Small-cap WellStar Energy (TSX.V: WSE) is not only surviving the oil downturn by playing it smart, it’s thriving on strategic new acquisitions in Saskatchewan and Alberta and a 2015 low-risk drilling and workover program that promises realistic growth and return on investment.
So many junior oil companies overleveraged themselves on $100 oil and are now facing bankruptcy or sell-offs of their debt. Not so WellStar Energy, whose management played it smart from the start and is now looking at increased growth with new operated assets in a low-risk drilling venue in the prolific Williston Basin and Western Canadian Sedimentary Basin (“WCSB”).
WellStar recently acquired a private company with operated assets in Saskatchewan and Alberta producing 62 boe/d with significant development and exploration potential.
When oil prices recover—and plenty of analysts think the climb back up will start soon—Canada’s western frontier of Saskatchewan and neighboring Alberta will ‘still have the edge’, according to a report from TD Economics.
Depressed oil prices may have skewed the view from Canada’s oil-producing west, but this will be one of the better places to bet on the oil rebound.
Saskatchewan remains the last highly accessible onshore North American oil frontier and it is home to part of the prolific Williston Basin, which extends from the oil-bearing formations of North Dakota and Montana into Canada and includes the well-developed, thick Bakken shale trend.
While the Williston Basin already produces over 1 million barrels of light crude oil per day, projections are that it could be producing double that as new wells come on line over the next several years. The Williston basin’s top Bakken producers are Whiting Petroleum Corp. (NYSE:WLL), Hess Corp. NYSE:HES) and Continental Resources (NYSE:CLR).
And as the industry gears up for the Williston Basin Petroleum Conference (WBPC) on 28 April, the message is clear: Saskatchewan is still alive and kicking.
Those companies who overleveraged themselves based on $90-$100 oil may be in trouble, but those who prepared for the possibility of an oil price downturn, and those who have made acquisitions on this downturn are poised for bigger long-term gains.
WellStar’s management has put a strategy in place that defies today’s market downturn on many levels. The company’s smart management plans initially to allocate capital for low-risk development opportunities, as well as tapping in to their extensive industry contacts—which includes operators and land owners in the Williston Basin and WCSB—to gain access to some major deal flow.
WellStar’s big game here is to make acquisitions that are significantly below what highly leveraged small to large-cap companies in the sector have been able to achieve due to the oil price downturn.
So far so good. Right now, WellStar is making impressive progress on workovers in its Saskatchewan and Alberta acquisitions, which are targeting adding another 80 boe/d of production to its portfolio—all for only $250,000.
Within the next two months, WellStar expects to acquire and evaluate 3D seismic for a Red River/Winnipeg sand dual leg horizontal well which offsets current production. Drilling success would target adding another potential 450-700 gross boep/d increase in production of which WellStar would own 50%.
We can expect further intuitive acquisitions by WellStar this year. In the coming months, they will be evaluating additional acquisition opportunities in Saskatchewan and Alberta.
While Saskatchewan is still on the savvy investor’s radar—just look at the March sale of Beaumont Energy Inc. to Whitecap Resources for a full price tag of $587 million—this is not just a Saskatchewan story.
What investors should be looking at here is prime management of junior oil companies. It is management that makes or breaks a company, and in the case of WellStar, the intuition of its team has kept it ahead of the game while others flounder in the oil price downturn.
“The key is to watch out for companies that are making fundamental acquisitions based on present-day oil prices and valuation metrics—companies that didn’t overleverage themselves based on $90 oil,” says WellStar President Andrew Rees.
“In Saskatchewan, investors and the bigger companies are looking for the smaller players who can deploy capital to low-cost, low-risk development opportunities that can immediately increase production,” he said. “When oil prices start to rebound, those who made smart western Canadian acquisitions will be well ahead of the game.”
This is the final weed-out, and it’s all about smart and sober management that wasn’t blinded by the shale boom and $100 oil prices and didn’t get caught in a bubble that has now burst.
By James Burgess for Oilprice.com
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