Oil and gas juniors adjust, but still get no respect

Claudia Cattaneo? Jun 11, 2012 ? 6:24 PM ET | Last Updated: Jun 11, 2012 6:58 PM ET

CALGARY ? Oil and gas juniors have been leading the way in discovering tight oil in Western Canada, an effort that in better times would have been rewarded by investors looking for the Next Big Thing. Yet today they are struggling with some of the most challenging conditions many ever faced.

Pushed by low natural gas prices to re-invent themselves into oil producers, juniors took up the challenge and were the first to experiment with new drilling technologies that unlocked so many new tight oil plays they helped reverse the decline of conventional oil production in Western Canada, much like in the United States.

Many are growing aggressively, at low cost, and keeping debt low to ensure they have staying power over the long term.

Yet their triumphs in the Montney, the Cardium, the Shaunavon, the Bakken, and other emerging tight oil fields have been stolen by the continuing mess in Europe, which is keeping investors away from anything that?s perceived as risky or tough to sell in a hurry. Their story is another measure of how the global economic malaise is dampening Canadian sectors.

?From 2009 to now, it?s been the toughest time I have ever seen in junior oil and gas,? said Trevor Spagrud, president and CEO of Hyperion Exploration Corp., on the sidelines of an investment conference Monday organized by the Small Explorers & Producers Association of Canada. The new junior, focused on the Cardium, expects to produce up to 2,000 barrels a day by the end of the year, at an operating cost per barrel of $12, including transportation.

?The volatility that we are seeing across the world right now is unprecedented,? he said. ?With light tight oil you do need capital markets, and right now that?s a huge challenge for the small guys ? today that?s not there.?

Yet the potential for tight oil is big, he said.

?A lot of these formations are just being figured out with the best completion, drilling techniques to use,? Mr. Spagrud said. ?I firmly believe that we have the better part of a decade of growth before you will see any declines.?

Doug Bartole, president and CEO of Vero Energy Inc., said Canadian energy is out of favour, and juniors even more so.

?If they want energy in their portfolio, [investors] are buying upscale,? he said. ?Because the world is so volatile, they have the ability to go in and out, and for us right now, they can?t.?

Yet Vero took radical steps to adapt to the new environment. It transformed itself into a pure-play Cardium tight oil producer in January by selling off all its natural gas properties. It expects to grow production to 3,000 to 3,300 barrels a day by the end of the year at a cost of $22 a barrel, including royalties.

Dale Miller, President of Guide Exploration Ltd., which has increasing oil production in the Montney along with low-cost natural gas assets, said juniors are finding a lot of new oil they didn?t see before.

?It?s phenomenal what new technologies have done to these plays,? Mr. Miller said. ?The Cardium has been around since the 1950s, and here we are, ramping up production with new technologies. I would have never guessed that.?

Juniors are coping by spending within their means, and staying focused on the long term, Mr. Miller said.

?We got a tremendous oil play going,? he said. ?We are all experienced. We can make it through this downturn.?

Gary Leach, SEPAC?s executive director, said about 100 publicly traded junior and intermediate companies, once the lifeblood of the Canadian oil patch, are still active today, down a third in five years. The survivors reduced their reliance on natural gas and now derive nearly half their production from oil. They are also bigger than they used to be and quicker to adapt to change.

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