How Are Private Operators Navigating The Downturn?

There’s something comforting about heading a privately-owned oil and gas company and not having to watch your company’s publicly-listed shares drop on an almost daily basis, according to the CEO and president of Calgary-based Velvet Energy Ltd.

For Ken Woolner, who has headed the fast-growing Alberta Deep Basin-focused company since its launch in 2011, there’s a flexibility that heads of publicly-listed companies just don’t have, especially amid today’s COVID-19-caused oil and gas industry crisis. 

“Our focus now is on gas wells in the Edson area, where we have a 400,000-acre, 100 per cent owned land position,” he said, adding that, given low crude prices, Velvet will be doing no new drilling on its light oil-prone lands in the Pouce and Flatrock, B.C. area holdings in the Montney.

Woolner, who has headed two publicly-listed companies during his 40-plus years in the industry (one was the former Velvet Exploration, which the former El Paso Corp. took over in 2001), said a year ago he would have steered Velvet in a more oil-heavy direction.

“Our focus would have been on drilling wells in the Montney,” he said.

Although such a fast pivot would have been possible if Velvet — with current production of about 30,000 boe/d — was publicly-listed, Woolner said not having to frequently justify his company’s strategy to numerous small shareholders affords executives with his company a sense of freedom and flexibility.

The company is well capitalized, having raised C$672 million from four private equity partners, including New York-based Warburg Pincus L.L.C., Trilantic Capital Partners, 1901 Partners Management L.P. and the Canada Pension Plan Investment Board (CPPIB).

“There are a lot of advantages to being private,” he said, adding that being so allows companies to “hunker down and survive” until things get better for the Canadian oil and gas sector.

And Woolner, who has seen many ups and downs in the sector — although the current price and energy demand shock is the worst he has experienced – is convinced there is a light at the end of this tunnel.

“It’s a bit of a war of attrition now, but I think things will be better in the back half of 2021. Ultimately, I think we [the Canadian oil and gas industry] could be the darlings of the investment community again.”

Amid all of the doom and gloom, the Canadian oilpatch is “a hotbed of entrepreneurs and scientists,” he added, which will ultimately serve it well.

Source: CanOils Assets

Natgas advantage

Woolner said the industry in Canada has other advantages.

As a large gas producer, he said he’s much more optimistic about gas prices going forward than about crude, given that so much gas demand is domestic, and in the U.S. The decline in shale oil drilling, where associated gas led to a North American gas surplus, will help Canadian gas producers. And Canadian gas consumption will always be strong in the winter, given the country’s climate.

However, Canadian producers still produce more than the country consumes, meaning exports are essential.

Velvet can produce up to 90 mmcf/d gas (it has shut-in about half of that) and he thinks it could reach those levels again this year, and definitely in 2021.

Meanwhile, the company is adjusting to the new COVID-19 reality.

It has 135 employees overall and, although it has closed its Calgary office, Velvet has not laid off a single person.

Its 85 office workers continue to do their jobs from their homes and its 50 field workers, deploying social distancing, protective gear and other cautionary moves, continue to do their jobs. It also is using an “A team and B team” approach, to space out its workforce.

And the company has long been a user of technology that allows its key employees to work from a distance.

“In some ways we’re busier than ever,” said Woolner.

Creating opportunities

He said Velvet will be looking for distressed assets to buy at some point.

“A lot of the damage has been done and this is creating opportunities,” he said.

Warburg Pincus, in particular, is a believer in the long term benefits of holding Canadian oil and gas assets, so the company has patient shareholders that will be interested in future opportunities, he said.

Jupiter Resources Inc. is another Deep Basin-focused gas producer that has the advantage of being supported by private equity investors with deep pockets and patience.

Company spokesperson Ryder McRitchie said the company, which holds a contiguous land position of 350,000 net acres, with over six tcfe in reserves, raised US$77.5 million in February.

Jupiter, which has its field offices in Grande Cache, Alta., also secured $225 million in a revolving credit facility in February. Jupiter’s largest investor is New York-based private equity firm Apollo Capital Management.

McRitchie acknowledges that the company has faced its struggles.

In December 2018 Jupiter recapitalized, converting millions of dollars in bond holdings to private shares. The company will produce an average of 400 to 450 mmcf/d of gas this year, which he said it can produce for close to break-even at current prices.

It has reduced its capital budget to about $110 million, down about 10 per cent from last year. Even before COVID struck, the company had a lean staffing profile, he said. Jupiter has 50 employees in Calgary, now all working from their homes, and 50 in the field.

“Our executives have long been big believers in technology,” he said, so working from a distance has not been an issue.

This is spring breakup time, so McRitchie said it is typically the slowest time of the year operationally, meaning field activities will be much less than in the winter months. He said the company will look at buying distressed assets in the future, given its strong balance sheet.

“There are a lot of attractive assets to look at,” he said.

Like Woolner, he is a strong believer in the strength of the Canadian gas sector longer term.

Associated gas production in the U.S. will decline and there are several gas pipeline expansions within Alberta, giving producers greater market access in the future.

“We feel we’re very fortunate,” he said. “We’re having to live within cash flow but having 93 to 94 per cent of our shares owned by four top shareholders makes it easier to focus.”

Westbrick Energy Ltd., another privately-owned Deep Basin player, has been able to weather the COVID storm, thanks to a strong investor base, an experienced management team and an emphasis on gas and liquids.

“We have 29,000 boe/d of capacity, but we don’t sell our production at a loss,” said Ken McCagherty, the company’s president and CEO, who has been involved in the oil industry for more than 40 years.

McCagherty, who worked in senior roles along with legendary oilman J.C. Anderson and has headed several publicly-listed firms, said he doesn’t believe there’s a significant difference between being a private firm or being public.

“The only difference between being a private and a public company is [if Westbrick was publicly-listed] we don’t have shareholders telling us what we’re worth,” he said.

Westbrick, which was founded in 2011, is backed by New York-based investment firm KKR & Co., which has US$250 billion in investments under its umbrella.

Although KKR is a patient shareholder, he said it wants its investment to pay off and is anything but on the sidelines.

McCagherty said his company takes a seasonal approach to its production, concentrated in the Rocky Mountain House and Drayton Valley areas of Alberta.

In the November through April period, it ramps up gas production to as much as 30,000 boe/d, with production being reduced to one-third of that during the summer. It’s an approach that has allowed the company to remain profitable in a difficult environment for gas prices.

While he says he’s “not prepared to bet the farm” on gas prices rising in the future, he is optimistic, given the likelihood that gas production will fall markedly in the U.S.

“[The prospect for] gas prices in the next little while have never looked better,” he said.

He said it’s ironic to think that it’s now a good thing to be a Canadian gas producer.

“I don’t think I would have heard anyone say that a year ago.”

While the Canadian oil and gas industry faces obvious challenges, McCagherty said good managers can still create cash flow. He contrasts that with the restaurant business, which has essentially been shut down across the country. Those businesses have no cash flow.

He said Westbrick moved early to adjust to the COVID-19 world, closing down its office as soon as the virus became a threat. Its 24 full-time office workers now do their jobs from home, with another six to 10 part-time consultants doing likewise.

Its 40 field workers adjusted to the COVID-19 protocols early, keeping their social distance from other workers and ensuring that facilities are kept very clean.

“We developed a COVID-19 redesign of how we employ people,” he said.

He believes that will allow the company to generate crucial cash flow while it awaits improving economics for the sector.