Palliser Report Good Oil Conference Sept 2014

This Report is a compilation of the discussions and views expressed at this year’s Good Oil Conference

(“GOC”) in Fremantle and the observations of the Palliser Group to the proceedings. The 2014 annual energy “talkfest” for the small to medium enterprises in exploration and development “(SME E&P”) included over 40 energy company presentations, 83 booths & poster boards and more than 700 delegates networking at the Conference.. Compared with Palliser’s previous attendance in 2012, notwithstanding the commercial risks of global oil and gas pricing and the lessening availability of risk capital for exploitation, Palliser detected a more positive vibrancy about the industry as companies outlined the benefits of their different strategies, successes and changes to their commercial realities.

Perhaps, too, the up-beat atmosphere could be attributed to the experience of the aging profile of company participants who have ridden the resource price/commercial cycles a number of times and know there will be light at the end of the tunnel if businesses have the right fundamentals and risk management procedures.

Palliser experienced a feeling of déjà vu from GOCs of a decade ago when hearing companies explain their different business development strategies, how they survived the industry downturn, how they had repaired their balance sheets and begun to look for new exploration and development opportunities overseas. There was a sense of “Back to the Future” in observing the dynamics of the industry adjusting to niche strategies and technologies in proven petroleum producing provinces.

However, what set the 2014 GOC apart is that companies are returning to these known areas in the USA and Australia having learnt the hard lessons of poor strategy and execution from a decade ago. Now they are focussed on strategic positions in non-conventional resources in “play types” such as the Bakken and Eagleford Shales in the USA, the Montny Formation in British Columbia and Alberta, Canada and the Perth & Cooper Basins in Australia. Companies have adopted advanced technology to de-risk projects. They have re-entered existing petroleum producing provinces to provide the basis of cash flow and reserves growth (that are essential for growth in Enterprise Value “EV”) and presented niche service offerings to investors. Investments in frontier areas are not in the “play-ground” of this savvy industry SME E&P sector.

Key GOC themes

Capital Funding. Over the last two years companies have significantly repaired their balance sheets and are now strategically selecting their projects based on “play types” and technology to obtain funding from different sources. Companies are using a variety of ways to generate funds from asset sales of derisked projects, trade sales, farm ins/farm outs and IPOs. Market Performance While capital raising is possible on the global stock markets such as AIM, ASX and TSX, the post IPO performances of the respective shares has been less than spectacular over the last 12 months. This limits future investor opportunities to raise funds from these sources unless they are at a significant discount via warrants or options at IPO. The AIM in the UK (exposed to the African and European gas markets) and the ASX (exposed to Queensland gas market and some USA focus and limited exposure in Western Australia), have shown a decline of around 11% and 14.5% respectively year-on-year. Contrary to that trend, the TSX market in Toronto (with exposure to Canadian onshore gas liquids and connections of the gas to LNG projects) has shown an increase of 6% over the corresponding period. Funding is also coming from sources such as private wealth companies which are taking an active role in the business with Board representations, commercial advice on strategy and helping in the development of the SME E&P companies through de-risking projects and through an exit strategy with a liquidity event such as selling them through trade sale activity or through M&A.

Tapping capital is a major challenge for SME E&Ps as the market and the sources of capital need to be convinced that the risk management processes of the SME E&Ps are in place to manage the activities of the business and protect shareholder wealth.

Oil and Gas Price…. Where to?
Although the forward price curve for Brent to 2019 shows a price of US$100 per barrel for Brent crude the consequences of the Eastern European problems are not impacting on the oil price predictions for this period. The market has factored these risk factors in the current price as a short-term phenomenon. Global demand growth for crude is expected to increase by 1.4 MMBBLs/day in 2015 compared to 1.2 MMBBLs/day in 2012 as a result of increased demand driven by transportation factors.

The forward gas price curve into 2016 posted on Henry Hub is a price of US$4.50 per MMBTU is a positive indication of future gas prices essential for determining the viability of gas liquids production from non-conventional shale gas plays and hence the ability meet the future supply demands of the USA domestic energy market and potential LNG export sales.

Global growth prospects….?
Westpac presented economic data which showed strong global economic performance to 2018 built around low global volatility exchange rates and stable long-term prices for oil. However the bank analyst also indicated that post-2018 is likely to experience a significant downturn due to changes in demand in the key engine drivers of global growth in China. Other factors include changing government policy to divert consumer consumption to infrastructure, rising interest rates in USA due to dampened demand from a growing retail sector, strong share activity,
improving housing activity and emerging markets.

Where are they exploiting and why…?
The SME E&P companies are returning to the traditional petroleum grounds they inhabited 10 years ago. The Australian companies are re-entering the US market, but more on a strategic basis focused on strategic plays such as the Bakken, Permian and Eagleford plays in the United States. To a lesser extent they are also looking at non-conventional shale in the Montny play in North-West Canada in the Provinces of British Columbia and Alberta.
Previously, Australian SME E&P companies adopted a “scattergun” approach in the USA to source production and cashflow. They were “burnt” by the dearth of technical and commercial market understanding for their exploration and production activities.
Now, with more experience and more thoughtful strategy, these SME E&P companies are focusing on low-cost drilling and completion technology applicable to specific play “types” such as nonconventional shale oil and shale gas liquids projects to generate both a reserve base and cashflow for ongoing and future exploration.
New drilling and petroleum engineering technologies are the key drivers in allowing companies to revisit existing and proven petroleum basins. These include 3-D seismic, powerful computer modelling and analysis that better define targets through higher definition of the petroleum systems they wish to drill. There are also new production technologies that focus on mobility and are reusable. For example, there are mobile offshore development production units (“MODU”) which are highly specialised systems that include a CALM buoy that operates in less than 90m of water and can be used to exploit stranded oil resources offshore.

Other business tools in the SME E&Ps “kitbag” include an ability to assess geographical risk that balances exploitation costs in different producing areas. This creates stakeholder partnerships with effective communication especially with local governments and accepts the need for embracing Community Service Obligations (“CSOs”) in regional areas. The use of government to government overseas trade relationships is a key element to ensure continuity of exploitation activity and access to resources and permits in different jurisdictions.

Australian SME E&Ps are returning to the offshore sector in a number of global jurisdictions but shunning Australia due to the high cost of operations there. SME E&Ps are targeting jurisdictions and partners with the aim of obtaining access to petroleum systems that can provide cash flow quickly.

Nevertheless, it is interesting and a touch puzzling to watch the diversification of Australian SME E&P companies overseas. They are prepared to return to the US to focus on specific play types like the Bakken and Eagleford, but have been less inclined to invest in the equally attractive Canadian Montny play that has similar parameters and success. It is hard to fathom this reluctance to invest in Canada given that country’s extensive technology base, geological potential, proven petroleum systems and exploitation history in a commercially sound fiscal system.

Risk Management tools needed….?
The GOC discussions also centred on the risk management approach to new jurisdictions championed by Ernst and Young. It is simply not in the best interests of shareholder value to decide one morning to go to an overseas petroleum province without careful and considered planning. The questions should include – when is the right time to invest overseas? Do I understand the fiscal regime? What records should be maintained in country? What is our local management and which are the local management contacts with key decision-makers in government and industry? What are the consequences of the tax legislation on the JV agreement? What are exit strategies? This list in not exhaustive but at least it starts the rational thought processes for overseas expansion!

These are simple questions, but they do provide an important set of rules to minimise the risk of the investment and consequences on the parent company.

Where is the next generation of explorers….?
The profile of the industry at this conference was an ageing population with plenty of “grey hair” and experience to provide perspectives on the various prospects and investment opportunities. This group of industry professionals have seen many cycles in the exploration and production systems over 30-40 years and they seemed to be relatively “relaxed” about the uncertainties that could occur in industry in the coming years due to potential oil & gas pricing volatility, permit access and capital raising issues. I If the profile had been 20 years younger, the mood of the delegates may have been quite different – an interesting scenario to ponder.

The presentations…ok?
The tone of the presentations gave a sense that the SME E&Ps are letting the facts of their activities, the strength of their balance sheets and the communication of different strategies based on commercial reality provide the basis for interest in their stock. There was limited direct stock promotion. It seems that that ASX Disclosure Statements are adding to this improved corporate governance.

Geoffrey R Widmer
Palliser Group
17th September 2014


The preceding commentary is a compilation of views and data from at the 5th to 6th of September 2014 -Good Oil Conference 2014 in Fremantle expressed by the various participants. The Palliser Group has not verified these facts as presented to the conference and has not made independent enquiries as to the validity of the statements made or of the data presented. The Palliser Group recognises the authors of the various views as detailed in the Good Oil Conference 2014.