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Is This Where Investors Should Be Looking When Oil Recovers?

Is This Where Investors Should Be Looking When Oil Recovers?

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.

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. Related: The Latest Media Attempts To Suppress Oil Prices

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.

And companies are still buying up land. The April sale of petroleum and natural gas rights in Saskatchewan raised $5.3 million in revenue for the province, bringing 2015 land sale revenues after two sales to a total of $22.8 million.

The highest price paid for a single parcel was $558,280. Prairie Land & Investment Services Ltd. acquired the 1,036-hectare lease north of Gull Lake. The highest price on a per-hectare basis was $6,312 and is shared by two parcels.

The next sale of Crown petroleum and natural gas rights will be held on June 8.

One indication of the continued optimism surrounding the potential of Saskatchewan despite the current oil price environment was the late March sale—at ‘full price’--of Beaumont Energy Inc. to Whitecap Resources for $587 million.

At the end of the day, Whitecap paid 2.5 times Beaumont’s value at current oil prices. Analysts were, of course, shocked.

For Beaumont, which had purchased the Saskatchewan Kerrobert area light oil resources in 2012 for only $110 million—the March sale price was brilliant. Related: Here's A New $1 Billion Funding Source For Mining Projects

More than anything, this deal demonstrates that Saskatchewan is still on the savvy investor’s radar, and good management can see past current oil prices and prepare for the rebound.

“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 Andrew Rees, President of Canadian explorer WellStar Energy, which also swooped in with a Saskatchewan acquisition in February—under current oil prices.

What most are eyeing in Saskatchewan is the province’s portion of the prolific Williston Basin, which extends from the oil-bearing formations of North Dakota and Montana into Canada.

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 few 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 Rees points out, this is a well-developed thick Bakken sand trend.

“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 Saskatchewan acquisitions will be well ahead of the game.” Related: Is Saudi Arabia Setting The World Up For Major Oil Price Spike?

At the other end of this equation, the debt-hobbled producers in the ‘Saskatchewan Bakken’ and Pembina Cardium—such as Lightstream Resources Ltd. and Penn West Petroleum—will have a hard time going forward in the current price environment. Both companies have severely curtailed activity, according to the Globe and Mail.

Only a year ago, companies such as these were riding high on three-digit oil prices and attracting tons of capital, pumping it all into massive drilling and new acquisitions. Since June 2014, however, oil prices have plunged 60% and these companies are now in trouble.

The weeding out of the good deals from the bad deals has now begun to restore a balance to Saskatchewan, which maintains the promise of a highly attractive final frontier in which smart management makes all the difference.

And as TD economics opined in its recent report: “Our long-term view has not been altered by recent events in the global oil market. The West will again be the best.”

By James Stafford of Oilprice.com

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  • thermaled on April 20 2015 said:
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    Otherwise, it's probably doomed because it doesn't scale; it's about the same price as gasoline with 30% less energy content, and the side effects, some of which were mentioned here, aren't so good. Electric miles will settle in at around 2 cents. Gasoline & ethanol miles are around 15 cents on nobody knows where they will be in five years. Pretty good bet PV4EV miles will continue to fall in price for some time.

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