Analysis of Q2 Results for Junior Oil and Gas Companies on the TSX Part Two - Costs and Revenue

Further to the last post, I am going to show a comparison of the average sell price per BOE and the costs per BOE for 57 junior oil and gas companies with production in the Western Canadian Basin that are listed on TSX.

The average oil and gas company have Operating and Transportation Costs per BOE at $12.80, General and Administration Costs per BOE of $5.57 and DD&A Costs per BOE of $27.76. The total costs are $46.14 per BOE of oil or $7.69 per MCF of natural gas. Neither of these costs include royalties, which would probably add around 20% of the sell price per BOE.

Just to be clear, DD&A (depletion, depreciation and amortization) costs give a good representation of how much it costs to add reserves to the company. DD&A costs show the acquisition costs of proved properties and the costs of wells and equipment and are amortized over the life or proved reserves.

Here is a list of companies with their respective Operating and Transportation Costs, G&A costs and DD&A costs vs. their average selling price and the potential profit or loss per BOE.

Company	Op Costs / BOE	G&A/ BOE	DD&A / BOE	Total Costs BOE Oil	Average Sell Price/BOE	Profit/Loss per BOE
Fairwest	$15.55	$2.62	$88.45	$106.62	$37.88	$(68.74)
Action	$30.84	$11.54	$45.70	$88.08	$39.29	$(48.79)
Questerre	$12.18	$17.83	$53.65	$83.66	$40.56	$(43.10)
One	$24.69	$10.76	$32.71	$68.16	$31.27	$(36.89)
Canadian Phoenix	$16.81	$23.63	$45.04	$85.48	$53.27	$(32.21)
Result	$9.74	$7.34	$30.34	$47.42	$19.02	$(28.40)
Insignia	$15.44	$8.97	$31.73	$56.14	$28.18	$(27.96)
Dejour	$17.38	$19.30	$25.10	$61.78	$34.61	$(27.17)
Fortress	$18.07	$8.38	$31.74	$58.19	$37.35	$(20.84)
Monterey	$13.43	$3.46	$29.48	$46.37	$26.42	$(19.95)
Redcliffe	$17.63	$6.79	$24.71	$49.13	$30.04	$(19.09)
Culane	$12.48	$4.31	$33.56	$50.35	$31.81	$(18.54)
Bellamont	$13.31	$4.04	$30.63	$47.98	$29.99	$(17.99)
Great Plains	$23.06	$6.56	$31.42	$61.04	$43.35	$(17.69)
Second Wave	$27.42	$6.15	$25.86	$59.43	$42.30	$(17.13)
Twin Butte	$16.03	$5.15	$27.90	$49.08	$32.07	$(17.01)
Anderson	$9.58	$2.34	$29.65	$41.57	$24.70	$(16.87)
Crocotta	$13.41	$5.98	$32.10	$51.49	$34.82	$(16.67)
Midnight	$9.16	$5.35	$33.82	$48.33	$31.99	$(16.34)
Argosy	$6.90	$12.89	$22.73	$42.52	$26.21	$(16.31)
Petro-Reef	$12.32	$3.57	$27.07	$42.96	$26.85	$(16.11)
Sure	$10.41	$4.82	$23.83	$39.06	$23.54	$(15.52)
Prospex	$10.23	$3.03	$29.34	$42.60	$27.32	$(15.28)
Orleans	$12.39	$3.32	$26.29	$42.00	$27.03	$(14.97)
Canext	$11.80	$5.53	$23.98	$41.31	$26.49	$(14.82)
Triton	$9.94	$4.76	$22.75	$37.45	$23.62	$(13.83)
BlackPearl	$13.94	$4.58	$41.72	$60.24	$47.07	$(13.17)
Diaz	$15.23	$(0.90)	$30.17	$44.50	$31.53	$(12.97)
International Sov	$8.50	$4.14	$22.91	$35.55	$24.28	$(11.27)
Cinch	$3.23	$3.74	$25.19	$32.16	$21.90	$(10.26)
Nuloch	$11.36	$6.79	$26.87	$45.02	$35.50	$(9.52)
Midway	$9.33	$5.55	$23.07	$37.95	$28.67	$(9.28)
Painted Pony	$16.89	$4.61	$28.07	$49.57	$40.48	$(9.09)
Arsenal	$17.72	$5.31	$33.13	$56.16	$47.35	$(8.81)
TRUE	$14.83	$2.90	$30.80	$48.53	$39.85	$(8.68)
Wrangler West	$15.67	$2.72	$22.05	$40.44	$32.16	$(8.28)
Twoco	$7.32	$3.25	$25.07	$35.64	$27.49	$(8.15)
Cequence	$17.39	$13.37	$23.98	$54.74	$47.00	$(7.74)
Open Range	$5.97	$4.22	$25.18	$35.37	$28.03	$(7.34)
Yoho	$8.55	$1.70	$19.69	$29.94	$23.12	$(6.82)
Berens	$8.52	$3.55	$23.22	$35.29	$28.61	$(6.68)
Seaview	$14.35	$3.04	$26.79	$44.18	$39.26	$(4.92)
Vero	$9.99	$2.73	$19.50	$32.22	$27.49	$(4.73)
Delphi	$13.39	$1.97	$24.68	$40.04	$37.49	$(2.55)
Ironhorse	$2.98	$3.81	$14.85	$21.64	$20.85	$(0.79)
West	$11.06	$4.11	$38.95	$54.12	$54.08	$(0.04)
Terra	$7.42	$3.13	$12.72	$23.27	$24.47	$1.20
Rock	$12.40	$2.58	$22.10	$37.08	$38.37	$1.29
Angle	$4.56	$3.15	$15.57	$23.28	$25.60	$2.32
Storm	$7.12	$1.71	$14.43	$23.26	$25.81	$2.55
Zapata	$12.70	$4.21	$20.20	$37.11	$39.88	$2.77
Buffalo	$14.64	$4.81	$14.89	$34.34	$37.27	$2.93
Zargon	$13.08	$4.29	$18.09	$35.46	$40.92	$5.46
Stonefire	$5.86	$1.96	$17.26	$25.08	$31.70	$6.62
Arcan	$11.50	$6.92	$23.11	$41.53	$52.01	$10.48
Freehold	$5.39	$2.86	$23.87	$32.12	$42.99	$10.87
Bonterra	$16.12	$2.43	$10.76	$29.31	$44.44	$15.13
Average	$12.80	$5.57	$27.76	$46.14	$33.61	$(12.42)

Two companies have been omitted that were on the last post due to the fact that there was no way to determine their average sell price. They were Dee Three and Eagle Rock.

Based upon the above figures, only 11 companies (or 19%) actually make money when you take the average sell price and back out the Operating/transportation cost, G&A cost and DD&A costs.

If you add royalties at an average rate of 20% of the sell price, then only 4 companies can make money on each BOE. They are Bonterra at $6.24, Freehold at $2.27, Stonefire at $0.28 and just scraping by is Arcan at $0.08. That's only 7% of the sample companies.

Another approach is to remove the DD&A costs and use the industry standard of $16/boe for find and develop costs and add approximately 20% of the average sell price for royalty costs. If you do this, there are only 6 companies of the 57 that would turn a profit on each boe. They are Bonterra, Stonefire, Black Pearl, Arcan, Freehold and West.

In looking at the prices received and the costs, these junior companies may have problem in the future unless they can cut their costs. There is only so long that you can produce oil and gas at a loss before that catches up to you.

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.

Analysis of Q2 Results for Junior Oil and Gas Companies on the TSX Part One

This might be a little late as Q3 numbers will be out soon, but I finally just got around to analyzing the results for Q2 2009. I have some of the published results from Q2 2009 for Junior listed companies (500 BOED to 10,000 BOED) on the Toronto Stock Exchange. This list comes from the Iradesso Quarterly or IQ report. The I Q Report shows the Junior and Intermediate oil and gas companies with production in the Western Canadian Basin. You can sign up for the report here.

I will have several posts over the next little while that analyze some of the numbers from Q2 2009. In this post I will look at the Costs that Juniors incur for producing natural gas. A little background, the costs that are listed here include Operating, Transportation, General & Administrative and DD&A (Depletion, depreciation and amortization). These costs do not include Royalty expenses. Operating and transportation costs are those that are associated with the direct day to day operations on the well. General and Administrative typically are those that are associated at the office level. DD&A costs are costs associated with acquiring reserves. Together these will give the approximate costs per BOED for oil and condensate or MCF for natural gas.

The average Junior profile is as follows:

Production: 2,632 BOED

Gas Weight: 69%

Gas BOED: 1,739 BOED

Oil BOED: 892 BOED

Operating and Transportation Costs per BOE: $12.80

General and Administration Costs per BOE: $5.57

DD&A Costs per BOE: $27.76

Total Costs (excluding Royalties) per BOE: $46.14

Total Costs (excluding Royalties) per MCF: $7.69

Here are the costs as they relate to the companies with production in the Western Basin:

Company	Op Costs	G&A Costs	DD&A Costs	Total Costs Per BOE	Total Cost per MCF
Fairwest	$15.55	$2.62	$88.45	$106.62	$17.77
Action	$30.84	$11.54	$45.70	$88.08	$14.68
Canadian Phoenix	$16.81	$23.63	$45.04	$85.48	$14.25
Questerre	$12.18	$17.83	$53.65	$83.66	$13.94
One	$24.69	$10.76	$32.71	$68.16	$11.36
Dejour	$17.38	$19.30	$25.10	$61.78	$10.30
Eagle Rock	$18.71	$6.08	$36.79	$61.58	$10.26
Great Plains	$23.06	$6.56	$31.42	$61.04	$10.17
BlackPearl	$13.94	$4.58	$41.72	$60.24	$10.04
Second Wave	$27.42	$6.15	$25.86	$59.43	$9.91
Fortress	$18.07	$8.38	$31.74	$58.19	$9.70
Arsenal	$17.72	$5.31	$33.13	$56.16	$9.36
Insignia	$15.44	$8.97	$31.73	$56.14	$9.36
Cequence	$17.39	$13.37	$23.98	$54.74	$9.12
West	$11.06	$4.11	$38.95	$54.12	$9.02
Crocotta	$13.41	$5.98	$32.10	$51.49	$8.58
Culane	$12.48	$4.31	$33.56	$50.35	$8.39
Painted Pony	$16.89	$4.61	$28.07	$49.57	$8.26
Redcliffe	$17.63	$6.79	$24.71	$49.13	$8.19
Twin Butte	$16.03	$5.15	$27.90	$49.08	$8.18
True	$14.83	$2.90	$30.80	$48.53	$8.09
Midnight	$9.16	$5.35	$33.82	$48.33	$8.06
Bellamont	$13.31	$4.04	$30.63	$47.98	$8.00
Result	$9.74	$7.34	$30.34	$47.42	$7.90
Monterey	$13.43	$3.46	$29.48	$46.37	$7.73
Nuloch	$11.36	$6.79	$26.87	$45.02	$7.50
Diaz	$15.23	$(0.90)	$30.17	$44.50	$7.42
Seaview	$14.35	$3.04	$26.79	$44.18	$7.36
Petro-Reef	$12.32	$3.57	$27.07	$42.96	$7.16
Prospex	$10.23	$3.03	$29.34	$42.60	$7.10
Argosy	$6.90	$12.89	$22.73	$42.52	$7.09
Orleans	$12.39	$3.32	$26.29	$42.00	$7.00
Anderson	$9.58	$2.34	$29.65	$41.57	$6.93
Arcan	$11.50	$6.92	$23.11	$41.53	$6.92
Canext	$11.80	$5.53	$23.98	$41.31	$6.89
Wrangler West	$15.67	$2.72	$22.05	$40.44	$6.74
Delphi	$13.39	$1.97	$24.68	$40.04	$6.67
Sure	$10.41	$4.82	$23.83	$39.06	$6.51
Midway	$9.33	$5.55	$23.07	$37.95	$6.33
Triton	$9.94	$4.76	$22.75	$37.45	$6.24
Dee Three	$9.45	$5.10	$22.73	$37.28	$6.21
Zapata	$12.70	$4.21	$20.20	$37.11	$6.19
Rock	$12.40	$2.58	$22.10	$37.08	$6.18
Twoco	$7.32	$3.25	$25.07	$35.64	$5.94
International Sov	$8.50	$4.14	$22.91	$35.55	$5.93
Zargon	$13.08	$4.29	$18.09	$35.46	$5.91
Open Range	$5.97	$4.22	$25.18	$35.37	$5.90
Berens	$8.52	$3.55	$23.22	$35.29	$5.88
Buffalo	$14.64	$4.81	$14.89	$34.34	$5.72
Vero	$9.99	$2.73	$19.50	$32.22	$5.37
Cinch	$3.23	$3.74	$25.19	$32.16	$5.36
Freehold	$5.39	$2.86	$23.87	$32.12	$5.35
Yoho	$8.55	$1.70	$19.69	$29.94	$4.99
Bonterra	$16.12	$2.43	$10.76	$29.31	$4.89
Stonefire	$5.86	$1.96	$17.26	$25.08	$4.18
Angle	$4.56	$3.15	$15.57	$23.28	$3.88
Terra	$7.42	$3.13	$12.72	$23.27	$3.88
Storm	$7.12	$1.71	$14.43	$23.26	$3.88
Ironhorse	$2.98	$3.81	$14.85	$21.64	$3.61
Average:	$12.80	$5.57	$27.76	$46.14	$7.69

If you focus on natural gas, there is an interesting picture. The current 2010 AECO strip is $5.93 per MCF for revenue. Of the 59 companies listed, only 15 companies will turn a profit on natural gas based on their costs and the AECO projections of $5.93/MCF in revenue.

If you were to add royalties to the expenses at 20% of the revenue (a swag on my part), then only 6 of the companies would be able to turn a profit. These companies are; Bonterra, Stonefire, Angle, Terra, Storm and Ironhorse.

Interesting how only approximately 10% of the publicly listed companies on the TSX can make money on natural gas. Also consider that the 59 companies listed are 69% gas weighted, which is a scary picture.

I have an Excel Spread Sheet version of the information contained in the Iradesso report that you can use for analysis. All you have to do is email me and ask for it. It's a great spread sheet for determining where certain companies line up compared to others and compared to the averages.

I will have more analysis in the near future on Q2 results, such as daily profit or loss per company, reserves replacement costs based on year end reserves numbers and Q2 DD&A numbers, among others.

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 Average Cost of a Well - Outpacing Inflation By Over 5 Times

In my first post on this blog, I brought the fact that capital costs associated with new wells has increased 86% from 1997 to 2007. This was on the entire Western Basin as a whole. Now I will look at it on the well level.

The spend per average well according to Canadian Association of Petroleum Producers, starting in 1997, was $1,670,674. Ten years later in 2007, the same costs associated on a per well basis were $3,253,541. These costs include: exploration cost, development costs, operating costs and royalties. On a per well basis, this represents a 95% increase in costs over a 10 year period. By the way, the biggest portion of these costs are services by driller, which also increased at the fastest pace.

The average yearly increase was 17% where inflation is typically 3%. At that rate, new well costs outpaced inflation by 5.78 times.

Another view would be demonstrated to the left. The red line shows what has happened from 1997 until 2007 and the blue line shows a straight inflation rate of 3% per year. In actuality, inflation only increased at 2.2% per year over this period.

If I owned an oil and gas company, I guess what I would be doing right now is wondering why these costs have escalated so much. Also, I believe that I would also be putting my drilling company on notice to ask them why they have increased costs so much and have really given very little back in return. Perhaps a new "Risk and Reward" model might work, where the driller can participate on the upside for a diminished fee.

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 British Columbia Carbon Tax - The New Additional Costs for Oil and Gas Companies

There is a new major expense that is impacting operating costs for oil and gas companies operating in British Columbia. It is the BC Carbon Tax that applies to the purchase and use of fossil fuels in the province of British Columbia. The tax rate starts at $15/tonne in 2009 and increases energy year by $5/tonne until 2012 when the rate will be $30/tonne.

As of July 1 2009, British Columbia's carbon tax rate on 1 Gigajoule of natural gas is $0.7449 or $0.709 per mcf. In 2010 the tax will be $0.945/mcf, in 2011 it will be $1.18/mcf and it will finally top out at $1.41/mcf in 2012.

Considering that the 2010 strip forward on natural gas is $6.05/mcf Canadian (as of October 3rd, 2009), this would mean that the tax on any gas consumed would be equal to almost 12% of the price. On the current AECO spot price of $2.66/mcf Canadian on October 3rd, 2009, this would represent a tax rate of almost 27%.

Another view on this is that the tax for 2009 is also equal to a 9% additional cost on the average operating costs of $7.63/mcf (based on National Energy Board figures for 2008). If the operating costs were to remain flat at $7.63 until 2012, then the new carbon tax would represent 12.4% additional costs in 2010, 15.5% in 2011 and 18.6% in 2012.

As it relates to oil and gas companies, in their operations, one the of largest consumers of natural gas will be their compressors for pipelines. The average size of a compressor on a pipeline is BC is 970 HP and based on initial calculations, the carbon tax would be approximately $57,000 this year, going to $142,000 in 2012.

Most oil and gas companies currently look at paying the tax as their only option, but there is another option that is available to offset the new tax. It involves harnessing waste heat from compressors and utilizing it to create electricity that can be used to offset the new costs of the carbon tax.

This would be accomplished by harnessing the waste heat to drive a turbine/generator to create electricity that could drive a supplemental electric compressor or this electricity can be sold back into the grid to create a revenue stream that can offset a portion or all of the carbon tax costs.

There is a double positive effect in harnessing waste heat to create electricity. One, you can generate a revenue stream on the electricity sold and two, you will receive carbon offset credits that have a value on the open market. Currently these credits are going for $15/tonne and this is approximately equal to the amount you would receive from generating 1 MW of green electricity.

If an oil and gas company understands the financial impact of the new carbon tax as it relates to their business, then they can start looking for waste heat in their operations to generate green electricity projects to assist with offsetting part or all of the new costs associated with the BC Carbon tax.