Here is a riddle for energy sector investors. Where is the best place in the world to make a new discovery? Answer: in your own backyard. That’s the lesson in the story of DXI Energy Inc. (TSX: DXI, OTCQB: DXIEF, Forum).
The Company has been diligently working its 99%-owned Woodrush property, located in the Peace River region of northeast British Columbia and has produced over 675,000 barrels of oil. Historically, this has been the hot-spot for oil production in the province.
DXI has been operating this property for roughly a decade. This has allowed the Company to acquire intimate familiarity with the geological complexities as it has developed this large land package. Current production assets are comprised of 3 light oil wells and 9 gas wells.
After years of operation, some of these wells were seeing declining production rates, even with the waterflooding introduced into production in 2012. Waterflooding is a production technique used in conventional oil operations to maximize the percentage of oil and gas that can be extracted from a particular reservoir.
Management was concerned about this production trend and eager to find and develop new, producing assets – to more than offset declines in existing production. They pulled out existing 2D and 3D seismic imaging on the Woodrush property, rolled up their sleeves, and went to work on reinterpreting the data to find high potential targets.
DXI had a clue to guide it as the Company sought to create a new geological model for the Woodrush property. Under the original interpretation, two of the producing oil reservoirs in which DXI was drilling were considered to represent very similar production models, and were nearly adjacent on the land package.
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To management’s surprise, production from one of these reservoirs was at a significantly greater rate than the other. This didn’t make sense under the original geological model. After close scrutiny, they came up with a new geological model for Woodrush, and became immediately enthused about the potential for additional “Halfway oil wells”.
What has made the Peace River district a premium destination for oil production in B.C.? The region has hosted more than 300 Halfway oil wells, beginning in the 1950’s.
These reservoirs have been dubbed “halfway” due to the relatively equal percentages of oil and gas that tend to occur. Two factors have made such oil wells highly coveted by the oil & gas industry:
- Large yields: these 300+ wells have averaged more than 500,000 barrels of oil and 0.75 billion cubic feet of natural gas each
- High pumping rates: Halfway wells can typically initially produce oil at a rate of greater than 500 barrels per day
DXI’s CEO, Robert Hodgkinson, connects the dots on how this new discovery relates to historic oil production in the region:
It’s most exciting that our geologically-based seismic picture shows our land package has now begun to resemble another conventional oil pool in the ‘fairway’, named Milligan Creek. Located just 10 miles to the west and discovered in the late 50’s, it has been for years referred to as a single field. In fact, it has produced over 34 million barrels of oil to date from a cluster of 4-6 independent Halfway sand packages. This could be what the DXI exploration effort is inferring to us.
This is a veteran management team comprised of oil & gas professionals averaging roughly three decades of industry experience. The Company has depth both at the senior management and operations level.
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It needs to be stressed that this is conventional oil production. No “fracking” is required, alleviating most environmental concerns. The Company has already established positive working relationships with the native communities located in this district.
Compare this to the oil fields in neighbouring Alberta. The higher producing wells in that province typically yield IP pumping rates of 200-300 barrels per day, versus rates of up to 500+ barrels per day for Halfway wells. Even after waterflooding, management is confident that new Halfway wells can produce a greater yield than conventional Alberta wells, while still offering the greater production potential that is derived from waterflooding.
This leads to the most promising aspect to DXI’s new “discovery”: it’s in the Company’s own backyard. There are two important reasons why this is a huge advantage for both DXI and its shareholders.
- Existing infrastructure
- Accumulated knowledge/expertise
The Company has already invested $12 million in Woodrush, in production facilities and related infrastructure. DXI is putting these advantages to full use. Management estimates that new Halfway wells can be put into production at a cost of ~ $2 per barrel. Even with oil prices treading water around the $50/bbl level, this represents extremely lucrative operating margins as netbacks average $30/bbl.
Interested investors will have one question uppermost in their minds: how much production can be generated at these very attractive margins? Investors won’t have to wait very long for an answer.
In September 2017; DXI announced closing on the first two tranches of a private placement. On October 11, 2017; the Company reported the closing of its third tranche. Total proceeds raised were ~ $2.5 million. The focus of the placement is a new Woodrush drilling program.
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First on the list for the new development program at Woodrush is Drill Target #1. Comprised of 260 acres, new geological modeling estimates 5.35 million barrels of oil in this one reservoir. Management is projecting a recovery rate of 50%, with the average thickness of the reservoir being 16 feet.
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Fortuitously (for both DXI and investors), drill rigs are currently located nearby, a luxury often not available this far north. Properly executed, this should translate into saving roughly 1/3rd the average cost of rig transport within the Peace River district, representing an economy measured in $100’s of thousands.
Crunching the numbers, success on just four wells in this first Target could increase the Company’s daily production to over 1,500 BOED. Parallel to this, the value of DXI’s oil reserves could be boosted by as much as $30 - $40 million.For a junior energy producer with a current market cap of less than $7 million, this will be a transformational event.
After that? Even more blue sky. DXI’s geo team is already merging 3D data that will improve the odds that even larger additional reservoirs exist beyond Target #1.
Why not start with these potentially larger targets? Think “dominoes”.
It’s faster/cheaper/easier to drill for oil in your own backyard than to do so ‘halfway’ around the world. Similarly, it’s even faster/easier/cheaper to produce new oil right next to existing production assets. The result is a better return on capital for both DXI and its shareholders.
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DXI is intent on maximizing the economic potential of these (new) Halfway wells on its Woodrush property. However, the Company is equally focused on conducting this new development in the most efficient manner possible. So management plans to tackle these drilling targets in order: starting with the closest prospective targets, and moving further afield as new successes are achieved.
For more conservative investors, it’s important to note that as an established oil & gas producer, DXI Energy has a full TSX listing. Equally significant, Woodrush is not the Company’s only producing property.
In Colorado, DXI holds a 25% working interest in the 2,200 acre liquids-rich gas Kokopelli Development Project in the north western part of the state. Even with the depressed conditions in the natural gas market, all 11 Williams Fork wells and a single deep Mancos well are currently in production.
Large, additional development potential exists in a reasonable gas price environment. Such muted price levels won’t last forever and DXI will reap the benefits of this valuable asset that boasts an estimated $20.5 million in YE2016 PV-10 net reserves.
Energy demand has declined across the Western world over the past decade, especially in the United States, something that is historically unprecedented. This decline in demand is the result of persistent, depressed economic conditions in the West, hidden by the economic mythology that clueless economists call “the U.S. recovery.”
The equation is simple: growing economies use more energy, shrinking economies use less energy. The U.S. economy has been using less and less energy over the past 10 years; the U.S. economy has been shrinking for 10 years. When Western economies actually begin to generate real economic growth again, demand for both natural gas and oil will rise substantially – along with energy prices.
Woodrush also has existing gas production potential that can easily be brought on line with reasonably stable prices. In the meantime, DXI Energy is focused on developing its highly economical Woodrush oil assets. But management has been working on the financial side of operations as well.
There has been debt restructuring. The Company has restructured $6.5 million of senior secured debt. This is now long-term debt, requiring only payment of interest, with a balloon payment of the full principal upon maturity.
There has also been the conversion of debt to equity. Already, balance sheet loans have been reduced by $2.24 million, with shareholder equity rising by $3.89 million. Further shareholder approval has been obtained to convert an additional $500,000 of debt into equity.
Another legacy of the difficult conditions in the energy sector in recent years are tax losses. DXI is currently holding roughly $130 million in tax losses, divided evenly between its B.C. and Colorado assets. Among other options, this enables the Company to structure future financing requirements in the form of flow-through shares, a form of equity financing that is especially attractive to higher net-worth investors.
With its balance sheet solidified, management’s focus is now clearly ahead. CEO Hodgkinson summarizes the blue-sky potential unfolding at Woodrush:
Now is the time to focus the latest science on new exploration of this previously very lucrative Halfway fairway. Many new discoveries will be made.
For investors doing their due diligence on DXI, the following factors stand out:
- Low cost, scalable oil production, with enormous upside potential
- All infrastructure in place and functioning to deliver new reserves at very low cost
- Funding in place for the first phase of new “Halfway” drilling at Woodrush
- A greatly strengthened balance sheet
- Attractive funding options for future financial requirements
- A full TSX listing at a micro-cap price
There are a lot of things for investors to like about DXI Energy Inc. The Company is also reminding energy investors of something that many have now forgotten: you don’t have to go to Alberta or Texas in order to find lucrative O&G opportunities.
dxienergy.com
FULL DISCLOSURE: DXI Energy Inc. is a paid client of Stockhouse Publishing.