Pescod InterviewAN INTERVIEW WITH JEFF CHISHOLM
PRESIDENT AND CEO WITH PAN ORIENT ENERGY CORP.
(As of September 10, 2008)
If you have been in the market for the last week or so, you’ve gone through something the likes of which we just haven’t seen in a generation or three. You probably spent the weekend reading the financial press and came away with the conclusion that the press agrees on only one thing…that we’ve escaped the biggest panic/credit crisis since the Great Depression and the good news is that we’ve come away still alive. Needless to say, there are some baby-boomers that have seen their savings change somewhat, there’s been some folks grab assets out of the equity market and I suspect there are a few people that have always thought bonds were for whoosies, suddenly asking what the heck a T-Bill is?
However, it looks like the hard steps have been made in the U.S.A. which was the father of this credit crisis, courtesy of the housing bust that was financed so poorly and the question is what next? I’m sure you noticed on the weekend the press told you that we could be in a recession or we might not and for those following the commodity boom, we could see gold at $700 or $1200 and we could see oil at $75 or $125. So there you go!
Meanwhile, Nick Majendie of Canaccord suggests that in the short-term we expect a strong rally from the lows to last several weeks, although longer-term, he wouldn’t be surprised to see a re-test in the first quarter of next year. In the meantime, while our own crystal ball is more than a little cloudy, we figure why not go look at a couple of oil and gas stocks that should/could see some big increases in production in the next while so that if oil is $100 by Christmas of 2009 and these companies just go back to where their stock prices were, one could have had (after an ugly time) maybe some better times…
We are narrowing our picks down to mainly oil stocks, because gas looks like it may be a little iffy here, and we are sticking with jurisdictions in the world that will allow oil and gas companies to make a buck, should they actually find some oil. So none of them are in Alberta, but Saskatchewan, the North Sea, Thailand and Albania are home to our picks that we will do interviews with over the next few weeks. Today, we start with Jeff Chisholm of Pan Orient:
David Pescod: Jeff, is there anything in this experience that you could add to because of your presence in Asia which regards to the current market conditions and what you see in Asia that might make you hopeful that there is an end in sight?
Jeff Chisholm: What could put that in frame and context - what we have been seeing in Thailand over the past two months and the projections of the government going forward over the next two months. They have seen sustained growth somewhere in the range of 6% to 8% over the last year and a half. As we all know there have been some political issues there. Recently the Central Bank/Central Government came out with forecasts of growth just under 6% for the remainder of this year, going into the early part of 2009. We still think that’s pretty significant. I think we are seeing similar things in China, perhaps we aren’t seeing the double-digit growth rates that we had over the last few years, but we are certainly in the high 7, 8 and 9. As far as oil demand, we don’t see a significant fall off in that part of the world from what we are seeing both on the ground and numbers put out by these governments.
D.P: Now you have been based in Southeast Asia for a while; first with Niko and then you were in Jakarta for a while. Anything about Asia that you don’t think most of us in Alberta would be aware of?
J.C: I’ve been over in that part of the world since 1988. The best example I can give you is when they start growing, they grow fast and really the best example for that is Vietnam. The first time I was there was in 1993/1994 and literally was the only motorized vehicle on the road from the airport to the hotel. Last time I was back in Saigon/Hochiminh City about a year/year and a half ago, probably about 10% bicycles, the rest were motor scooters and cars. Similar sorts of growth in Jakarta though it was much further ahead in the 1990’s than Vietnam was. But I don’t think people understand that when these countries start growing, with those populations, just how rapidly it happens.
D.P: Let’s put it this way…Looking at the price of oil down the road, we’ve had an enormous correction and a crash in the oil stocks. What do you see down the road?
J.C: Down the road I think that certainly in the big picture sense, this is probably the best thing that could have happened to the U.S. Government in the short-term. The fall in commodity prices has essentially allowed them to avoid an interest rate rise. They have achieved what they would have achieved with an interest rate rise by the fall off in commodity prices and inflation and I think we may get back to normal (whatever normal is going to be) after the election in November. I’d expect December to certainly be out of any bottom that we are going to see at this period of time in the commodities, specifically oil and gold.
D.P: What kind of prices do you see ahead for oil down the road?
J.C: I would qualify any price that I give with regard to oil, with regard to what the U.S. dollar is doing against a basket of currencies. I would say in today’s U.S. dollar terms that if we hovered certainly in between that $90.00 to $110.00 range, that would be expected and I think for 95% of the oil companies out there that would be the sweet spot. We are not killing demand and at the same time we are making a lot of money.
D.P: As far as Pan Orient, you’ve suffered like many others in that suddenly your stock is going on a two-for-one sale and yet one bad well? This has not been deserved!
J.C: We are right now in the middle of developing the main part of our main field. We should have some results out within the next seven to ten days. All initial indications are very good. Our production is strong – above where it was in Q2 on average. Our price we are receiving for the commodity is very high historically, i.e. within the last year and a half. We have more than enough cash to carry out our current work programs and we are going to have two rigs going for at least the next year to year and a half.
D.P: Now you are expecting some enormous increases in production over the next while, is that right?
J.C: We have stated that our exit target for 2008 will be 9000 barrels a day net. If things work out for us, we will achieve that target much sooner than year-end, but that is something that we are extremely confident that we will meet at this time.
D.P: What kind of numbers are you doing today and what would you expect by the end of next year?
J.C: The numbers we are doing right now are somewhat affected by the fact that we are doing multiple wells off the same drill pad and at the time that we are drilling through the main target zone, we cannot have the other wells producing at that time. It’s just simply not safe. I would be quite pleased if we hit that 9000 barrels within the first two weeks of October, perhaps the third week.
D.P: As far as working in Thailand, that seems to be a generous area of the world. A lot of the oil seems to be found at shallow areas and is quite economic to process.
J.C: What is interesting is that if you take a look back over the last two years, the crown jewel in Unocal’s basket of assets were their properties in Thailand. It was their largest individual asset anywhere in the world. That was the main reason they were taken out by Chevon. With that said, a couple of the main growing juniors in Asia have been located in Thailand one of those being a company called Pearl Energy that went from zero to 22,000 barrels over the last year and a half. Ourselves, going from zero up to a gross production rate by the end of the year we plan at 15,000 barrels a day. There has been some gas discovered up in the northeast, apparently quite a large field by some of the other companies like Salamandar Energy out of the U.K. and Coastal Energy that trades on the TSX. So it really has been a place that has had a disproportionate number of smaller companies having great success in that time frame.
D.P: Any discomfort operating in Thailand? Some commentators seem a little bit worried about the generals in Thailand…
J.C: In the grand scheme of things, looking at international assets worldwide, I would see at this point in time, far less political risk in the Asia region than say, anywhere in Africa. There are certain issues to be dealt with in Latin America where there has been a history of nationalization/changing fiscal terms. We have not seen that (nationalization) in Asia at any point in recent history and I think that with these growing economies, these governments are under the gun to provide growth. Part of that growth is maximizing your domestic production and I think that’s on our side in the big picture.
D.P: Now you are hoping to make a venture into Indonesia and more than a few people worry that Indonesia has a pretty brutal royalty structure.
J.C: What we have seen actually in Indonesia is the old contracts which were called a JOB. The production splits for that were 93.5% to the government and the remainder to the contractor. What we currently have in one of our contracts in Java is a production split of 75/25 for oil and 60/40 for gas. The larger number in favor of the government. If you throw on top of that the cost recovery, 90% of production – i.e. 90% of the production goes to you until your development costs, overhead and everything else is paid off. You run the economics on that, it is clearly in the middle P-50 of what exists in the rest of the world. The other contact that we have onshore Sumatra is an 85/15 split and it would be at the lower end of that P-50.
D.P: And you are quite comfortable with that?
J.C: We are quite comfortable with that, particularly at a reasonable estimate of future commodity prices and the size of the potential prize.
D.P: What are your corporate goals for the next two years?
J.C: As we stated here, at year-end 2008 it’s to get production up to 9000 barrels a day net, hold that up through 2009 and continue exploration drilling and year end appraisal of resources in Thailand to perhaps lift that production higher or at the very least, push that production profile out further and to have significant growth i.e. have at least those kind of production numbers in Thailand, within the next two years in Indonesia.
D.P: If you had to pick one other stock to own other than POE, what would it be?
J.C: Probably the only qualifier I will put on that is that this company’s production is hedged, and right now with the current market conditions with liquidity being very important, with future near-term reserve and production growth, probably Oilexco would be near the top of that list.
D.P: Oh! Well, you made our day with that!!! Now there are a couple of analysts that are following your stock – Warren Verbonac is one of them. What are the analysts saying and what are their targets?
J.C: We are covered by six people. Right now on five of them, the target vary between approximately $15.00 a share to $18.00 and I think we have one that is down in the $12.00 or $13.00 range.
I think we have a very active period between now and year-end. We are going to see significant production growth in Thailand; we are going to be drilling our two best exploration prospects before year-end. We are going to be going after at least 22.5 million barrels of near in resources, adjacent to production at Na Sanun East and we are going to have a big test that we are about to pull off in Indonesia around the third week of November that could be a company changer at a very cheap cost of about $1.3 million net to us.
D.P: Thank you very much Jeff.