₪ David Pescod's Late Edition September 28, 2007
AN INTERVIEW WITH MICHAEL GREENWOOD, CHAIRMAN, CEO AND DIRECTOR PACIFIC RODERA ENERGY (As of August 30, 2007)
We kind of like Don Coxe’s view of the world in that commodities are going to be good for the next while because of demand out of India and China. Needless to say, there's been a bump in the road here, but his view of the world is not the only one out there, so it’s time to go visit with Mike Greenwood, who used to be Peter Brown’s sidekick at Canaccord and he’s the guy given credit in a big way for helping develop Canaccord into be the biggest independent retail brokerage house in Canada.
D.P: Mike, your view of the world has a decidedly short term bitter gloom shall we say?
M.G: I think there’s gloom, but it’s an opportunity with a silver lining for those who have cash and are value buyers, and I’d have to describe myself as a value buyer. We are coming into a cycle here, in particular with natural gas at low prices for some period of time, probably 18 to 24 months. This will discount the valuation of oil and gas properties as well as the value of public and private companies. That’s going to present a lot of opportunities to buy at the bottom of the market.
D.P: Okay, now this is a little longer term than you had suggested before – 18 to 24 months in the market these days seems like forever.
M.G: What I’ve stated before is that we are heading into a credit cycle. Credit cycles last up to three or four years and we are probably at about 11 months into this credit cycle now. The really big bite in the credit cycle happens in year two. The other factor that’s come in over the last year on the natural gas front is you’ve seen the Americans actually increase their drilling by about 25% which more than offsets the reductions in drilling rates here in Canada and we’ve experienced a material increase in the amount of LNG of 3 Bcf/day going into the United States.
Also, as a result of the last Katrina event, a lot of people had factored in the possibility of another heavy hurricane cycle, and basically went back and made all of those large production platforms category 5-plus capable. Another heavy hurricane cycle doesn’t look like it’s going to happen, and even if it does, there will not be the reductions and downtime. So, there’s a big gas bubble out there right now, storage reserves are at their all time highs and that’s going to create an overhang for some period of time.
D.P: Now, your focus is definitely natural gas, but while we’ve got you we might as well ask - what do you see for other commodities (base metals for instance)… In the meantime your views for oil prices are still decidedly bullish?
M.G: I’m still bullish on oil, there's a bit of a bubble here for producers in Canada in particular because there's not enough pipeline capacity, but the world is consuming at increasing rates, so I am very bullish over a longer period of time. The commodity cycle, again, I’ve got a bit of a different view. We are going to have a little bit of a dip here which will be, again, a buying opportunity. The dip is going to be driven by the fact that I think the housing market and the increasing foreclosure rates in the US are factors that are going to translate into the negative outcome of a recession. The recession will not only be a U.S recession; it will be a worldwide recession.
You’ve seen a slowdown in the European and Japan economies, and then you take into account that 65-70% of export coming from China/India go to the United States and that most of those things are flat panel TV’s and washers and dryers etc. I think there's going to be a bit of a pullback here or a retraction, so that’s going to take some pressure off of the commodities. One further comment is that, at the top of the commodity cycle, a lot of marginal production comes on stream and it takes a while for the market to absorb that. Again, I think it’s going to be an 18 to 24 month cycle with a lot of upside and it will be a real buying opportunity again during that cycle.
D.P: Now, your focus is natural gas which is definitely amongst all the commodities in the toilet, you had predicted this and you’re looking to take advantage of it through Pacific Rodera. You’ve raised a lot of money albeit at higher prices and an awful lot of people from Canaccord who knew you took place into those private placements. But the one thing that stands out is that you and your family are the biggest shareholders in the company now.
M.G: Yes, I put close to $9 million of my own capital in, so I guess I have to be a believer in myself. Tiger Williams has probably put in a further million/million and a half dollars towards the last financing and on top of that, the board bought more stock. So as a result, the board, Tiger and I own approximately 30% of the company.
D.P: A lot of this paper was done at higher prices too.
M.G: Yes, but you know I’m actually not concerned with that, because what I predicted what was going to happen - is happening – but there is a little bit of an anomaly right now because we are trading at cash, so there is not a lot of value given for the upside in the Northwest Territories or our management abilities to execute a business plan. We’re in a market malaise right now so all stocks go down in that kind of environment, but it’s a buying opportunity and I’d like to be able to buy more stock except I can’t because I’m at 19.9% of the company and I have a restriction in terms to being able to buy, under securities regulations.
D.P: At this time, you still haven’t been able to get the deals done in the natural gas, and you are suggesting there's still a spread between what people think their assets should be worth and what they probably are worth?
M.G: It takes a while for people’s expectation to change. They have to go through the seven stages of change. The penultimate stage is capitulation followed by acceptance, and I don’t think we have capitulation yet.
There are an awful lot of assets coming on sale right now. People are starting to get what the impact is; banks are pulling back or retracting credit, and the markets have pulled back the ability to raise equity capital. All these things take a while to wind through the system. They are going to be grinding in this fall, next winter and spring, I think that’s going to be the bottom of this cycle. It’s our opportunity to get in there and really start to seriously buy things at very attractive prices.
D.P: You’re not only looking for assets in natural gas to purchase, you are also looking for management teams.
M.G: I think that’s the other thing that’s happening now. There are an awful lot of companies out there who did go public and if you look at them today, it’s going to be hard for them to retain their people. They don’t have the ability to raise the capital, their stock options are all under water, so we will depart from a cycle here in Alberta, where getting good quality people is extremely difficult.
Now, if you’ve got capital cash and the ability to attract people, there's an environment where you can actually get the best of the best.
D.P: You’re a big believer that natural gas was going to hit the skid, it has. Now why should we take this bullish thought that you and others are going to scoop up assets over the next while and then we are going to see some
good times in natural gas ahead.
M.G: We are in Hubbert’s Peak and the world is consuming oil and gas at more rapid rates than we are actually finding reserves and so there's going to be a turn- around there.
I think this opportunity coming up is going to be an opportunity to get a large land base, a huge fairway that will allow you to be able to create a real company over a period of time in the future, and this window is the opportunity to construct that. From the perspective of buying low and creating a lot of value, this is the easiest environment to create value for shareholders, even short, mid and long term. We are going to take advantage of that.
An example of that would be, the last couple of years if you are negotiating transactions on farm-ins, probably the best you could do is pay a hundred to receive 50% interest.
It is very hard to make an economic return on that kind of number and right now we’re already negotiating with majors in order to pay a hundred to get maybe 75% or 80%. Now that really starts to drive your economics and you get much higher rates of return. It’s all timing. Five years ago, a lot of the majors were very aggressive on the land sales, but the problem now is they all cutback budgets just at the time when the lands are expiring and they revert to the crown.
As a result, this is the time to be able to cut deals where you can do farm-ins at very attractive rates. Large oil and gas companies in the last couple of years could basically ask whatever they wanted to on a transaction. They are actually on the opposite side now; they are not on a good negotiating position. We are on a better negotiating position and if we can deliver on our promises we made through drilling commitments etc., they benefit, we benefit and we can pick big tracts of land for very low holding costs and very, very low acquisition costs.
D.P: Down the road, one of the big reasons you’re bullish on gas is the big demand from the oil sands, am I correct?
M.G: Yes, right off the bat, probably 10-15% of exported gas, maybe 20%, could be going ultimately to oil sands production because of the requirement for BTU for thermal requirements for the oil separation process.
Given the context of a limited ability to get more LNG in the United States because of the “not in my backyard” scenario, the decline rates overall in North America are at a very sharp 25%, along with the prospects of the amount of capital being committed in these types of projects that are being built and their requirement for BTU’s. That’s all just more fuel for the fire.
D.P: Now let’s get in your crystal ball and your take on natural gas prices in the short run and down the road - say two years?
M.G: Short term is always hard to determine but I said last time that I thought we would see this summer gas prices approach $5.00. Well, we’re in that environment. With gas storage being at the levels that they are right now, you could potentially see gas approaching the lower end of $4.00 ...
D.P: In Calgary it could.
D.P: Any other questions we should be asking you Mike?
M.G: I think that’s it, that’s as good as my crystal ball can predict and there are lots of things that can happen that can make it go wrong too, right?
D.P: Two last interesting points though, you had said previously one thing going on in the oil and gas patch these days are insiders and management don’t own a big chunk of stock in the companies, so they’re not as keen to say, face the distressed sales that you would normally expect at a time like this.
M.G: Frankly, one of the disappointments that I found is that these management groups have so little interest in their company that they really don’t control the direction of the company and unfortunately the outcome of that is a lot of these people are basically trying to retain a job, rather than create shareholder value. so they have a very different motivation.
I don’t even receive salary here until we get production up to some numbers that are reasonable in terms of overhead, relative to production. They pay my expenses. You don’t see that at other oil and gas companies because it’s their job and they get all the upside to the stock options but none of the downside in their own personal account because they have nothing invested in the company. I think that’s problematic. Because of these factors they have less willingness to do transactions such as combinations and mergers; also they have less ability to get those transactions done because they don’t have enough ownership.
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Shortly after this interview Mike Greenwood did announce that they had acquired the management team that would run Pacific Rodera.
Mr. Mark Hornett will become President and Chief Operating Office and he as formerly Operations Manager at Mission Oil and Gas.
Mr. Roger Harman is the Chief Financial Officer and was formerly the Chief Financial Officer of Canadian Superior Energy.
Mr. Andrew Arthur will be Vice President, Exploration and was formerly with Mission Oil and Gas.
Mr. Douglas Crawford will be Vice President, Production and was formerly with Mission Oil and Gas.
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