently signed a contract with the Chinese National Petroleum Corporation, and in late June we started exporting to China. China is a very logical market for us because it is close to our operations.
TWST: Is that potentially a big market for you?
Mr. Isautier: Potentially, yes.
TWST: What do you have to do to accommodate that market? What changes, if any, have to be made?
Mr. Isautier: It’s not an issue for us. We are ready. The railroad is in place. The terminal for trans-shipment is in place. The ball is really in the court of the Chinese. The Chinese National Petroleum Corporation is a state-owned company. It has its own pace of decision-making and we are dependent upon their decisions. From an economic standpoint, these exports to China are clearly beneficial to them, as much as they are to us. But it takes a while for market realities to prevail.
TWST: Who are you competing with in Kazakhstan?
Mr. Isautier: As a producer, we are subject to the competition of other foreign companies operating in Kazakhstan but these competitors are not well positioned in the area where we operate. With regard to refined products, we operate in a free market. There are other refiners. There are importers from Russia, Turkmenistan and Finland, so our refined products have to be competitively priced.
TWST: Do you have the management team to carry out what you want to do over the next couple of years?
Mr. Isautier: We are expanding our management team. We already have a good team but as we undertake new projects we will need to add to our management team. Gradually as we develop our strategic plan for investing in either of the other parts of Kazakhstan, or in other countries, we will require further additions to our management and professional team.
TWST: Why will you have to move to other areas?
Mr. Isautier: We anticipate that our cash flow will significantly exceed the requirements for capital expenditures in the area where we currently operate. Most oil and gas companies in North America have to virtually reinvest 100% of their cash flow to maintain current production level or grow it. In our case, we can achieve excellent growth by just spending a fraction of our cash flow. This means that we will most likely have excess cash resources, given the projects we are currently contemplating. A part of the excess cash could be used to pay out a dividend to shareholders or to implement a share buyback. A part of the cash could also be used for further acquisitions in new areas in Kazakhstan or in other parts of the world.
TWST: For investors looking at your company, what kind of growth should they expect from Hurricane over the next two or three years?
Mr. Isautier: We are prudent in terms of making forecasts because forecasts of earnings are so dependent upon future oil prices and predicting future oil prices is a very difficult and risky exercise. So unfortunately, I cannot give you a number. What I can say is that in terms of production growth over the next few years, we should be able to maintain the same kind of growth as experienced in the last few years.
TWST: Is that assuming that oil prices stay somewhere around current levels?
Mr. Isautier: No, even if oil prices were to return to more traditional levels, given that the economics of our projects are sufficiently strong, we would still proceed with these growth initiatives.
TWST: As CEO of the company, where are you spending your time right now?
Mr. Isautier: I spend most of my time in the UK. I go to Kazakhstan on a regular basis. I go to Russia from time to time, and I also spend some time in North America — particularly to meet with shareholders, investors and financial institutions.
TWST: How do you feel about the value the market is currently putting on your stock?
Mr. Isautier: I feel that the market doesn’t really understand the company. We have only four oil analysts who currently follow the company so the story hasn’t yet been widely disseminated. The company has changed dramatically over the last six months and these structural changes, particularly the integration of the refinery in our operations, has not yet been understood by the marketplace. This means that at this time the market is extremely severe to the company, in terms of valuation. To address this problem, we intend first to deliver a consistent performance that will speak for itself. We are trying to be better known in the investment community. We continue to meet with institutional investors. This past June, Hurricane was a participant in the largest oil and gas investment conference in Canada held in Calgary, Alberta. Over 300 portfolio managers and oil and gas analysts from across North America and Europe attended this conference. I am confident that over the next six months to a year, Hurricane will be better known, understood and appreciated by the marketplace.
TWST: When you went out and made your presentation, what two or three reasons did you give investors to go out and buy your stock?
Mr. Isautier: The main reason is that we are a company with a long reserve life index of about 16 years, including proven plus probable reserves. Our production has been growing and will continue to grow. Our reserves have been increasing and we have every reason to believe this trend will continue. This growth will be achieved at minimal capital cost. Our operating cost has been dropping and will continue to drop. Our netback, particularly through access to the export market, has been improving. Our proportion of crude oil sales going to the higher netback export market is increasing. Our refinery has the potential for cost reduction at minimal capital cost. We are positioned for exploration and acquisitions. We have an exciting growth story! It’s a story of creation of value for shareholders and all that comes with excess cash flow generating capacity. Frankly, I don’t think there are many companies that have all these features. Investors need to understand Kazakhstan better. Once they’ve done their homework on the economic and political dynamics in Kazakhstan, I think they will feel more confident investing in Hurricane.
TWST: Thank you.
BERNARD F. ISAUTIER
Chairman, President & CEO
Hurricane Hydrocarbons Ltd.
300 Fifth Avenue SW
Suite 2700
Calgary, Alberta
Canada T2P 3C4
(403) 221-8435
(403) 221-8425 - FAX
www.hurricane-hhl.com
e-mail: hurricane@hurricane-hhl.com
Investor Relations contact:
IHOR P. WASYLKIW
Vice President Investor Relations
(403) 221-8658
(403) 216-8646 - FAX
Each Executive who is the featured subject of a TWST Interview is offered the opportunity to include an Investors Brief or other highlight material to be provided and sponsored by and for the company.
To ask a question of this or any other publicly traded company, visit QAWire.com
Copyright 2000 The Wall Street Transcript Corporation
All Rights Reserved
The Wall Street Transcript (TWST) interviews are published verbatim, and TWST does not in any way endorse or guarantee the accuracy of any information or opinions expressed herein and all opinions are subject to change without notice. Nothing herein constitutes a solicitation to buy or sell any securities. TWST interviews with CEOs may include include "forward-looking statements", which are based on factors that involve risks and uncertainties. Actual results may differ materially from those expressed or implied. TWST shall have no liability whatsoever for any trading losses arising out of use of this information. Copyright 2000 Wall Street Transcript Corporation. All Rights Reserved.
twst.com |
