2018 EPAC award winners: Energy red of tooth and claw

Whitecap Resources president and CEO Grant Fagerheim. Image: Joey Podlubny/JWN

With no outlets for increasing oil or natural gas production, western Canada’s petroleum producers find themselves in intense competition with each other for market share and investment dollars.

It’s survival of the fittest, with the fittest being the lowest cost operators with resource bases that can attract investment to grow, and with the smarts to access the highest value markets for their production.

This year’s Explorers and Producers Association of Canada’s (EPAC) Awards feature four winners that have responded to the challenges facing the industry and are competing successfully to survive and grow.

Congratulations to the 2018 EPAC Awards winners, and all the nominees.

Top Private Emerging Producer

Trailblazer: Vesta Energy leverages U.S. learnings to crack Canada’s first true shale play

Vesta Energy president and CEO Curtis Cook. Image: Joey Podlubny/JWN

For years, while Vesta Energy Corp. quietly went about figuring out how to produce Canada’s first true shale oil play, it wasn’t even answering EPAC’s scouting calls for its annual awards event.

As a private company, funded initially by JOG Capital, it wasn’t ready to tip its hand in the so-called East Shale play, which Vesta president and CEO Curtis Cook says is more accurately called the Duvernay Shale Oil Basin. “Geologically, you have the reef—the Leduc Reef that they found in 1952— and then you have the sea, where all your plankton and organic material was turned to oil. We’re in the sea, the source shale,” Cook says.

To put a finer point on it, everyone was chasing the condensate windows in the Montney and Duvernay, while Vesta is in the shallower eastern oil basin of the Duvernay.

So what spurred Cook’s candor now? Well, Vesta has amassed 275,000 acres in this shale since the company was founded in 2011. It has drilled 70 wells and currently produces over 7,000 bbl/day of 42 degree API oil. It has identified about 10 billion barrels of oil in place and has an inventory of over 2,000 drilling locations.

While Cook admits his team is still climbing a steep learning curve, Vesta achieved commercial production two years ago, with corporate returns of over 30 per cent and IRRs on individual wells as high as 65 per cent.

So Cook now has an eye to a future that could involve taking the company public.

“My job is to create options and, in my view, our company lends itself to the public markets. I believe it’s a product that is profitable, scalable, sought- after and I think we’re doing it the right way,” he says.

An engineer and former Renaissance Energy “graduate”, Cook rubs shoulders with fellow Renaissance alumni who went on to lead companies such as Spur Energy, Peyto Exploration, Storm, Pengrowth and Chinook.

Cook started his first company in 2000, a heavy oil venture called Exodus Energy that he sold to an income trust. Then he built a company in coalbed methane, and he sold those assets to Trident Resources Corp.

After the markets crash of 2008, as shale gas started to flood the North American market, Cook concluded that natural gas prices would never come back. So for his next venture, he filtered out natural gas opportunities as well as heavy oil because, by then, there was too much competition. Meanwhile, everyone was shifting to scalable opportunities in the Montney.

“That works, I thought, but it needs to be oil,” Cook says.

Acreage in the east Duvernay went for a song, which appealed to Cook’s buy-low/sell-high instincts. When it became apparent that this play was analogous to the Texas Eagle Ford and the Permian, Cook partnered with EOG and then later on, bought out EOG’s position.

Fast forward two years to May 2017, JOG Capital and Riverstone, with Mark Papa as technical advisor, co-led an equity financing of $305 million for Vesta.

Because of the Eagle Ford analogy, Vesta borrows heavily from U.S. technical advances in shale. It uses plug-and-perf, as do most operators in the Eagle Ford and Permian. It builds its own leases, owns its own equipment and tries to avoid consultants “because we want the relationships to reside within our company,” Cook says.

Vesta goes so far as to style itself as a “U.S. company operating in Canada”—but with some differences. Vesta works to the highest Canadian standards. It recycles 99 per cent of its frac water, minimizes its footprint and supports the communities in its area of operations.

A big difference is also that land prices in Canada are a fraction of what they are in the U.S.

“We produce the same product, we have same cost structure, and we make just as much money, but the valuation of this play versus a play in the United States is about 1/10 of the cost,” Cook says. “Canada is in a tough spot today and there just are not a lot of products like this. The market is looking for something like our story.”

Top Public Emerging Producer

Pragmatic: Common sense leads to uncommonly good results at Yangarra

Yangarra Resources president and CEO Jim Evaskevich. Image: Joey Podlubny/JWN

When Yangarra Resources Ltd. bought its first oil-hauling truck, its president and CEO Jim Evaskevich went to pick it up and drove to the field.

“I have a Class 1 license and it sends a nice signal for folks in the field that management understands their challenges and how to help mitigate those challenges,” says Evaskevich.

Hands-on practicality starts at the top and trickles down through Yangarra’s departments. After all, Evaskevich spent the first 20 years of his career in field operations before taking an executive role as vice-president of resources at Glacier Ridge Resources Inc. and, since 2003, as the head of Yangarra.

“Use common sense,” he likes to tell his team. At Yangarra, common sense sometimes leads to less common ways of doing things. For example, Yangarra currently produces 8,300 boe/day, all of which is hauled by truck.

Doing so avoids the risks of costly emulsion pipeline breaks in a wet part of central Alberta where spills are costly and damaging to the environment. Trucking also allows Yangarra to blend its heavier and lighter crudes at its own facility to about 805 to 825 kg/m3, which Evaskevich says is the sweet spot that captures about $4 more per barrel.

“Some would tell you that you spend more money to truck it than to pipeline it, but the problem with that argument is that Yangarra’s operating costs are $8/bbl and our peers are at $10 to $14/bbl. So obviously, somewhere in that translation, something has been missed in their argument,” he says.

Evaskevish’s practicality is reflected in the company’s ownership of infrastructure and equipment, including crew trucks, bobcats, skid steer loaders and, consequently, it’s one of those rare companies today that has more staff in the field than in the office: 20 in the field versus 15 in Calgary.

An important pivot for Yangarra came in 2013 when it shifted to a full-cycle internal rate of return perspective. That led to its focus on the Cardium, shutting down its Jaslyn field and turning away from its Medicine Hat assets.

The financial markets crash of 2008 taught Evaskevich the value of maintaining a strong balance sheet, which served the company well when oil prices collapsed in 2014. Through the downturn, Yangarra bulked up on Cardium acreage. On this score, Evaskevich also takes a little different view than some of his peers. “When you’re near the top of the commodity cycle, debt-to-cash flow needs to be one-to-one or less. When you’re at the bottom of the cycle, four- or five-to-one is just fine,” he says.

Currently, Yangarra is at about 1.5:1, and Evaskevich is comfortable with that. He says that he’s willing to issue stock “if it makes sense.” But Yangarra mostly uses senior debt to finance its development activity, which currently is focused on getting the most from the Cardium by tapping the lower bioturbated Cardium zone. “Everything changed when we drilled our first bioturbated

Cardium well in 2016,” Evaskevich says.

It tried to frac the bioturbated Cardium on two occasions prior to that using a ball-drop completions system but failed.

“One of our competitors was using sliding sleeve and, while I like ball drop because it’s easy, I was aware that we were losing a lot of energy from the packers. So we wanted to try something that would pinpoint all of the energy of the frac into the reservoir,” Evaskevich explains.

Sliding sleeves and cemented liners proved to be the answer.This type of completions also allowed Yangarra to run extended reach wells. Twenty-six bioturbated wells and $350 million later,Yangarra has learned that the bioturbated section tends to be oilier, have more pressure and is very brittle.The accumulated data and learnings from this work is now being translated into repeatability and efficiency. By successfully producing the bioturbated Cardium, Yangarra’s already top-decile average full-cycle rates of return of about 30 per cent have increased to about 72 per cent.

“They’re just phenomenal wells,” Evaskevich says. “When you total the upper zone with the lower bioturbated zone, all of a sudden you’re talking about an OIP [oil in place] that’s really attractive.” Some companies might allow the excitement of success to overshadow other dimensions of its work, but common sense prevails here as well. Yangarra’s support of community has always been important and continues to be.

During the downturn, Yangarra cancelled its Flames season tickets and gave half of the savings to the Food Bank and the other half to Classroom Champions. It has now upped that spending and its support for health and education in its central Alberta area of operations.

Top Intermediate/Senior Producer

Slow burn: Whitecap’s low decline assets and stable cash flow make for a perfect blue chip company

Whitecap Resources president and CEO Grant Fagerheim. Image: Joey Podlubny/JWN

The purchase of Cenovus Energy’s Weyburn CO2 project by Whitecap Resources Inc. might have raised some eyebrows at the end of last year, but the acquisition is in complete alignment with Whitecap’s focus on long-life light oil assets with modest decline rates of 10 per cent or less.

“Weyburn has three per cent declines and spins off a very significant amount of free cash flow,” says Whitecap president and CEO Grant Fagerheim. “To keep production flat at 14,800 bbl/d, we expect to spend just $60 million and at today’s pricing. That will generate between $120 million and $130 million of free cash flow—the true counted cash flow is $180 million to $190 million.” Add to that Weyburn’s 57-year reserve life and Whitecap’s expectation of growing that production by three per cent per year and you start to wonder how much competition there was in bidding for this asset.

“There was competition, but not everyone could raise $940 million in the short six-month window,” Fagerheim says.

The ability to quickly raise money is an outcome of Whitecap’s strong balance sheet. Through the downturn, Whitecap focused on return on capital. It aggressively cut back its capital program when oil fell below $30/bbl so as not to pointlessly burn through inventory. When prices came back to $45/bbl, so did Whitecap’s capital program. It acquired Husky Energy’s oil assets in southwest Saskatchewan for $595 million in 2016 and, a year later, Weyburn. Whitecap’s total production is now 71,000-bbl/d from five core light oil plays, stretching from the northwest Alberta/B.C. border to southeast Saskatchewan. These assets generate stable cash flow, which is ideal for Whitecap’s dividend distribution.

Whitecap became a dividend-paying company in January 2013, filling a gap in the investment community in the low-interest rate, post-income trust era. It sustained the dividend distributions through the downturn while many companies suspended theirs. Low decline reserves, stable cash flow, oil price hedging, a healthy respect for debt (“a silent killer”) and a focus on reservoir simulation and analysis to get the most from its assets under secondary and tertiary recovery—the sum of these parts make Whitecap a compelling story to the investment community.

As a business graduate by education, Fagerheim never underestimated the value of a cohesive business story. He got his start at Dome Petroleum in the 1980s, then worked at Sceptre and Northrock, and in 2000 launched his first company, Ketch Energy (part of it survives as Advantage Energy), followed by Kareco Energy in 2005.

“We sold off the gas from Kareco in 2007 and changed names to Cadence Energy at the AGM in 2008. We got an unsolicited bid to buy Cadence Energy by Barrick Gold in July 2008 and closed the transaction on September 8, 2008, just before the world changed on September 15 with the bankruptcy of Lehman Brothers. So my overall comment is that I’d rather be lucky than good,” he quips. Today, as oil prices firm up, Whitecap’s business story only gets better. It is spending between $430 million and $450 million in 2018 on organic growth. Fagerheim anticipates growing the business by 14 per cent per share on production and 27 per cent per share on cash flow, at a 2018 oil price estimate of $58 WTI. So that’s the good news. What about challenges?

“You want me to go there?” Fagerheim says. But he dives in anyway. “We are extremely challenged by our governments, not only by our province but, more importantly, by our federal government as a result of not having a complete and well-thought-out energy strategy nor a financial strategy for the country.”

“There has been misinformation about Canada not being clean and environmentally friendly. We are clean. The only oil and gas producing country that has lower greenhouse gas emissions in the world is Norway,” he says.

What is needed is re-education of Canadian governments and many Canadians to remind them about the importance of oil and gas to the Canadian economy. This could be done through community meetings, going to universities, high schools and communities to talk to people about what actually drives the Canadian economy. “Without access to foreign markets, the discount on Canadian crude alone is saddling future generations with debt,” Fagerheim says. “That we’re dependent on just one buyer, the United States, which is growing its production and could at any time shut us down, should be alarming for our governments.”

Top Junior Producer

Grit: Westbrick does whatever it takes to get through tough times as a gas producer

Westbrick Energy president and CEO Ken McCagherty. Image: Joey Podlubny/JWN

Last year, natural gas prices hit negatives and some producers had to pay to take away their gas. This year, Ken McCagherty, president and CEO of Westbrick Energy Ltd., expects AECO prices to dip to $.75/mcf. And that’s a generous expectation.

Nobody makes money at those prices, so what does a producer do when it is 78 percent gas weighted and happens to be on the wrong side of the James River—the theoretical constriction point for TransCanada’s NGTL pipeline?

First Westbrick reminds itself that it has been through all this before. It rallies around the fact that it is a low-cost producer in the heart of some of the best gas production in western Canada, and that it is not alone. Westbrick is a stone’s throw from properties owned by some of the best performing Canadian E&Ps, including Tourmaline, Peyto, Bellatrix and Vermillion.

“We also have some key strengths,” McCagherty says. “I sincerely believe that people are our greatest strength. We’ve got a team of professional geologists and engineers that really know how to execute and we think we can be competitive with anybody.” Another strength is that Westbrick has strong shareholder support. It is 79 per cent owned by U.S. private equity firm Kohlberg Kravis Roberts & Co. KKR came on board in 2012 when Westbrick was producing just 2,500 boe/day with an investment of $75 million and a commitment for later investments of another $175-million

of equity capital.

Good capital support spurred Westbrick’s rapid growth through the downturn. Since 2014, it doubled production to the current 31,000 boe/d. Westbrick has over 1,000 net drilling locations, 27 employees and 100 per cent of its shares sit on the board, so decision making with full board approval is painless.

“So we have the right people. We have capital that’s still interested in investing in Canada and we’re a going concern, with 500 sections of land,” McCagherty says. “With those three elements, a little elbow grease and working hard, we’ll figure it out. We figured it out for 40 years. We’ll figure it out now.”

Those four decades started for McCagherty with a job offer from Charlie Fischer at Dome Petroleum. After four years at Dome, he got an opportunity to work for pioneering oilman J.C. Anderson. He worked for JC for almost 10 years as his “right-hand engineer.”

By 30, McCagherty was a vice-president of exploitation marketing and decided he wanted to learn another side of the business. A stint of deal making with Encal Energy in the 1990s sparked his entrepreneurial bent and eventually set him on course to putting together seven start-ups of his own, including West Energy Ltd., which was sold to Daylight Resources Trust (later bought by China’s Sinopec), and now Westbrick.

Through those years, McCagherty realized that overcoming challenges in the oil and gas industry really comes down to grit. “You need grit. Why do you need grit? Because if somebody really understands nature, they see it wants you dead,” McCagherty says. “I’m amazed by the things we are willing to do to make it work. We’ll do what it takes.”

In 2018, facing dismal gas prices, doing what it takes means cutting back drilling, focusing on half-cycle economics and giving preference to acquisitions over the drill bit.

“The saddest part is that for every rig we shut down, that’s 125 people out of work,” McCagherty says. “We’re a low-cost operator—not quite a Peyto—but it’s not just a matter of being a low-cost operator. We are shareholders first, so we’re very careful about how many shares we have outstanding because you have to lift the whole thing.”

Here’s some perspective on what he means by lifting the whole thing: Westbrick raised only $290 million of equity to get to over 30,000 boe/d. Tourmaline, by contrast, raised $6 billion of equity. That’s 20 times more equity to achieve only nine times as much production as Westbrick.

“So the focus isn’t so much size but creating per-share value,” McCagherty reiterates.

By half-cycle development of resources he means that, currently, Westbrick has all the infrastructure and facilities it needs and won’t be adding to it.

“We’ll minimize our commitments. We’ll figure out where our niches are. We’ll focus on liquid opportunities—we already have some built into our land base and we’ll look at others,” McCagherty says. “We’re going to prioritize acquisitions over drilling and we’ve already started that.”

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