₪ David Pescod's Late Edition June 11, 2007
AN INTERVIEW WITH JOHN CLARKE
EXECUTIVE VICE PRESIDENT, CORPORATE,
CANDAX ENERGY
(As of June 5, 2007)
We are with John Clarke, who for a couple of years in a row, was voted Canada’s top oil and gas analyst and he decided to leave all that and actually go into an oil and gas company for himself and then suddenly it wasn’t as much fun for a while, right John?
John: No, there was fun involved with it David, but it was broken up with the combination of several frustrating events during the first year.
Dave: Why don’t you tell us a little bit about Candax Energy’s past history?
John: Candex was a company that didn’t come together until late in 2004, so it had a quick start in 2005, acquired some producing assets with exploration upside, raised money to purchase those and got listed by August of 2005. So we’ve been a public company for just about two years and we have had some problems. We are looking at 2007 as a turn-around year, having only one year operating experience prior to that. We started out very fast, we had a couple of problems, one with a contractor we hired to develop our offshore El Bibane field and then with a very frustrating exploration success that we couldn’t test at commercial rates and so that’s been a teaser in the market. Although 2006 was very sobering, I’m confident with the changes that we’ve made this year, bringing in more operational fire power with a very strong COO, hiring a new drilling contractor etc. that 2007 is a turnaround year for us. The Titania drill rig is currently offshore Morocco and is due to arrive in the Mediterranean in the near future and we should have the program started by the end of June, early July.
Dave: Now this offshore rig problem, it’s a world-wide problem, isn’t it? And it has delayed your programs by what, a year?
John: Yes. We signed the original contract for mobilization in January 2006 and it wasn’t until 12 months later that we terminated the contract because we couldn’t see them ever getting it right. The original contract was for a purpose-built jack up barge with a rig put on top of it. The problem in replacing that contract being that there are only about 25 rigs in the world that can work in this shallow water depth. Although we are 18 km offshore, we are only in about 20 feet of water in some places, which limits the number of rigs capable of drilling in this kind of environment.
Dave: At this point, there are still a couple of analysts following you, but I guess the important thing is that you can see year-end oil production this year of as much as 3,000 barrels a day and you have upside unrisked exploration potential of as much as $7.00 a share…
John: That’s right and the exploration potential has always been there. We had a year end reserve report by Rider Scott, a well-known independent reserves engineering firm, which gave us approximately 850 TCF of contingent resources on the upside on the Chaal Prospect.
Chaal was the exploration discovery that I mentioned earlier that we couldn’t get a test on because of heavy mud in the well bore.
The good news is we know we are in a petroleum system and it’s just a question of finding the best way to drill an appraisal well. Then we also have two deep prospects at the Triassic level underneath our existing producing fields at El Bibane and Ezzaouia. The Triassic reservoir is prolific in North Africa, running from Algeria through Southern Tunisia and into Libya. We see this as a fairly low risk exploration prospect. In fact, the only risk we can see is in reservoir. We have structure, we have seal, and we have source, so if you doing a Monte-Carlo simulation (for all those great gurus out there), I would say this has at least a 20% chance of success. Between these two structures, we have potential for multiple TCF’s and lots of associated liquids.
If you look at our 60% interest in Chaal and an average of a 30% working interest in these two deep Triassic prospects, we have over $1 billion value there – albeit un-risked, which works out to over $7.00 a share. When I say un-risked, it really is un-risked. It’s a wildcat play, you can risk it or play around with the chance of success, but if we hit, it’s not risked value anymore, it’s actual dollars in the bank.
Dave: What are the schedules for these plays and when would you expect results on them?
John: Both plays are deep and we expect both to be high pressure. They are approximately 5000 metre wells, but we are sharing risk with a number of partners for both deep Triassic prospect at Ezzaouia and also in the Chaal well. Ideally we would like to get a rig capable of handling the depths and pressures in both wells. In Canadian parlance it would be a triple we are looking for, basically to go down to 5000 metres. We are talking with the top drillers in the world for managed pressure drilling or under-balanced drilling, and we are looking at about a six months wait time for a suitable rig. I don’t think at this point in time we can hope too much for a spud date before late this year. I would say at the earliest we will be trying to drill by the end of this year and if not then hopefully in the first quarter of next year.
Dave: The question I should be asking about at this time?
John: I think you should be asking about what I think of where the stock price is now, what’s the NAV value, and what was the impact of the press release today?
Dave: I’m so glad that I asked that question!!
John: I’m glad you did too, David. Let me just say that at year end 2006, we had an NPV on the reserves of about $106 million and $51 million in the bank, so that gave us somewhere around $0.93 a share NAV value. The press release today ran the stock up from $0.66 to close today at $0.75, so we were 13% up on the day, but we are still a long way away from our NAV value.
There is currently nothing built in for exploration upside, and quite frankly I think the market is looking at us to deliver on expectations. Last year shareholders and the Company were frustrated by continued delays on our expectations to start drilling, but this time we believe we will be able to hold to our schedule and deliver on the production growth. I would say that Candax is still very undervalued and even if our operational results take us back up to our NAV value with no upside speculation, that would be quite a boost from today. The news on the Ezzaouia workover program was very encouraging. We guided the market to expect Candax to net out an increase of about 200 bopd, and we’ve netted out 1,100 bopd and we are very pleased about it.
We don’t know quite how big the reserves are behind this production increase, but we are re-evaluating the whole Ezzaouia field for potential higher production levels by exploiting both Jurassic and Cretaceous reservoirs, and hope to see further increases as we implement our in-fill drilling program later this year.
We are going to drill two in-fill development wells and we may do so more work-overs. So we are very, very happy with the results and I am pleased to see that reflected in the jump in the share price today.
Dave: Any surprises working in Tunisia?
John: Not really. You tend to realize that everything is slower than you want it to be anywhere in the world and that’s just exaggerated in the International scene. We don’t have easy access to rig fleets, and we negotiate with the Government and also work with them as partners. It was sobering last year on many levels but we are now more inclined to go with the tested and true in this environment and that’s what we’ve done this year. We have re-shaped our organization, we brought in some heavy operational expertise and trimmed the ranks, and I think we are hungry and are keyed up to take our operations by the scruff of the neck and drive forward.
Dave: So meat and potatoes work for the next few months and then it gets exciting near Christmas?
John: Yes, I think that describes it pretty much. There’s an in-fill drilling program for two development wells that will happen before the end of the year and hopefully we can announce the contract for two exploration wells to start drilling by the end of the year or early next year. Yes indeed.
Dave: Now you used to be a former award-winning oil and gas analyst, what is your take on the oil and gas market for North America?
John: I think a lot of people are crying wolf. I mean we have a sustained oil price here over $60, and contrary to what you were saying when I told you last winter that I thought that gas price would average $8.00 in 2007, I still think we are probably likely to get that. At these prices I think you can make money if you are in the right place and if you’ve got low cost operations – I still think the Oil & Gas sector is still a great place to be. I don’t see it changing dramatically over the next five or ten years. The demand is there and the supply is somewhat constrained.
Dave: One thing that has changed is the Canadian dollar.
John: And what’s wrong with that? When I arrived in this country it was trading at $1.03 to the U.S. greenback and I thought it was great! Are you going to do the Chinese trip on me and say we can’t export our goods because they are too expensive? It’s oil, a global commodity … and if it’s trading at $60 WTI and Edpar is the same price, that’s what it should be.
Dave: Now if you could put on your stock picking what, we need one stock pick from you and naturally we would expect (with your high standards, particularly now that Niko has performed so well which was one of your picks way back at $8.00 and here it is at $90) it to do well…
John: I’ve always said that Niko would be a $100 stock. It depends when Mr. Sampson decides to sell out I guess. I know there is a lot of acquisition interest from many regions around the world, and I still think that NKO will be in excess of $100 when it disappears.
People say I sometimes play favorites, but I’ve always stuck with the International companies because I think they offer more upside, and I was lucky enough to get on that ship early on. That’s what happened to the Rallys, Centurions, Nikos and even the First Calgary's. All of those stocks were tremendous growth stories. So I’ll stick with my International explorer hat on – and I’ll say that I like Antrim Energy very much. Right now it is doing very successful bread and butter work in Argentina. No one pays too much attention to that because they don’t have the 1000 plus bopd oil wells, but their production has been growing steadily and they are well placed. I also like their Causeway play in the UK North Sea. It’s drilling right now I believe, so I wish Antrim and my friend Stephen Greer all the best and I’ll punt with that one.
Dave: Thank you very much Mr. Clarke!
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