October 14, 2021
Canadian E&P Perspectives
Clearwater - An Emerging Oil Workhorse
Our view: The Clearwater play has quickly emerged as a WCSB workhorse, attracting significant capital and a competitive M&A landscape. New entrants have emerged with hopes of extending the play’s productive boundaries outside the ‘core’ Marten Hills and Nipisi areas. Initial results are broadly encouraging and we expect increased investment driven by some of the strongest economics in the WCSB, though development remains early stage and is not without risk. Several producers are currently testing or evaluating implementation of enhanced oil recovery (water/polymer floods), which we expect will underpin longer-term development and ultimate resource recovery.
We expect continued ramp in investment, driven by the lowest supply costs in Canada. The Clearwater investment case has been clearly defined by early movers that were able to generate material cash returns and build sustainable businesses within cash flow despite limited regional infrastructure and the exploratory nature of earlier developments. Simple and inexpensive well designs coupled with strong productivity offset quality discounts (~12-20 API) with our regional type curves pointing to sub-C$40/ bbl supply costs (15% BTax IRR) as noted in Exhibits 11/17. Clearwater wells can generate sufficient cash to cover initial capital outlay in as little as three months in some cases, despite fairly high initial declines.
Core developments fairly well-defined, moving to enhanced oil recovery. Starting in early 2017, Spur Petroleum began developing the core of the conventional Clearwater oil play at Marten Hills, testing multilateral horizontal wells in an attempt to improve economic recovery. As the play has progressed, most producers are sticking with 6-8 leg laterals in order to maximize royalty credits, though design depends on development areas and in some cases land constraints. Average initial productivity is in the range of 30 bbl/d per leg, though highly variable. Several producers are evaluating water/polymer floods with an eye to maintain production stability and improve recovery.
Exploration results extending the boundaries of the play. Exploration continues with more recent entrants pushing the productive boundaries of the play into new areas. Recent results have proven productivity in offshoot regions such Peavine, Jarvie, and Ukalta. While variable reservoir characteristics result in differences in productivity (net pay ranges from ~5-30m), we are encouraged by continued activity and note roughly 280 wells have been drilled in the broader Clearwater region YTD with activity likely to ramp up through the winter months.
Regional takeaway capacity supports near-term growth. Field level infrastructure remains limited as producers build out new fields, though Plains Midstream developed an expandable 50,000 bbl/d crude terminal in order to accommodate regional growth. In addition, a consortium of producers backstopped the 50,000 bbl/d Marten Hills Pipeline System, providing access to markets in Edmonton. The Marten Hills system is expandable to 70,000 bbl/d and we expect further infrastructure development as regional production increases. In our view, broader Clearwater production will likely more than double from current levels of roughly 50,000 bbl/d over the next several years.
M&A valuations generally sit at the upper end of Canadian oil-weighted transactions. Clearwater asset valuations have reached up to $90k/boe/d, with recent deals trending higher (Exhibit 5), driven by a competitive landscape and a limited number of sellers. We also note the Canadian royalty companies are all active in the play, eager to provide early development capital in exchange for gross overriding royalties.
Top ideas for Clearwater exposure. Our top Clearwater levered E&P ideas include Headwater Exploration (TSX: HWX), Tamarack Valley Energy (TSX: TVE), and Baytex Energy (TSX: BTE). Each Canadian royalty company has indirect exposure with our favourite name being Freehold Royalties (TSX: FRU).