Alarm bells in the Legislature Building in Edmonton must’ve been going off on Wednesday when the average prices of first land auction of the year yielded less than half of the previous year. But while companies and their land agents appear to be spending less on land, budgets will most likely be directed into the ground to the benefit of the drillers.
After 2011 netted the Alberta Government a record total of $3.54B through 24 sales, some sweat must’ve been pouring when the first auction of 2012 pulled in an average per-hectare price of $403, compared to 2011’s average of $861 per hectare over 4.1 million hectares.
While the average is far lower, some high priced parcels still attracted heavy bids. The highest price paid garnered $12,217 for a total of $3.1M on a parcel west of Fox Creek in Northern Alberta, chasing the ever popular Duvernay. Along with Cardium plays in the 31W5 region, Duvernay packages in the North around 69-9W5 are the two most popular from a Calgary perspective, with very large ranges in price from $12 thousand down to $460 per hectare.
Still, over the average, the land sales look to have leveled off from last year’s record pace. Many reasons for this drop are in play: a shaky Europe; a fire sale on natural gas rights; and inflation in drilling services.
“As far as capital costs are concerned, we’ll certainly see inflation this year, even over last year,” says Doug Bailey, CFO of Hyperion Exploration [HYX – TSX.V] which is a primary Cardium player with multiple light oil packages and an increased drilling program for 2012.
“There’s just enough of the conventional iron around to service all the horizontal drilling that’s going on right now. Everybody’s doing it.”
After companies opened their wallets in 2011 for premium land packages, 2012 looks like it’ll be both the year of the Dragon, and the year of the Drillers.
These days, conventional drilling rigs expect margins of over 40% on any given project. But the hybrid rigs (read: shallow) are being basically used at a loss right now. It’s the conventional rigs that are commanding a high dollar. Even comparably, the fracking outfits aren’t going to stand to gain compared to the drillers.
“If you’re willing to pay for it, not only are the fracking crews available, but it’s the drillers that are taking the lion’s share of the profit at this time, in my estimation,” adds Bailey.
From an investment standpoint, it’s worth keeping an eye on the publicly traded drillers, as capital costs will be directed at the drill bit in place of accruing more land.
Of course the usual big names like Akita Drilling [AKT.A – TSX], Ensign Energy Services [ESI – TSX], Major Drilling [MDI – TSX], Precision Drilling Corp. [PD – TSX] and Trinidad Drilling [TDG – TSX] come to mind. A nice bonus for getting involved with drillers is the propensity for some to issue dividends.
But hunting for new faces among the crowd is a worthy investment of time during this rush for rigs. For instance Energold Drilling Corp. [EGD – TSX.V], which entered the North American energy drilling sector after establishing itself as a driller of all trades, including: geothermal, mining and UN approved water wells in Africa (an approval that’s not issued out lightly).
With operations spanning 22 countries, Energold made some strategic acquisitions to get into the energy sector, nabbing Bertram International Corp., complete with 12 coring rigs for Canadian Oil Sands during the winter, 75 seismic rigs and 32 specialty rigs. While still on the Venture Exchange, it’s worth a look.\
Whether or not the next Alberta land auction will yield even smaller returns in a couple weeks is up for grabs at this point. But it’s apparent that while the ground is still frozen, the riggers are heating up.
G. Joel Chury
Editor in Chief
VantageWire.com