₪ David Pescod's Late Edition April 25, 2007
Interview with Darren Katic
President of Pacific Energy Resources
(From April 17, 2007)
One of our favorite oil and gas stock pickers over the last
year or two, who’s done amazing at picking stocks, has
been Andy Gustajtis of Dominick and Dominick. With the
huge move in Rally Energy and some of his other favorite
stocks, he’s had to change his top picks and now Pacific
Energy Resources is his number one pick. It was time to
visit with the Darren, of Pacific Energy, to get an update on
this story and this is a confusing story, isn’t it?
Darren: It is. It’s an unusual story with a lot of moving
parts and a complex execution strategy, but I think as it
plays out over time the shareholders will benefit greatly as
we succeed through that complex strategy of primarily
bringing Platform Eureka back online and of course ultimately
fully redeveloping the Beta Field – offshore California.
David: This offshore California oil – you’re actually getting
producing fields from Majors, which isn’t usually the way it
happens….
Darren: No that’s right. Over the last few years the Majors
with the exception of a few offshore platforms have divested
themselves of these assets – primarily because
they’ve become small opportunities to them, as well as, I
think strategically they’re moving out of California, and in
their wake they have left a lot of good opportunities. There
have been a lot of successful companies built on this strategy,
that have actually grown into mid-size independents
you know the Plains Energy and Venoco Inc. – some good
success stories), but we feel we have actually one of the
most attractive assets offshore with big reserves and an
unique situation where you have almost 5,000 barrels a day
shut in only because a pipeline that connects Production
platform Eureka to processing platform Elle needs replaced
(Approximately a 2 mile line).
David: How big are these two fields and how soon can total
production been seen?
Darren: The Beta Field is essentially a complex of three
offshore Platforms - two producing Platforms (Ellen and
Eureka) and one processing Platform (Elle). The Ellen
Platform is currently producing about 2,100 barrels a day
and Eureka is currently shut in, as I have mentioned.
Now, we believe that ultimately we can recover an additional
65 million barrels as indicated in our reserve report.
It could be closer to 100 million barrels depending
how affective some of our enhanced oil recovery techniques
pan out, but it is a big field - 600 million barrels of
original oil in place of which only about 100 million barrels
have been produced, which is very low recovery factors
for a field like this.
David: Now, it is quite a story of how you actually got
these fields from the Majors. Which Majors were they
and didn’t it take like 18 months to get these negotiations
done?
Darren: It did. We essentially acquired the field from a
company known as Aera Energy (LLC). It’s the largest oil
producer in California - producing almost 200,000 barrels
of oil a day. Aera Energy is owned jointly by Shell and
ExxonMobil at about 50% each.
So you can imagine - this relatively small asset for
them inside a large company like Aera which is in turn is
owned by two giant companies, ExxonMobil and Shell. It
was hard for us to get their attention, of course, a small
asset to them we believe is a company maker for us.
It took us about a year and half to negotiate the purchase
of the asset and then of course a few months to go
through the regulatory process and now we own 100%
working interest in the Beta unit – three federal offshore
leases as well as the transport pipeline - and we are approved
by the US federal government as the owner and
operator of the oil field.
So, it was a huge undertaking for a company of our
size not only acquiring the asset from Major oil companies,
which are historically more difficult to deal with, as
well as regulatory hurdles.
David: What kind of a production do you see from these
fields down the road and secondly and possibly more
importantly, how nervous should one be about having an
oil and gas asset in California?
Darren: Well, we ultimately feel comfortable that the field
can produce north of 10,000 to 12,000 barrels a day, and
possibly even higher depending on EOR activity. In its
“hay-day” in the 80’s when these Platforms were installed,
it produced well over 20,000 barrels a day.
This particular asset has never gone through the natural
progression that we see in oil fields where they first
are produced by the Majors then divested to small independents
then again down to smaller companies and so
on and so forth and ultimately go through the redevelopment
phases, so this is the first round of redevelopment
phase for Beta and we feel comfortable that
it can produce conservatively north of 12,000 barrels a
day.
In terms of the United States – California is a major oil
producer (number four, behind Louisiana, Texas and
Alaska). It produces close to a million barrels a day, not
to mention the State’s natural gas production. Of course,
it uses 2 million barrels of oil a day so domestic production
is very valuable here in California.
We’re one of the largest producing States in the country
and if you look at recent M&A activity in the United
States, and I can’t speak for Canada, but California production
per producing barrel sells pretty much higher
than any State in the country.
That’s primarily due to the long life nature of California
reserves such as the Beta Field or Wilmington Field,
which is where we have some of our onshore production.
That field, Wilmington, was discovered back in the 1930’s
and is still producing over 40,000 barrels of oil a day.
David: Now the other area of the world that you have
interest in is Wyoming, which is an area that has been
very kind to companies like Ultra Petroleum and others. If
you could give us an update there?
Darren: Sure. As you know we T.D. our first exploratory
well in the Pacific Creek Project back in February (it’s
called) Paladin in the Green River Basin area of Wyoming.
It was a deep test and it’s close to the Jonah Pinedale
Fields. We plan on completing the well in July once
the Sage Grouse mating season is over.
We have 500 to 700 feet of perspective pay that we
plan on a complex fracture stimulation job during completion.
We are incredibly excited about the well, we
think it will be a productive well and the really exciting
part of it is that if the well does turn out to be a productive
well, which we believe it will, this thing will be a giant
discovery, the aerial extent is so big that it really would
be a huge, huge discovery!
David: This is not a cheap deal you did with Shell there is
it?
Darren: It’s not! We have one more well to drill to earn,
we spent about $4 million on seismic, we spent about
another $4 million drilling the well and we have spent
about $1 million so far on completion activities and we’ll
spend some more. Of course, we have another well to
drill, the Ranger well, which we plan on drilling after we
complete Paladin.
It’s an expensive undertaking to earn a 40% working
interest in 100,000 acres, but given everything that’s going
on around us, not a bad deal at all in this really hot
area, lets see how the wells test and then we will know. I
think Questar Resources is having some deeper success
recently, I think they press released that they had 11 million
cubic feet a day out of I think what they call the Baxter,
and we have that all under our lease too.
So we actually in the process of modifying our Ranger
well plan to go down and test some of the deeper formations
that have proven successful near by us! It continues
to look better and better as our offset operators in
the area continue to have success.
David: As we stated, this is a little bit of a confusing
story – a California company trading on a Canadian Exchange
– that’s going to be taken care of shortly right?
Darren: That’s right! A U.S. company traded up in Toronto
is not a structure one would design; it was something
that we inherited from a business combination we
did rolling up some of our onshore assets.
To get to the critical mass that we wanted to pursue
the offshore transaction – as part of recent financing we
have started the undertaking of listing in the United
States, we will file a registration statement with the SEC
within the next 45 days and hope to be through that process
shortly after (six to eight months) after we file.
And of course, if one is going to go through that process
it makes sense to go ahead and list on a US Exchange,
which we are hopeful we’ll have completed by
the end of the year.
David: Well let’s look at what can go wrong? What can
go wrong in California that might cause you to lose
sleep?
Darren: One distinction that’s important about our offshore
assets is that we are in Federal waters and the
main jurisdictional body over the assets is the MMS,
which is the federal agency US department of Interior.
Essentially we’re under the same types of rules that
they have in the Gulf of Mexico - in terms of getting drilling
permits, which is not the case for all the platforms in
California.
So, we’re not in as difficult regulatory environment as
one would think just being offshore California, but having
said that there are hurdles here that we feel confident
we can get by, but I think our risk is really in execution.
As far as our production development goes (non exploration
activities) we don’t feel we have geological risk
given the amount of well control and other data points
we have, we don’t have transportation risk in as much as
we own our pipelines to market and we don’t have Hurricane
risks, which of course recently has been a big issue
for offshore producers.
So, you know, being in the oil business there are certain
risks that one can not avoid and I feel our risk profile
is very low compared to a lot of other companies and just
really being limited to execution risks - drilling risks essentially.
David: The last question we usually ask our Company
Presidents is, if you had to buy another stock other than
your own and you’re going to suggest to your best
Buddy a stock that might be a double down the road,
which one would you pick knowing that it can’t be your
own or one that you have a conflict of interest with?
Darren: Well, just being in California and following a lot
of the California public entities down here, I have been
following Breitburn Energy (NASDAQ:BBEP) which just
recently did a public offering and I am familiar with some
of their assets and their management, I also think we will
be seeing a lot more of the LP structure down here in the
US. I think that they have been a good success story and
I also like their stock.
I also think Venoco Inc. (NYSE:VQ) is a very good
stock.
They have also recently gone through the public process
and their stock was a little beaten up out of the gate, but I
think it’s a good buy. I also think that they have some
solid assets and I am familiar with those assets.
They are one of our competitors, but they produce
offshore and onshore California. I think that they are
both solidly managed companies and I like their asset
base.
David: Okay one last question. A year from now what
will the price of oil be and the price of gas?
Darren: A year from now……let me get my “crystal ball”
out and take a look! You know it is an interesting discussion,
we’ve been looking at the possibility of hedging
some of our onshore production, but I am bullish on oil.
I think that oil will remain between $60.00 and $70.00 –
and possibly go higher depending on what happens politically
around the world. Long term, I think both oil and
gas will remain strong.
I am a little bit more nervous with gas in the short
term then I am with oil, but being an oil guy I have more
of a long term vision and try not to worry myself too
much with the short term fluctuations in commodity pricing.
Basically what our strategy is to have a certain
amount of commodity hedging to remove some of the
short term volatility, particularly as it relates to whatever
your company breaks even is – in terms of your debt
load and every thing else. I think it’s a pretty good strategy.
But, I think oil will be $60.00 and $70.00 and I hope to
see gas move higher towards the $8.00 or $9.00 range. I
am not sure it will in the short term, if I had big gas production
I would probably be hedging it right now.
David: Thank you very much for your time, Darren.
DEB’S DITTY:
I told my husband whenever I’m down in the dumps,
I buy myself a new outfit.
He told me, “Oh, so that’s where you get them.”
If you would like to receive the Late Edition, email Debbie at debbie_lewis@canaccord.com
.... I apologize for not formatting this issue so it is more readable ... but I am still under the weather and that is not a priority today.
Merry |
