Petro One Energy Inc. (TSX.V:POP), supported by a technical team of former Exxon Mobil Corporation (NYSE:XOM) geoscientists, doubled in value this week on news of a $100 million two-stage financing committed to by Korean Sovereign Wealth-backed Korea Myanmar Development Corporation (KMDC). This is a serious game changer for the company, and one that has a lot of observers scratching their heads, since Petro One’s land position in Manitoba and Saskatchewan tallies an underwhelming 3,656 hectares of land spread across 12 properties. The company has minimal production, and so observers are wondering why such a well-heeled, sovereign wealth-affiliated group choose to align itself with such a modest producer?
It is a relatively safe assumption, in the absence of any statement to the contrary by either KMDC or Petro One, that the group views Petro One as a platform from which to build a portfolio of producing assets. Rather than pay top dollar for established producers like Chinese state-owned entity CNOOC Ltd did in its acquisition of Nexen Inc. (TSX:TO) for $15.1 Billion, or Petro China’s $1.32 Billion purchase of a 40 percent stake in Athabasca Oil Corp (TSX:ATH), or Sinopec’s $2.1 Billion purchase of Daylight Energy Ltd.
In each of those deals, the general consensus is the buyers paid too much. Learning from those mistakes, it is conceivable that KMDC is bringing little experience but plenty of wisdom to its entry into the Canadian oil patch.
Structured Earn-In to Petro One’s Assets
KMDC is only on the hook, at this point, for a total of CA$18 million, assuming the deal closes on schedule on September 2nd, 2014. After an initial 8-well program, KMDC will have 120 days to evaluate the results and make a decision as to whether to continue financing into a possible total of 97 wells.
The initial tranche that is expected to close imminently calls for the issuance of units at a discounted rate. According to the press release,
“The pricing for the initial $4,000,000 private placement announced on July 28, 2014 was agreed to be set at the lowest “Discounted Market Price” of Petro One shares occurring during the 20 day period following the second trading day after the July 28, 2014 news release, subject to a minimum price of $0.25. Accordingly, based on the closing price of the Company’s shares on July 31, 2014, the financing has been priced at $0.25 per Unit. Each Unit is comprised of one common share and one warrant, and each warrant will be exercisable at $0.375 for two years after closing, subject to accelerated exercise if the Company’s shares trade over $2.00 for a period of 10 consecutive trading days after four months from the closing date. As a result, KMDC is obligated under the Agreement to advance $14,000,000 for the drilling fund to bring the total initial Phase 1 investment to $18,000,000, and has the right to increase that by an additional $82,000,000 in Phase 2.
It was made very clear in the speeches given by Government Officials and Chairman Lee that they consider $100,000,000 in funding to be the first step in a longer term, more comprehensive arrangement with Petro One.”, the press release continued.
Petro One’s Management Team
The team that is assembled around Petro One suggests a solid connection into Exxon Mobil Canada.
Starting with Chief Consulting Geologist Tevor Bremmer, Trevor Bremner has a wide range of Canadian experience in petroleum, mineral exploration, and government, and is a registered professional geologist in Alberta, Saskatchewan, Manitoba, and Northwest Territories. In the petroleum industry he formerly held a variety of positions with Imperial Oil, Mobil Oil Canada, and Mobil-GC Canada, working on a broad range of projects in Western Canada, the Beaufort Sea, and the Avalon Basin of offshore Newfoundland. His experience includes exploration,
production, and management, and he has been involved in planning, drilling, and
evaluating numerous oil wells, as well as prospect generation, land acquisition, unit
negotiations, and basin analysis.
Dennis Price, the company’s senior consulting geologist, joined ExxonMobil Corp. in 1981, where he held technical and business assignments in all facets of exploration, development, and production in most of the key Canadian basins. Recent experience has been focused mainly in Alberta, Saskatchewan, and British Columbia, where he has been managing geoscience aspects of conventional oil and gas properties, property divestment, and new opportunities. Dennis’s extensive Western Canada experience includes prospect
generation in Devonian, Triassic, and Mississippian carbonates, Cardium, Viking, Glauconitic, Ellerslie, Triassic Coal Bed Methane, and shallow gas formations of the Alberta, Saskatchewan, and British Columbia plains and foothills. Dennis is credited with the discovery of 15 MMBOE reserves proven through drilling or participating in joint activities in the WCSB. He was directly involved in identifying and bringing forward a large unconventional Cardium tight oil opportunity on ExxonMobil Canada lands at Harmattan (80 MMBO). Imperial has a team currently exploiting these lands on behalf of ExxonMobil Canada.
Ron Larson is Petron One’s Chief Geophysicist responsible for assessing and evaluating new technologies. and helping to maintain a state of the art consultancy. With 30 years of industry experience, Ron has worked on projects in mining, both conventional and unconventional oil and gas, on all continents except Australia and Antarctica, with significant experience in shale
gas; quantitative seismic reservoir characterization, and microseismic monitoring of
hydraulic fracture operations.
Roger Sakatch has more than 25 years experience as a reservoir engineer, and has wide ranging experience including reserve and economic evaluations, field optimization and development, oil and gas drilling including tight horizontal wells, completions, and installations, recompletions, gathering systems, reservoir modelling and simulation, pressure transient analysis, material balance analysis, decline analysis, frac program design and optimization, waterfloods, tight horizontal wells, budgeting, planning and regulatory approvals, evaluation of
business opportunities, and due diligence analysis. He has worked for a variety of companies that include D&S Consulting, Saskoil, Kerr-McGee, Ocelot, Richland, Encal/Calpine, Vermilion, Centurion, Canoro Resources, and Sea Dragon Energy, mostly in the role of Engineering Manager or Senior Engineer. Roger has worked on many projects in Alberta, Saskatchewan, and Manitoba, as well as Gabon, Tanzania, Netherlands, Australia, North Sea, France, North Africa, India and the Middle East. While with Richland, he was instrumental in purchasing the Paddle River property in Alberta for $20 million, and subsequently doubling the production from this asset. Roger’s work in designing and optimizing production facilities for Aventura Energy Ltd. (a Vermilion subsidiary) resulted in 3,800 BOE/d of stable condensate production, and played a major role in selling the company for $228 million, resulting in a significant profit to Vermilion. He also helped Vermilion to acquire a gas field in the Netherlands, and an oil field in Australia, each worth approximately $100 million.
So what’s the attraction for KMDC? It would appear that the company will use Petro One as the platform through which it exploits its consulting group’s connections with Exxon Mobil to acquire projects and build a portfolio of producing assets and exploration plays.
Compared to the Chinese approach of paying too much for assets already in production, this would appear to be a much smarter approach.
DisclosureWe are shareholders in Petro One Energy Corporation through affiliated entities.