Why Junior Oil and Gas Companies are F'ed

If you were to look at companies financial information side by side, you would be surprised at what the results may be.

First off, the numbers for the companies listed here are from the Q1 2009 Iradesso report, if you don't get this report, you should. It benchmarks some publicly listed companies that have the majority of their production in the the Western Canadian Basin. You can subscribe to it here.

Included in the comparison are Operating Costs (Op Costs), General and Administrative Costs (G&A) and Depreciation, Depletion and Amortization (DD&A). Royalties per BOE were not included in the Irradesso report so they have been excluded from this information. The total costs for a barrel of oil equivalent (BOE) for oil is simply the operating costs plus the G&A costs and the DD&A costs. The costs per mcf of gas are the same costs divided by 6 (6 mcf per BOE for oil is the conversion factor).

The last column in the example, Approximate Loss/Profit / BOE, is based on revenue for the daily production for gas at $4.00/mcf converted to a BOE and oil at $68/BOE, then taking out the costs for gas and oil by company and finally dividing this amount by the actual production for the day.

The oil and gas company is listed down the left-hand side.

As you can see with the Junior oil and gas company's listed here, the average cost (excluding royalties) is $7.65/mcf. Based on this, you can see that at the AECO spot price for gas (as of July 15th) at $3.04, for every MCF of gas that a company produces, they loose $4.61 on average. Oil is a better picture, with costs of $45.92 (excluding royalties) and revenues per BOE for western Canadian select at $56.35 Cdn, then there is profit of $10.43.

Basically the bottom line on this information is that of the sample group that I have listed, the vast majority are not making any money on their production. I still am trying to figure out how some of these companies are staying in business. My belief is that we will be seeing more of companies looking at "strategic alternatives", which I take as "Putting ourselves up for sale".

There is a larger excel spreadsheet that this came from that I would be more than happy to forward if you would like a copy. Just contact me at chris@argentis-group.com.

The next post will be on the intermediate producers, with production between 10,000 and 100,000 BOED.

These opinions are mine and may not reflect your view. If you would like to contact me, then please feel free to do so at info@argentis-group.com.

Why An Average Gas Well In The Western Canadian Basin Will Probably Not Turn a Profit Over The Next 8 Years

The average gas well drilled in the Western Basin will not turn a profit if you look at the numbers associated with drilling. Considering that 65% of the production in the Western Basin is Gas, this should be cause for alarm.

Reference Data:

In 2008 the average well costs $2.4M to drill according to the National Energy Board.

The average reserve life index (proven + probable) for the Juniors (500 to 10,000 BOED) is 9.7 years and 11.7 for the intermediaries (1o,000 to 100,000 BOED) - for this example I will use 8 years as a probable reserves life index.

The average price per MCF to provide a 15% ROI (in 2008) was $7.63/MCF according the National Energy Board.

The average well produces 30 BOED as of 2007.

Sproule's average price for natural gas/mcf for the next 10 years as of May 2009:

2009: $3.61
2010: $5.48
2011: $6.33
2012: $6.30
2013: $7.14
2014: $7.16
2015: $7.18
2016: $7.21

So given that the average well produces 30 BOED and may last 8 years, then the following 3 scenarios will play out given the current and future revenues as listed with Sproule and costs of $7.63:

Without Decline In Production and No Escalation in Costs Over 8 Years:

Total Revenue: $3,313,345
Total Costs: $3,411,144
Difference: -$97,799


With Decline @ 10% Decline In Production - No Escalation in Costs Over 8 Years:

Total Revenue: $3,406,283
Total Costs: $4,283,080
Difference: -$876,798


With Decline @ 10% and a 3% yearly escalations on Costs Over 8 Years:

Total Revenue: $3,406,283
Total Costs: $4,688,742
Difference: -$1,282,460


So given the different scenarios, if I were in a gas weighted company, I would be wondering how I might ever get out of the downward spiral and what alternatives are available to me. Few and limited. Also, if I were invested in gas weighted companies, I would seriously think about whether I would keep my money invested in these companies. In fact, in a future entry, I will show how very few intermediaries (10K to 100K BOED) and juniors (500 to 10K BOED) can turn a profit. I still don't get how they stay in business. Most of the companies that are still producing uneconomical wells are probably doing so just to get the cashflow, which is a dangerous game with natural gas prices where they are. As of writing this, July 11th 2009, AECO spot price on Natural Gase prices is $2.87/mcf.

These opinions are mine and may not reflect your view. If you would like to contact me, then please feel free to do so at info@argentis-group.com.

The Past 10 Years - Costs Are Out of Control

If you work in the oil and gas industry, you already know that the way that business was done in the past won't help you today. Basically the numbers show it and these numbers show why we are in such trouble right now.

For example, over the last 10 years (1997 to 2007) the following happened in the oil and gas market in the Western Canadian Basin:

• Capital expenditures to increased 86% from $17B to $31.6B
• Production increased 16% from 5.14M BOED to 5.97M BOED of which gas production increased 5% and oil production increased 31%
• Find and Develop Costs increased 61% from $9.14/BOE to $14.53/BOE and currently F&D costs are $16/BOE
• Production per well dropped 40% from 50 BOED to 30 BOED
• Number of wells increased 92% from 103K to 198K

So if capital expenditures go up by 86% and production only goes up by 16%, there is a serious problem. Spending more to get less is not an economical model that you should follow, unless you are hell bent on bankruptcy. This also holds true to F&D costs, if they have increased by 61% and you are only finding 16% more production, then the math just doesn't work.

If the number of active wells pretty much doubles and production decrease per well, you can also figure out that all those extra wells either are draining the other wells, or they do not produce as much or there are a lot of dry/dud wells that are bringing the average down.

With low gas prices (July AECO prices are $3.27/mcf as of June 27, 2009 when I wrote this) I would question why anyone would even think about drilling a gas well in Western Canada. I can go on about this topic and will on another posting to show how the average well will never turn a profit in the next 10 years if ever, unless gas prices dramatically increase (which according to Sproule's price forecast), some radically new technology is found, massive government subsidies or low cost reserves are found.

Basically, if you look at the past 10 years, and if costs decrease as they are expected to by 25% to 30% this year, there still will be a misalignment of costs in comparison to the increase in production. Bottom Line: Troubles ahead if something drastic doesn't change.

These opinions are mine and may not reflect your view. If you would like to contact me, then please feel free to do so at chris@argentis-group.com.