CEO Interview: Hammerhead Nails It On ‘Green’ Montney Growth With Recent Combination

Scott Sobie.

Hammerhead Energy Inc.’s journey to becoming a publicly-traded company was a natural progression in which various options were considered, but ultimately it was a $1.39 billion business combination with Decarbonization Plus Acquisition Corporation IV that made the most sense, says Scott Sobie, president and chief executive officer.

“From a historical view, we had already spent a fair bit of time planning and detailed engineering on progressing the decarbonization piece of our business,’ he told the DOB about the February deal. “Although we hadn’t sanctioned any capital yet to that, we recognized that future regulatory pressures on decarbonization will not be less, but more. And so, our thinking as a private company was: We’d like to be ahead of the curve on this as opposed to a follower.”

Upon its combination with the special-purpose acquisition company, Hammerhead now trades on both the Nasdaq and TSX, noted Sobie. “We were able to do so at a valuation that was very compelling.”

In terms of how ‘going public’ impacts the company’s operating and business plan, the CEO said that it has not. Hammerhead is still working to deliver sustainable, reliable energy, while also generating top-tier returns that could compete with oil and gas peers, as well as with the broader market. “In terms of me and my role as a CEO, it certainly changes a bit of those public-facing dialogues we did before but are probably doing to a much greater extent now.”

In 2022-23, because it was private at the time, Hammerhead could use free cash flow to reduce debt and build in-field infrastructure (to be completed in Q3), Sobie said, meaning the company has a significant amount of operational flexibility along with lower operating costs. “In other words, we’re not needing to build infrastructure to drill into the business, which generates an enormous amount of free cash flow starting in Q4 2023.”

Quality of assets

“This is an organically-grown company,” Sobie said. “We have a highly technically-focused staff contingent who have been with us right from the start. We aggregated the land in the volatile oil window of the Montney.”

He added: “In terms of the depth and breadth of inventory, we actually feel there aren’t many that compete with us on that basis. If you look at what has happened, a lot of our traditional drilling was done in the northern area in the land base we call Gold Creek, and more recently we’re moving into Karr.”

According to Sobie, while Gold Creek has provided extremely high-returning wells, the Karr assets are even better and weighted even more towards oil. As such, the company is currently developing in North Karr with plans to develop in South Karr towards the end of the year. This asset suite holds between 1,300 to 1,500 potential locations.

“Of that location count, we’re drilling 40 wells per year. Of that 40-well-per-year drilling program, from 2022 to 2023, that provided us with about a 25-per-cent increase in production growth. As we continue forward in this plan, we can continue that sort of growth while still generating a very high level of free cash flow. And so, [with] the quality of the inventory, what it provides us with is an ability to do that for decades into the future.”

For its 2023 capital program, Hammerhead is development-focused with a continuous two-rig program expected to drill about 40 wells. The company is committing about $100 million to infrastructure expansions within its North and South Karr areas in order to accommodate its ongoing and expected growth in production at Karr.

Environment matters

The combination with Decarbonization Plus also made sense for Hammerhead, suggested Sobie, as the company has been committed to providing clean energy, backed with funds to enhance that goal, for several years now. In fact, Hammerhead published its first environment, social and governance (ESG) report three years ago.

“Because we were a private company, we didn’t necessarily need to do that, but we felt that, number one, it was the right thing to do. Number two, it’s a facet of our business that we wanted to spend some time and attention on. That’s how we’re continuing to view it. We do think that in the future the companies that have made inroads into that [ESG] side of the business will be attracting more investment than the companies that don’t.”

He added: “In the near-term, we have some detailed engineering plans on reducing our carbon footprint. That plan is a multi-year plan over several years, where we have detailed engineering and capital forecasts that can get us to net-zero Scope-1 and Scope-2 emissions, and we can do it by as early as 2030.”

Future M&A potential

In terms of further M&A opportunities, said Sobie, Hammerhead certainly feels that scale matters, as does the “public realm” from the standpoint of attracting investment. For his company, the challenge is that the returns on its current assets are so strong that any merger would have to complement as opposed to degrade those returns.

Unfortunately, he said, the market currently does not seem to differentiate between a company having assets of high quality to drill versus merely having inventory. However, he added, that change in recognition is coming.

“We think the multiples given to companies that can demonstrate not only a high quality of current asset inventory, but a high quality of asset inventory well into the future, will see a multiple advantage on their share price. Once that starts to happen, we think that we’ll be very well positioned to be able to do things in the market to build scale that we think is actually important.”

What’s in a name?

In July 2017, when it was still a privately-owned producer, Canadian International Oil Corp. first proposed its name change to ‘Hammerhead Resources Inc.’ The company further recently swapped out ‘Resources’ for ‘Energy’ with its Decarbonization Plus combination.

According to Sobie, the rationale behind the ‘Hammerhead’ moniker is: Topographically, where the Smoky and Kakwa Rivers meet at the southern edge of the firm’s land base, it looks like a hammerhead. “That area was coined the ‘hammerhead area’ by trappers, Indigenous [peoples] and those in this area at the turn of the [previous] century.”

He added: “That was the reason for naming the company, because we always recognized that area will be an important part of our ongoing business. And that’s where we’re continuing to get into at the end of this year. And so, that’s the reason for the name.”

For Sobie, who has been with the company since its inception, what keeps him enthusiastic and personally invested in Hammerhead are three key things — the rock, the plan and the people. On the ‘rock’ side, he noted, the company has “tremendous assets” that keep improving with time in terms of well deliverability and returns on cash flow. As for the business plan, Sobie said, simply put: It makes a lot of sense.

“We’re not building the company and developing the assets in such a way to sell it, for example. We’re developing it to become a sustainable, long-term venture that is very competitive.”

As for the Hammerhead culture, he added, the staff “is truly invested in the vision” of the firm, and those workers are also intelligent and work collaboratively. “That’s a fundamental reason why I love being here. That’s what we were trying to build. I’m happy to say that we’ve been really successful in being able to do that.”

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