Since the spring there has been considerable volatility in the price of energy-both oil and natural gas.The price of oil has come down from the $80 and $90 per barrel to $65 at first and then to around $50 per barrel.For awhile it went back into the $65 per barrel range and now has returned to the $47 to $50 per barrel.This volatility has had a dramatic affect on the Canadian oil producers.For awhile they were adjusting to $50 per barrel but then the price moved back up.Now it seems to be "zoned" in the $50 price range.
Strategies
There are really only a couple of strategies that a producer can have.The most likely strategy is to cut the capital expenditure program.This will reduce the number of drilling rigs and the number of wells drilled.This strategy doeshave it's problems .Over time the production rate of all wells starts to decline.Less oil in the well and less pressure lead to a natural decline.If new wells are not discovered to find oil to replace the oil decline then overall production will drop.This will cause the price of the company's shares to drop.This reduces the ability of the company to finance future activities and to buy equipment.
One strategy used is to sell off non-core assets for cash..Although the price of acreage will be down somewhat from peak times it drops in price slower than the price of oil does.Certain companies have purchased in the past a tremenduous amount of acreage and will not likely use it for quite a while.Other companies with more cash on hand find this a good time to buy acreage at a reasonable price and build their inventory of oil producing lands.All of this land has already been explored to some degree;so there is little probability of a sizeable oil company acquiring uneconomical acreage of oil or natural gas bearing lands..All of the companies in the oil patch know or can find easily good estimates of likely oil reserves on any land they are interested in.But some companies are still doing enough exploratory drilling to increase the value of their undiscovered land.The price of oil goes down but the likelihood of a bigger reservoir goes up. Penn West is an example of a company that has kept it's exploratory drilling up and has increased the value of it's proved and probable reserves and the land that contains it.There are three categories of land-proven,almost proved and probable.Exploratory drilling will increase(sometimes dramatically) the reservoirs in probable acreage.One or two wells may increase the size of the reservoir and the value of the acreage In addition,horizontal drilling can expand the size of the reservoir in proven and almost proved acreage.And horizontal drilling is usually cheaper than vertical drilling.Horizontal drilling goes horizontally from an existing well and explores the dimensions of the reservoir.Sometimes the reservoir is bigger than originally recorded. This is the strategy that Twin Butte Energy has used.The extra oil discovered has allowed it to dispose of non-core assets. But the increase in the value of their existing assets has caused a reduction in the value of total assets to a lesser extent.Cash obtained from non-core assets will be used to pay down debt.Debt goes down by 15% but the total value of assets is reduced by less than 15%. This is a necessary strategy by producers to preserve value.
The second Strategy- Productivity
Not all companies are in the position of having good unexplored land or oil pools that are larger than originally recorded.Many companies have reasonable information on the size of their reservoirs.Extra drilling may not increase the probability of having a bigger oil pool.Then the best strategy is to try and reduce the cost of exploration or delivering oil to market.Twin Butte reports that it has reduced the cost of drilling a well by about 22%.Other companies are looking at using new drilling rigs with lower costs of production.So even with a lower price per barrel a reduced cost of production will minimize the drop in the netback per barrel of oil or natural gas.This will help producers to survive in a low price environment and thrive once the price of oil goes back to the long term trend.
Wednesday 29 July 2015
Saturday 18 July 2015
Huronia VII -the Kawartha Marina
Workathon is the blog where I cover a number of more irregular subjects.One of these subjects is regional consulting;I have started a series called Huronia Consulting.It provides interesting ideas on towns in the southern Georgian bay area.Huronia I,II and III relate to Midland.Huronia IV and V and VI refer to Wasaga Beach.Huronia VII relates to Lindsay,Ontario.
The Trent Severn Waterway
I looked at several ways of increasing the regional economy in the Lindsay, Ontario.This entailed a look at several ways of increasing the population such as increasing student population and putting in a new bus terminal just slightly off the downtown core.But it was felt that more investment would come into Lindsay if a new marina was constructed below the Lindsay lock.The idea is that boats both from Peterboro and Lake Simcoe and maybe even a few from Port Perry would come in order to have a bit of a vacation without having tremenduous expense - a day trip or a weekend trip.There is also a large build up of boats in Lake Simcoe(Barrie,Orillia,and Georgina) that presently can only travel around the lake.But the question is how much do you spend and how big should you build the marina?
A field of Dreams
The famous line in the movie called Field of Dreams is "build it and they will come".Using this line of thinking would mean build the ideal and biggest size that you can and the vacationers will come.The figures used in my blog called Econothon in Wordpress were $6 to $10 million for construction and $3 to $5 million for dredging. And this would not include any dredging south of Lindsay(in the Scugog River).It was also thought that dredging must continue every two years after that for another almost $1 million every two years. This however is for the maximum size.Lindsay need not start with the maximum size until it is clear that they indeed will come.The smartest strategy would be to build a smaller marina and see how it is received.This would involve excavating some of the land in Mcdonnell park.The first phase would be to move the river edge over to the present sidewalk and moving the river edge on the other side back to the stone wall.This will add to the width of the river an extra 35 feet in the park and about 25 to 50 feet on the other side of the river.The distance from the start of the river wall (at the bridge)to the curve in the river (or the sidewalk) is about 225 feet.It is about 10 feet down to the riverbed on the north side and maybe 5 feet on the south side.In total this would be about 100,000 cubic feet to excavate. This is the widest part of the river now and will be another 50 feet wider after construction.This means drilling and removing the present concrete wall (on both sides) and excavating down to the riverbed.This phase will not look at removing the Queen Street bridge although it is realized that this restricts the size of boat coming into the marina.The most likely alternative for the bridge would be to put in a steel swing bridge or lift bridge.The swing bridge would be like the one in Burlington in the Hamilton Bay harbour.
Phase 1
Phase 1 should cost only $1 to$2 million and require little dredging.Once again dredging every two years of the Scugog will be a part of this plan.This is the deepest part of the Scugog and the marina is only intended for small draft boats at this stage..If this is successful then we can look at phase 2 which would require reengineering the bridge and a lot more dredging(even up to Sturgeon Lake).This strategy however( even with the lift bridge) will get only minimal investment on Lindsay Street north.However if the marina is full all the time this will be the signal to move to phase 2.
The Trent Severn Waterway
I looked at several ways of increasing the regional economy in the Lindsay, Ontario.This entailed a look at several ways of increasing the population such as increasing student population and putting in a new bus terminal just slightly off the downtown core.But it was felt that more investment would come into Lindsay if a new marina was constructed below the Lindsay lock.The idea is that boats both from Peterboro and Lake Simcoe and maybe even a few from Port Perry would come in order to have a bit of a vacation without having tremenduous expense - a day trip or a weekend trip.There is also a large build up of boats in Lake Simcoe(Barrie,Orillia,and Georgina) that presently can only travel around the lake.But the question is how much do you spend and how big should you build the marina?
A field of Dreams
The famous line in the movie called Field of Dreams is "build it and they will come".Using this line of thinking would mean build the ideal and biggest size that you can and the vacationers will come.The figures used in my blog called Econothon in Wordpress were $6 to $10 million for construction and $3 to $5 million for dredging. And this would not include any dredging south of Lindsay(in the Scugog River).It was also thought that dredging must continue every two years after that for another almost $1 million every two years. This however is for the maximum size.Lindsay need not start with the maximum size until it is clear that they indeed will come.The smartest strategy would be to build a smaller marina and see how it is received.This would involve excavating some of the land in Mcdonnell park.The first phase would be to move the river edge over to the present sidewalk and moving the river edge on the other side back to the stone wall.This will add to the width of the river an extra 35 feet in the park and about 25 to 50 feet on the other side of the river.The distance from the start of the river wall (at the bridge)to the curve in the river (or the sidewalk) is about 225 feet.It is about 10 feet down to the riverbed on the north side and maybe 5 feet on the south side.In total this would be about 100,000 cubic feet to excavate. This is the widest part of the river now and will be another 50 feet wider after construction.This means drilling and removing the present concrete wall (on both sides) and excavating down to the riverbed.This phase will not look at removing the Queen Street bridge although it is realized that this restricts the size of boat coming into the marina.The most likely alternative for the bridge would be to put in a steel swing bridge or lift bridge.The swing bridge would be like the one in Burlington in the Hamilton Bay harbour.
Phase 1
Phase 1 should cost only $1 to$2 million and require little dredging.Once again dredging every two years of the Scugog will be a part of this plan.This is the deepest part of the Scugog and the marina is only intended for small draft boats at this stage..If this is successful then we can look at phase 2 which would require reengineering the bridge and a lot more dredging(even up to Sturgeon Lake).This strategy however( even with the lift bridge) will get only minimal investment on Lindsay Street north.However if the marina is full all the time this will be the signal to move to phase 2.
Friday 10 July 2015
Connacher Oil and Gas finallly recapitalizes
Workathon is the blog I use for irregular company reports and those with sketchy data.This is one of those reports.Connacher Oil and Gas has talked about recapitalizing for some time and it appeared as though it would never happen.But they brought in a completely new board of guys with experience in turnarounds and startups.And they have pulled it off.
Recapitalizatuion
The conversion starts by exchanging approximately $1 billion of debt (including unpaid interest) for new common shares.They will also issue $35 million of "new convertible notes" and the interest will be compounded and accrued.The recapitalization will save $80 million of annual interest expense.The First Lien Term Loan Credit will replace the old revolving credit facility which was less secure.This will result in a consolidation of the common shares on the basis of 800 new shares for each old common share.Connacher Oil and Gas will then have 28,300,000 outstanding shares.
Conclusion
This blog has followed Connacher Oil and Gas for some time.The advice given in this blog was to keep increasing production and not to recapitalize.When we first started looking at Connacher, production was only 11,000 barrels per day;now it is at 15,100 barrels per day.Of course,neither Connacher nor this blog counted on the drop in the price of oil.Now Connacher has replaced it's debt with new common shares and reduced interest expenses by almost $100 million(in total).The new board seems very sharp and experienced and if anybody can pull this off it looks like they can.Connacher has already worked hard to get their production up to 15,100 barrels per day and their chances of succeeding are better now than when production was at 11,000 barrels per day.However now they are limiting capital expenditures to maintenance and production increases are even more important.A lot of money has been spent on their second facility called Algar and they need to spend a little more to get production from this facility they have been working on since 2010.This blog predicts gradual declines for revenues,and the stock price unless they get more production from their second facility at Algar.Or else they will have to sell off some non-core assets to get capital needed to bring the stock price back to the original conversion price.
Recapitalizatuion
The conversion starts by exchanging approximately $1 billion of debt (including unpaid interest) for new common shares.They will also issue $35 million of "new convertible notes" and the interest will be compounded and accrued.The recapitalization will save $80 million of annual interest expense.The First Lien Term Loan Credit will replace the old revolving credit facility which was less secure.This will result in a consolidation of the common shares on the basis of 800 new shares for each old common share.Connacher Oil and Gas will then have 28,300,000 outstanding shares.
Conclusion
This blog has followed Connacher Oil and Gas for some time.The advice given in this blog was to keep increasing production and not to recapitalize.When we first started looking at Connacher, production was only 11,000 barrels per day;now it is at 15,100 barrels per day.Of course,neither Connacher nor this blog counted on the drop in the price of oil.Now Connacher has replaced it's debt with new common shares and reduced interest expenses by almost $100 million(in total).The new board seems very sharp and experienced and if anybody can pull this off it looks like they can.Connacher has already worked hard to get their production up to 15,100 barrels per day and their chances of succeeding are better now than when production was at 11,000 barrels per day.However now they are limiting capital expenditures to maintenance and production increases are even more important.A lot of money has been spent on their second facility called Algar and they need to spend a little more to get production from this facility they have been working on since 2010.This blog predicts gradual declines for revenues,and the stock price unless they get more production from their second facility at Algar.Or else they will have to sell off some non-core assets to get capital needed to bring the stock price back to the original conversion price.
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