Iron Brdg Res Inc. OEXFF

RE:RE:RE:RE:RE:RE:Hey Velvet

[ditchdigger251]

I know Kakwa pretty well - water disposal is much tougher there because the Belloy (1st formation below the Montney) doesn't seem to be available for water disposal which is HUGELY negative to Op costs.  I believe Paramount took over control of the Wabamun A & B pools that collectively might have produced about 25 to 30 bcf of gas between them.  However the injectivity (from my memory) of their Wab A pool well was pretty poor with daily injection vols somewhere around 200 to 300 bbls/d.  I don't know how good the Wab B pool would be but I think the two pools are separated by almost a township (so not a cheap backyard disposal alternative).  There might be some potential in the Debolt (the next zone under the Belloy) but because of the depth there's very little in terms of discovered Debolt pools in the area (I remember one that was SW of Kakwa which was ~10% H2S!).  There's not much appetite to drill disposal only well to roughly 3500m TVD (or deeper) either which is a big limiter.  So water disposal in Kakwa is a big challenge to economics.  Whereas IBR's Gold Creek/Elmworth operation they have on-lease two Belloy disposal wells and another converted Montney Hz- a big difference!

Another thing is Kakwa Montney although not very sour overall (like maybe averaging 200ppm) is still sour enough to be a pain in the butt operationally (as in processing production), capital-wise (as in higher costs for sour spec infrastructure) and regulatory-wise (as in more red tape and opportunity for delay from objectors).  IBR's sweet liquids rich Montney production is somewhat a rarity and the netback advantages that being sweet cannot be overstated.  Sweet gas and liquids is much cheaper to process, get regulatory approvals for and buy equipment for.  Depending on how sour the production is the added capital could run 20% to over 50% and the effect on netbacks from higher processing/shrinkage/quality adjustments could shave off 1/4 or more of the net revenue.

Thirdly Kakwa is much much deeper than IBR's Elmworth.  My recollection of Paramount's Kakwa acreage is it's not as deep as other (like Orlen Upstream's) but still probably averages about 1000m DEEPER TVD-wise then IBR's Montney land.  This means every well is going to take much longer to drill (this is HARD stuff to drill (1 to 3 m/hr) and can add a couple of weeks.  It also makes the completions more costly because of the much higher pumping pressures leading to increased risk of failure & poorly pumped stages.  Also doing operational things that are much more straightforward on IBR's wells like coil cleanouts or using artificial lift like pumpjacks are much more expensive (if not at times impossible).  Another thing is at Kakwa depths the reservoir temperature is very high (over 90 deg C) making material choices more important and there's a pesky issue with wax that can cause some tough days if not treated properly. 

So the big issues with Kakwa to me are: (1) the lack of disposal (2) inherent sourness (3) extreme depth all of which do not affect IBR's Elmworth Montney.  There's a reason why Hammerhead (which has Montney & Duvernay out the ying-yang) has high graded their Elmworth holdings as the economic best of their best.  And Elmworth Montney reserves as far as I can remember have type wells that are at least comparable if not even better than Kakwa.

So yes I agree 110% that Velvet's offer looks beyond pathetic.  At the Kakwa offer of $340MM that equates to $2.19/IBR share.  Having said that IBR doesn't have equivalent gas handling capability but adding that extra 40mmcfd might shrink the price down to the $2/share level once 8-22 & 3-17 Hz's are completed and tied in (with resulting total prod'n pretty similar I think to 5300 boed number quoted).  If the advantages of being sweet, shallower & easy local water disposal are factored in I can see quite a value uptick from there.  This is what Industry is paying for good Montney now.  So if we believe that IBR has great Montney what should the price be?