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CALGARY — Frustration at a capital market that threatens to starve to death healthy junior oil and gas companies took centre stage at an oil and gas investor showcase on Wednesday.
Several small companies said at the Explorers and Producers Association of Canada event in downtown Calgary they are cutting costs and putting non-core assets up for sale while trying to restrict spending to less than cash flow until markets improve.
In an opening keynote, analyst Joseph Schachter of Schachter Asset Management said there’s not much hope of a recovery until 2016-17, when he predicted the world supply-demand equation will support sustainable prices of more than $120 per barrel for oil and, more importantly in Alberta, natural gas prices of more than $7 per thousand cubic feet.
“So it’s a question for the industry of surviving for the next few years, which will be tough,” he said.
“Access to capital is going to be tough. Flow-through business is dead. So, if you’re not one of the premium stories that can do flow through, most of the junior companies ... will have to be living within their cash flow and debt lines and make sure their debt lines don’t have problems in case of reserve writedowns.”
Flow-through shares appeal to investors because they get special tax treatment but the funds raised must be used for exploration and development.
Richard Thompson, president and chief executive of Marquee Energy Ltd., said in a presentation his Calgary company is having great success with its southeast Alberta Banff/Detrital unconventional oil play but lacks the funding to grow beyond its current 2,300 barrels of oil equivalent per day of production.
“There’s just no opportunity. We’re not going to the market,” he said in an interview, noting a share price that has fallen from a 52-week high of $1.23 last August to a low of 42 cents last month.
“Investors just don’t care. You look at the flow of funds in our space and it’s been dreadful.”
He said Marquee is cutting costs everywhere — for instance, it calculates it can shave $150,000 from the $2.5-million price of a Banff horizontal well if it drills in the summer instead of the winter — and has put Cardium assets producing 700 boe/d on the block.
It has net debt of $49 million as of March 31 and Thompson said paying that down while continuing to grow is essential for building the company to a size where it will attract a larger buyer.
During his presentation, president and CEO John McAdam of Tallgrass Energy Corp. laid out a plan that would allow the company to grow from the current 530 boe/d to over 3,000 boe/d at the end of 2015 — if it had $100 million.
“This is the dream, this is the opportunity we have so it’s incumbent on us to exercise that,” he said. “So how are we going to do that?”
He said Tallgrass has declared “non-core” everything it owns other than its Niton-Bigoray Cardium play — including its much larger Duvernay and Nordegg acreage — and aims to sell them to reduce debt and pay for drilling.
McAdam added the company is also working on “alternative” financings he can’t discuss.
President Dale Miller of Long Run Exploration Ltd. said his company is well-financed to run a prudent capital program through 2015 but is frustrated by the promising assets on the market it can’t afford to buy.
“It’s very tempting but, unfortunately, because of the high cost of capital, if we’re going to make any acquisitions it has to be through debt,” he said.
“We’re not going to try to raise equity at these prices. Like most companies, we feel we’re undervalued.”
Long Run closed Wednesday at $3.84. Its 52-week high was $5.07 in December.
Read more: https://www.calgaryherald.com/business/Capital+freeze+puts+juniors+survival+mode/8516698/story.html#ixzz2WCpxNmyi