With the costs of development being among the highest in Alberta, the Duvernay has earned the reputation for being an asset only a major can drill. Known as high cost/high reward, the Duvernay draws only the deepest of pockets.
This hasn’t stopped some juniors from taking part. Thanks to the magic of a carried interest, juniors are able to get a piece of the action. Juniors and privately-owned companies are dangling Duvernay rights to someone who can afford to drill them. The strategy has landed some big fish, and some big dollars.
Chevron [NYSE: CVX] recently paid just under a billion dollars for 67,000 acres of Duvernay rights from privately owned Alta Energy Luxembourg. These additional acres brought Chevron’s Duvernay position to over 325,000 acres., 3 Other majors such as Encana [TSX:ECA, NYSE:ECA] have paid high prices for acreages in the Duvernay as well. In a deal that closed out 2012, Encana paid upwards of $9,000 per acre for a deal with Petro-China.
Interest continues to ramp up. In August, Athabasca Oil Corp. [TSX: ATH] opened a data room to potential partners for its Duvernay acres. Up for grabs is a 40% interest. The opportunity was rumored to have drawn the interest of between 20 to 30 companies.
Within 50 kilometres of Chevron’s billion-dollar acquisition is a Duvernay package, owned by High North Resources [TSX.V:HN], that is twice the size, and on par with that of Talisman. High North Resources is a junior explorer with a multi-zone package that includes premium access to the Montney formation, and 119,680 acres of Duvernay.
Directly adjacent to High North Resources, is this year’s Montney success story, Long Run Exploration [TSX:LRE].
MONEY IN THE MONTNEY
Since the end of June, Long Run Exploration has seen its share price rise 50% from $3.69 to $5.54 (as of September 21, 2013). Through repetition, the company has gone on to prove it can steadily grow production in the Montney.
This success led to Long Run announcing a $110 million expenditure in the area; with 50 wells to be drilled over the next year. To date, 9 wells have been licensed directly down the border with High North Resources’ Block H property; four have been drilled so far this year. These wells have delivered production between 250-350 barrels a day of light oil, with some getting upwards of 500-600 boe/d, when gas and liquids are accounted for. Half a year ago, Long Run wasn’t active along High North’s border; now they’re practically knocking on the door.
Through a recent capital raise, High North closed $3.4 million for drilling its first two Montney horizontal wells on its Block H. Formed only in February of this year; the $3.4 million was more than a third of the company’s market cap prior to the fundraising. They’re now in another round of fundraising for an additional $5 million to complete the first two wells, and to drill a third Montney well. The aim is for near-term production, with results similar to Long Run wells
Favorable spacing allotments allow High North to drill up to eight wells per section. If the company gets on a roll like Long Run, there’s potential for this company to ramp up its production quite quickly. A roadmap to 2,000-3,000 barrels a day is legible.
Even more interesting for High North’s shareholders is a recent acquisition made by Long Run. Long Run recently purchased 133 sections (with 1500 boe/d production) for $55 million. It’s feasible that High North could be the next comparable three months from now. A successful run of producers could potentially bring High North near the 1,500-3,000 boe/d mark, and draw a similar price point for its 195 sections. Even a $55 million valuation would bring the company’s share value to $1.10.
BLUESKY IN THE DUVERNAY
When High North purchased Valleyview Exploration to become the entity that it is now, it gained the rights to a total of 195 sections (or 125,000 acres).
The multi-zone rights included both unconventional and conventional oil potential, stacked across four targets: the Nordegg, Duvernay, Montney, and Exshaw.
The package was quite significant. It gave High North a Montney position similar in size to that owned by Shell [NYSE: RDS], and a Duvernay position 50% of the size of that held by Chevron.
Knowing that drilling the Duvernay is out of the picture for a company of its size, High North has filled its calendar for the next year drilling the Montney. That doesn’t mean that its Duvernay rights will go unnoticed.
As majors such as Encana, Shell and Chevron sit to the south, High North’s Duvernay package may draw the biggest interest of the company’s portfolio.
Coupled with the Montney, the Duvernay gives the company a solid duo of possible early and profitable exit strategies.
THE BOTTOM LINE
At the helm of High North is President Colin Soares. No stranger to both the Montney and to smooth exit strategies, Soares was a valuable addition to the team in mid-May of this year.
Soares’ previous Montney deal, Rocor Resources, proved a liquids rich gas play in the Monias area, south of Ft. St. John, BC. As President and founder of Rocor, Soares successfully sold the company to Petrobank (PetroBakken) for over $50 million in late 2008.
The High North team is sitting on prime real estate. Long Run is chasing and proving up Montney targets to the north and east. Shell is creeping up from the south, paying hefty sums along the way.
The success of Long Run’s wells along High North’s border is a very good sign for High North’s drill program. The first well already delivered positive showings of hydrocarbons and the second well was spudded last week.
If High North encounters anything like what Long Run has been consistently delivering, with wells averaging 250-350 barrels per day, investors would likely see a cascade of further drilling on High North’s lands.
The company’s production goals are reasonable. Its lands are gaining value by the month. With a proven exit strategist at the helm, the High North story is going to move along fast. It’s not a matter of “if,” but “when” the company’s package becomes the inevitable takeout target it was built to become.
By. G. Joel Chury