HAZ / Barrington Petroleum
Yes, I picked up on the increase in share price and volume. Shares were incredibly cheap in the low $4.00 range. Not surprised to see institutional buying. The company has been on a barnstorming tour of the major brokerage houses over past month.
Here are some notes from one of their presentations by David Evans (Chairman & CEO) and Timothy Dunne (VP Finance, CFO).
Main point was the expectation of substantially higher gas prices as a result of increased pipeline capacity. For a company whose production is 61% gas, this offers tremendous upside. They intend to preserve that gas focus.
Company overview:
Three areas :
- deep "wet" (i.e. condensate rich) gas in Alberta
- light oil from the Williston Basin, and from deep exploratory wells in western Alberta
- heavy oil from Cold Lake
Company disposed of non-core assets (by number, more than half of their properties), and will still show a production increase in 1997 on the order of 30-40% net of disposition and declines.
Currently an opportunity for investors. Because of El Nino, the industry is currently putting 200 mmcf/d into storage. At this time last year, they were extracting 1bcf/d from storage. Implies soft gas prices, and soft stock prices for gas-heavy companies. Within a year, with new export capacity and normal weather, gas prices will be significantly higher.
There is currently not enough production to meet expanded deliverabilty. Given decline rates, need between 5-6,000 gas well completions per year to fill pipelines. 1997 is expected to hit 4,000 gas well completions, vs. 3,215 in 1996 and 4,195 in 1994. They characterize the necessary levels of drilling as "unattainable").
High impact deal for the company is the Cold Lake First Nations (CLFN) heavy oil play. Their exposure through this deal is to a reservoir potentially 500 million to 1 billion barrels (this the is the total figure, not the recoverable figure). If everything went perfectly, the CLFN could yield from 10,000 to 30,000 boe/d. This led to a discussion of the economics of heavy oil.
"Why heavy oil?"
- BPL "light" production is avg. 30 deg. API, which gets $22.49 at the wellhead. Royalties are $4.50, and op. costs are $4.75, for a field netback of $13.24. With finding (& onstream) costs of $7.50, profit margin is $5.74.
- Heavy oil gets $15.50 at the wellhead. Royalties are 77 cents (and less on CLFN), and operating expenses are $5.50, for a field netback of $9.22. Finding costs are $2.50, for a profit margin of $6.72.
Q: what about the expectation that heavy oil production growth will vastly exceed increases in upgrader capacity?
A: The refiners do not make any money when differentials shrink, as they did a couple of years ago. As such, they are motivated to sign long-term contracts. BPL has guaranteed refiners a certain stream of product in the future, guaranteeing a relatively constant differential on the order of $6. With this arrangement, Barrington has a known level of profitability fixed into the future.
The CLFN will return 10% of reserves with primary production only -- not steam injection or other enhanced recovery. With enhanced recovery, the figure could rise to 50% (which may be conservative -- another company with a similar holding is claiming 65% recovery).
Q: In the context of rising costs in the service sector, at what point does profitability diminish to the level that increments to cash flow no longer justify high cash flow multiples?
A: The standard of $5 or whatever for F+D costs was established in the context of price expectations of $16-$18 for oil, and $1-20-$1.40 for gas. Costs have risen, but price expectations have risen as well, to perhaps $19-$22 for oil and $2+ for gas. Hopefully that will be enough to maintain profit margins. Service companies were squeezed for the last 15 years and are now having their day in the sun. If they charge too much, people will stop drilling. But that means that gas deliverability will fall short of export capacity, which in turn should put upward pressure on prices.
Q: what is your capital cost per barrel of production
A: based on 1996 figures, BPL spent $14,000 per daily barrel of reserves. Best in the industry in $10,000. In the current acquisition market, a boe/d costs between $20,000 and $25,000.
BPL had a study done on the value per boe implied by the current share price. Cheapest was Blue Range at $5.82. Barrington was second cheapest, at $6.34.
Company's vision is to produce 66,000 boe/d by 2002 (vs. proj. exit of 20,000 boe/d this year).
Outlook is for CF of 96 cents/ fully diluted share this year, and $1.17-$1.34 next year.
Average production between 22,500 and 25,000 boe/d in '98, vs. 18,180 this year. (exit production noted above)
LT debt will be maintained at 1.5x CF.
Hope this info gives you a better insight into their operations at this time. This info is second hand, as well as subject for change, and should be verified with the company.
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