(WHITE)CAP­PING OFF A GREAT RUN

White­cap Re­sources has run its busi­ness in a sus­tain­able man­ner from day one

Alberta Venture - - On The Money - BY JODY CHUD­LEY

THE PLAY

I have a dream for the North Amer­i­can en­ergy sec­tor should we ever emerge from this world of mori­bund oil prices, a dream of self-sus­tain­abil­ity.

The price of oil has col­lapsed be­cause the Amer­i­can shale pro­duc­ers, with their growth first, prof­its later busi­ness model, drilled us into an over­sup­ply. Had th­ese com­pa­nies not lever­aged up and grossly out­spent their self-gen­er­ated cash flows, we wouldn’t be in this mess.

Wouldn’t it be great if, on the other side of this oil bust, the en­tire North Amer­i­can en­ergy sec­tor adopts a sus­tain­able ap­proach to busi­ness? In­stead of bor­row­ing as much as pos­si­ble and fo­cus­ing on growth, how about liv­ing with- in cash flow and maybe even pay­ing a div­i­dend? That way, we wouldn’t over­sup­ply the mar­ket with oil and we could also keep ser­vice costs un­der con­trol.

Be­lieve it or not some in­de­pen­dent pro­duc­ers have been do­ing that. To make it work, com­pa­nies need a fast pay­out play so they can quickly re­cy­cle cash and an­chor their cash flows. One such play is the light oil pro­duc­ing Vik­ing in West Cen­tral Saskatchewan. Vik­ing wells don’t have big ini­tial pro­duc­tion rates but they have some­thing else: good eco­nom­ics at rea­son­able oil prices. The Vik­ing for­ma­tion is not deep so it doesn’t take long to drill, which means costs are low (un­der $800,000 per well). While those costs keep com­ing down with each pass­ing year, the in­dus­try is also drilling bet­ter wells.

The leaps and bounds the in­dus­try has made when it comes to the pro­duc­tiv­ity of hor­i­zon­tal wells is an­other rea­son why rapid growth and out­spend­ing cash flow is a flawed strat­egy. Think about how many well lo­ca­tions were drilled in 2012 and 2013 us­ing now out­dated tech­nolo­gies and tech­niques. By go­ing slowly, the pro­duc­ers would have been drilling many of those lo­ca­tions later us­ing bet­ter tech­niques with the re­sult be­ing sig­nif­i­cantly higher ini­tial pro­duc­tion rates and larger ul­ti­mate re­cov­er­ies.

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