The Ju­nior Maker

David Wil­son is a se­rial en­tre­pre­neur who’s ap­plied a sim­ple strat­egy to four suc­cess­ful ju­nior en­ergy com­pa­nies over four decades

Alberta Oil - - CONTENTS - BY NICK WIL­SON

Ha­bit­ual en­tre­pre­neur David Wil­son is some­thing of a “busi­ness whis­perer” when it comes to cre­at­ing small, suc­cess­ful oil com­pa­nies

DAVID WIL­SON MUST BE DO­ING SOME­THING RIGHT.

He started his ca­reer as a rig worker and a driller, and wound up sell­ing his own oil com­pany to ExxonMo­bil for $3.1 bil­lion. In be­tween, a pe­tro­leum tech­nol­ogy di­ploma landed him a com­ple­tion job here and there, and years of start­ing and then sell­ing ju­niors honed his strat­egy for suc­cess.

Wil­son founded a lit­tle-known com­pany called Pronghorn Re­sources in 1987 as its sole owner and pro­duced con­ven­tional oil and gas in Alberta and Saskatchewan. “The first well I drilled, I got lucky and ended up with a pretty de­cent well. I also did some smaller ac­qui­si­tions that turned out re­ally well,” Wil­son says. “Start­ing a com­pany 30 years ago was much eas­ier than it is to­day; there are a lot more hur­dles these days, there is way more bu­reau­cracy and red tape.” Also mak­ing life eas­ier for ju­niors back in the day was the ready avail­abil­ity of cheap land.

Six years later, his next start up, Gen­e­sis Ex­plo­ration, needed more cash. So he took it to the Toronto Stock Ex­change as a ju­nior cap­i­tal pool com­pany with an ini­tial al­lo­ca­tion of $200,000. Sub­se­quent raises paid for the yearly drilling pro­grams. “Af­ter im­ple­ment­ing the drilling pro­gram, we would reap the ben­e­fits of our stock price

go­ing up be­fore rais­ing cap­i­tal again,” he says. Pronghorn even­tu­ally merged into Gen­e­sis.

But how did he grow such hum­ble firms into the Celtic mam­moth? “Our strat­egy back then was the same as it is to­day with Kelt and as it was with Celtic; in down­turns you want to ac­quire as much as you can, whether it’s through as­sets or raw land,” he says. “We were able to do that at Gen­e­sis, Celtic, and now at Kelt. This is when you cre­ate all the value in a com­pany. Every­body else is con­cen­trat­ing on just get­ting through to the end of the down­turn. When no one has a land bud­get, it’s very easy to buy a lot of land at a frac­tion of the cost.”

The strat­egy grew Gen­e­sis into a 23,000 boe/d com­pany—two thirds nat­u­ral gas, and one third nat­u­ral gas liq­uids and oil—putting it on the radar of in­ter­na­tional play­ers. U.S. firm Vin­tage Pe­tro­leum snapped it up in 2001 for $898 mil­lion, break­ing Cana­dian oil patch records. Its cash of­fer of $18.25 for each Gen­e­sis share was at a 32-per­cent pre­mium over its 10-day av­er­age trad­ing price. Gen­e­sis timed the mar­ket cy­cle per­fectly, sell­ing as takeover prices rose.

Wil­son is a boom-and-bust veteran whose firms tend to bounce out of slumps higher than when they went in. “Go­ing into cy­cles, the big thing is to keep your bal­ance sheet in good shape,” he says. “Every­body is al­ways tempted to push their debt. It’s im­por­tant to have the where­withal to keep your debt lev­els low—you’re never sure when prices will drop.” But Wil­son is not a one-man show. Some of his firms’ in­vestors have been at his side since the get-go. “We’ve got a lot of share­hold­ers that were there from day one; these are the guys who think long term and stay with us in the down­turns when we are cre­at­ing value.”

To­day, the in­dus­try has far more short-term in­vestors, in­clud­ing hedge funds. Not only are stocks sold into these down­turns, but hedge funds will short the stocks and cause them to drop even more dra­mat­i­cally. So the lows be­come lower and the highs higher.

LIT­TLE OVER TEN YEARS AF­TER HE

founded Celtic, ExxonMo­bil bought it in 2013 for a princely $3.1 bil­lion. The as­sets Exxon bought pro­duced 72 Mcf/d of nat­u­ral gas and 4,000 b/d of NGLs, con­den­sate and crude. Celtic share­hold­ers who had stayed with Wil­son from its start cashed in at 50 times their ini­tial in­vest­ment.

Celtic soon spun off some as­sets to form Kelt Ex­plo­ration—Wil­son’s next project. “Exxon would have bought all of Celtic’s as­sets, how­ever, when we sold the com­pany, we ne­go­ti­ated as part of the sale that the Celtic share­hold­ers would re­ceive shares in a new spin-out as part of the value,” he says. Exxon was very in­ter­ested in the Resthaven Mont­ney and the Kay­bob Duver­nay. “We re­alised they weren’t as in­ter­ested in our other plays, so it was fairly easy to use these lands and pro­duc­tion in a new start-up en­tity as part of the pur­chase price,” Wil­son says.

Kelt has four main plays in Alberta and a larger one in Bri­tish Columbia. It also has a lot of Mont­ney gas in­ven­tory, but is wait­ing for a price re­cov­ery be­fore get­ting ag­gres­sive on the gas wells.

Kelt sends its nat­u­ral gas via the Al­liance pipe­line to the Chicago mar­ket, which pro­vides a pre­mium to Western Cana­dian prices. And Wil­son isn’t against partnering with his Mont­ney neigh­bors.

“At Kelt, we part­nered with 7G [Seven Gen­er­a­tions En­ergy] on some of our lands, and it was a good ex­pe­ri­ence,” Wil­son says. “We col­lab­o­rated and shared data, which made a lot of sense in to­day’s en­vi­ron­ment.”

Kelt some­times buys its neigh­bors too. True to form, Wil­son has grown Kelt by buy­ing Artek Ex­plo­ration af­ter its shares plunged 70 per­cent and only days af­ter it an­nounced a 33-per­cent in­crease in re­serves. “In Artek, we saw some re­ally good value,” he says. “We al­ready had a 40-per­cent in­ter­est in the play, so it made a lot of sense to ac­quire the rest of it. Be­cause their bal­ance sheet got stretched, it made sense for them to do the deal in which they re­ceived shares of Kelt so that they could par­tic­i­pate in the up­side,” Wil­son says. “As far as our next move, Kelt is very ac­tive at Crown land sales and is ac­quir­ing new acreage to add more Mont­ney in­ven­tory.”

With decades in the game and a track record sec­ond-to-none, Wil­son is a se­nior states­man of the patch. He wit­nessed multi-stage frack­ing giv­ing many ju­niors life as they drove the U.S. shale revo­lu­tion—to­day they are spear­head­ing the Mont­ney and Duver­nay de­vel­op­ments. What does Wil­son ex­pect for the fu­ture? “I think it’s go­ing to be more of the same; con­cen­trat­ing on non-con­ven­tional reser­voirs, and longer wells with con­tin­ued multi-stage frack­ing. It’s hard to pre­dict what new tech will come along, but I’m sure there will be plenty in the next 10 years. I think it’s still go­ing to re­volve around non­con­ven­tional plays,” he says. “If you’re a ju­nior or a midcap, you’ve got to be ef­fi­cient to sur­vive.”

A lot of ju­niors these days gen­er­ate new prospect ideas in new plays along with new com­ple­tion tech­niques. In con­trast, “ma­jors tend to science every­thing to death, whereas the

com­pa­nies I’m in­volved with are more likely to try dif­fer­ent things to see what works best,” Wil­son says. “We owned a lot of Duver­nay acreage at Celtic, and while the ma­jors were re­search­ing the play, we de­cided to drill the first Duver­nay hor­i­zon­tal.” The well was suc­cess­ful, al­low­ing Celtic to tie up the ad­di­tional acreage hav­ing proved it to be eco­nom­i­cal. “With ma­jors, a lot of the­ory goes into every­thing, whereas ju­niors can’t spend a lot of money on R&D,” he says.

One chal­lenge fac­ing many ju­niors—and one that will make start­ing a ju­nior in Alberta, the in­cu­ba­tion prov­ince of so many, a whole lot harder—is the Alberta En­ergy Reg­u­la­tor’s in­terim dou­bling of the Li­a­bil­ity Man­age­ment Rat­ing, a sol­vency test, to 2.0. Re­cently, a court ruled that banks should have first rights on pro­duc­ing as­sets and leave the prov­ince hold­ing the bag on aban­doned wells. Wil­son says, “I don’t think it will im­pact Kelt. We have a lot of high pro­duc­tiv­ity wells, with high net present value (NPV). The higher your NPV per well, the higher the LMR. Kelt’s LMR is around 5.0, which is fairly high for the in­dus­try.”

Slumps drive merg­ers and ac­qui­si­tions that can of­ten skew the num­ber of ju­niors. “We’re start­ing to see more M&As now, and that makes sense,” Wil­son says. “That’s how it nor­mally works; every­body thinks it should hap­pen at the bot­tom of the cy­cle, but it ac­tu­ally hap­pens when we’re com­ing out of it.” To make it oc­cur, an eq­uity win­dow has to open up so the ac­quirer can raise money to do the ac­quir­ing, Wil­son says. Every­body’s bal­ance sheet at that point—even the ac­quirer’s—is fairly stretched, Wil­son says. The only way that a firm can ac­quire is through a merger or by rais­ing cap­i­tal in the mar­ket. “Typ­i­cally as you come out of the bot­tom of the trough, merg­ers and ac­qui­si­tions ac­cel­er­ate,” he says. And as the sur­vivors emerge from the del­uge, there will be Kelt, headed by Wil­son, with his pow­der still dry.

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