NAI500’s President Gilbert Chan recently conducted an interview with Allen Bey, CEO of Rock Energy (TSX:RE) for his comments on recent oil price drop and his company’s operations.
Q1: Just a question every investor interested to ask in this kind of market, how are you managing the company with a WTI Oil Price around $60? What means did you take to make sure the company is in healthy condition, and if anything more you will do in the next 6-12 months?
First of all we cut down on our capital spending program in first quarter from $90M to $25M. Because we are concerned about the debt, we do not want to see the debt to cash flow level go out of whack. Then we did an equity raise of $15M to shore up the balance sheet. We are able to increase our capital program back up to $40M, that’s what we have right now. With a $60 oil on average, we will have $53M in debt exiting the year, that will be less than 1 times the fourth quarter Cash Flow annualized.
We also look at the cost, if $60 oil becomes the norm, we need to look at how we are able to make money. So we started looking at different prospects, with shorter payout, trying to get our capital and operating cost structures down.
e.g. at our Viking wells, we are able to shave the capital cost from $1.1M down to $850,000 , so we are drilling next set of wells, if they do well, it will come in as 25-30% IRR
Then we look at our operating cost, Cash cost, interest and Royalty costs.
So this year it’s all about watching over our balance sheet, making sure we keep our debt level down and only expand when we can.
Q2: I know you are not in the business of predicting oil price, but what do you think oil price will be in the next 2 years, and why?
Globally, shale oil has become the marginal cost barrel with a break-even point of around $60-$65 , where we are at right now. It really needs a $75-$80 in order to make money
In my view, in next year or so the oil price will start to come back to that level. Remember, the world needs 93M barrels of oil every day, and no one is trying to find those at this price level. Also, talking about Excess capacity in OPEC, historically OPEC will run from 5M to 7M barrels in excess capacity, but currently it is at 2M barrels which is their low end of comfort. The signal is, the oil price will kick around $60 for the next quarter or 2, then it will move back up to a level that justifies the reinvestment into the industry.
Q3: What’s the growth potential of Rock Energy? Why should investors invest in your company right now?
Our Q2 production will probably be down to 4000 BOE/day, as we initiate the EOR scheme at Mantario, and manage the declines in our Viking play.
But we have been drilling more wells, and have already drilled 8 wells during the month of June, and we will be drilling a total of 15 wells in the summer. So we will be moving back up to 5000 BOE/day by end of the year. Assuming a $60-$65 oil price, we can achieve 6000BOE/day of production by end of next year.
That would generate a 50% growth in the next 18 months, while maintaining our debt to Cash flow ratio of less than 1.
Q4: Do you also look at other assets that you may want to take advantage of the low valuation and acquire them too? What are the criteria usually you use to look for assets that fit into Rock Energy?
We are looking at these things carefully, not aggressively. We have been focusing our own inventory, we have over 800 drilling location inventory right now.
When I look into bringing in new assets, I need to ask, ‘would they be better than our current drilling inventory?’ secondly, is it Near our Core area of operations and thirdly, can I afford such transaction because I am not looking to raise equity at this level. So with all these 3 elements in mind, we are taking a more conservative approach in terms of looking to acquire new assets in the near future.
Q5: What do you think the investors should look at when investing into junior O & G producers in terms of information? And how is Rock Energy standing among your peers now?
First of all, Investors should ask themselves, do they think the oil price will go down to $50 range or they will go up to $70 instead, that’s 1 question they need to ask themselves first if they are to invest into oil & gas stocks. Next, who’s going to be around for that, investors want to pick a company that has a low debt level that will be able to survive that with a strong balance sheet.
Then you want to ask if they are low cost producers, again Rock fits into that category nicely. The next question investors should ask, if the oil price starts to improve, are they going to have the assets that they can grow and take advantage of the better environment. Again, Rock has over 800 drilling locations to prepare for such time.
The most important thing is, Rock has already started drilling again while most of our peers are still managing their balance sheet. We are very much ahead of them in terms of our growth path, and that’s what sets us apart.
