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