Brad Lingo – MD & CEO, Elk Petroleum, Australia
Brad Lingo, the recently appointed MD and CEO of Elk Petroleum, highlights how the company’s new direction and initiatives have bolstered its tremendous performance over the last six months and remarks on how Elk is now better positioned to not only develop its Grieve project, but also pursue other potential asset plays. He also depicts the appeal of employing enhanced oil recovery techniques, even in a low pricing environment, while discussing the absence of Australian players entering this space.
Brad, you assumed the position of MD and CEO of Elk Petroleum back in August 2015. How would you evaluate your success over these past six months?
It’s no secret the challenge that the current oil price environment is posing for many oil and gas companies, and more globally, across other resources. So, I can say with pride that Elk is one of the few ASX listed resource companies that has set new 52-week highs in the last six months, with a roughly 500 percent increase both in market capitalization and share price. And the market cap increase is only on a pre-dilution basis; in terms of post-dilution, the increase is as high as 700 percent. Not only have we had stellar performance from a stock perspective, but we’ve also had no problem in securing additional capital. We recently completed an equity placement that was 100 percent over subscribed. There was even additional money on the table that we didn’t take because we only wanted to raise a small discreet amount of money.
We’ve brought attention back to the company in a very focused way – effectively “pressing the reset button.” Elk Petroleum has fundamentally good underlying assets that previously were not properly recognized due to technical, commercial, or financial challenges. My job has been to unveil the true potential of our resource base, and ensure that investors and stakeholders alike understand the true quantity and quality of it. For any junior resource company, it comes down to doing four things, and doing those four things really well: finding it, funding it, fixing it, and creating the value for shareholders to capitalize on.
Elk Petroleum has been largely known as the only ASX-listed company dedicated to enhanced oil recovery (EOR)—a segment that’s slated to grow at a CAGR of 17% over the next five years. Given the tremendous prospects of EOH, why haven’t we seen other Australian players enter this space?
There’s a good reason for that. Historically, Australian oil and gas players have been fundamentally exploration companies. They’re extremely adept at finding hydrocarbons. Enhanced oil recovery, on the other hand, is not about finding, but fixing. The conversation effectively switches from geologists or geoscientists discussing where resources should be located to engineers talking about execution, execution, and execution. The number of truly Australian production operators really boils down to just a few, namely Woodside and Santos. The depth and pool of experience focused on purely production drilling and marginal extraction isn’t typically inherent within Australian oil and gas companies. Furthermore, these companies have operated more as generalists across their various business segments, whereas EOR companies have solely dedicated themselves to and specialized in this particular segment of the oil and gas value chain.
That’s one of the aspects that attracted me to this opportunity with Elk. The company was always intended and setup to focus on enhanced oil recovery – whether that’s with CO2, chemical flood, or other technologies. The original founder of Elk Petroleum, Bob Cook leveraged his background as a petroleum engineer while working with several of the large supermajors all over the world – eventually developing the necessary skillsets to become a good production operator looking to get more out of what is already owned. This is what enhanced oil recovery is truly about.
In a recent interview, you had stated that this type of technique is actually quite profitable, even in the current pricing environment. Is that uniquely attributed to Elk’s operating strategies? Or an industry-wide norm?
It comes down to the companies who specialize in EOR and do it well. The notion that EOR is only profitable with high oil prices is a complete misnomer. Enhanced oil recovery is actually born out of low oil prices because the first budget to get cut by senior management is exploration. These executives then impose a company-wide mandate to preserve production rates and reserves. And that’s exactly what yielded the need for enhanced oil recovery.
Primary oil recovery exploits roughly a third of discoveries; EOR is about obtaining another third or two-thirds of that same resource base. There are a lot of people walking away from assets leaving more in the ground than they actually took out. The companies that come to this revelation and understand what it takes to excel using this type of oil production are the ones creating value – especially now in the current operating environment.
For example, taking a look at where our operations are focused, the Northern Rockies, the three fields that anchored the beginning of CO2 EOR in Wyoming all started production in 1986. This was an absolute disaster year where the average WTI oil price was $14 per bbl for the year. All of those fields are still producing, uninterrupted for 30 years. For approximately 20 of those 30 years, the oil price was below $30, and even less than $20 for half of those years. If EOR wasn’t a viable tactic in a low pricing environment, then companies such as Chevron, ConocoPhillips, Devon, and Anadarko wouldn’t still be producing those fields in the Northern Rockies today.
EOR is a proven technology and low risk. Once an EOR project is up and running, particularly with CO2 injection, you’ve actually created a long-term production asset. For instance, once in production, our flagship project, Grieve, will be commercially producing for the next 20 years.
The company had recently reached a restructuring agreement with JV partner Denbury Resources regarding Elk’s Grieve assets. Especially in light of historical performance, what was the logic behind preserving this partnership with Denbury, as opposed to acquiring 100% interest in Grieve or even seeking out another partner?
Given the operating landscape that they were entering, Denbury, like many other players, had acquired a relatively significant amount of debt to grow their business, which created challenges for them in providing the additional capital required to complete the Grieve project. Our preferred option was to buyout their interests and takeover the asset 100 percent, while paying back a portion of their initial investments over time. However, Denbury expressed their continued interests in maintaining their stake in the project and seeing it through to completion – both in terms of construction and the start of production. Considering our relatively unencumbered balance sheet, void of immediate and constraining debt obligations, we decided to provide the necessary capital infusion to finish development, while increasing our working interests from 35 percent to 49 percent.
Compared to before, how is the company better structured now to drive value and deliver shareholder returns?
We understand exactly how the project should work and why we’re in it. This project is what we’ve been designed to focus on since day one. Ensuring the project is delivered is a commitment we have to the people who’ve provided money to us in the past—our shareholders. Their aspirations are to see the Grieve project in production and for Elk to grow off of that asset and other similar assets. It puts us in a unique position with that as our goal and commitment. Essentially, under the new ownership structure Elk brings the desire and cash, while Denbury contributes in kind and ensures that the project gets built on time and within budget.
The field is now slated for first production by 2017. What potential challenges do you anticipate in achieving this target, and how will you go about positioning the company to best mitigate or circumvent these hurdles?
Principally, we’ve managed a degree of risk through the restructured contract. Denbury is firmly committing to a fixed price, turnkey EPC contract through to a definitive completion date—incurring liquidated damages otherwise. The project is already about 70 percent complete, with all the environmental approvals in place. The central production facility has a front half and a back half. The front has been completed and operating since 2013. The back half still needs to be built—requiring the USD 55 million injection from us. Consequently, we need to complete our fundraising activities, both debt and equity, to fund us through closing on the joint venture restructure. Then it’s about making sure the money is spent well, and working with our JV partner to ensure that the focus and commitment on execution to a date certain is achieved.
You’ve also expressed intent on pursuing further acquisitions in the years to come. The Singleton development aside, what other type of prospects is the company evaluating at this stage?
We have made it clear that our focus is about improved and enhanced oil recovery. Our aim is to do that one thing and do it well, while also demonstrating that EOR is in fact highly profitable even at low oil prices. On a cash basis, the Grieve project at $20 a barrel is still delivering a 50 percent profit margin. To this end, we believe the underlying fundamental economics merit that focus because it can deliver substantial shareholder returns despite low commodity prices. Our acquisitive strategy involves identifying assets that are complementary to either side of our business: CO2 aggregation and supply or CO2 utilization and mature oil production.
We want to be careful to walk before we can run, and demonstrate that we do have the commitment to quality and execution. We will stay focused on delivering the projects that we currently have in the pipeline. That being said, Australasia is a region where CO2 EOR is virtually unutilized, especially when compared to the US and the Middle East. The broader vision is to eventually bring the capabilities and expertise closer to home, while developing the CO2 supply and a market for its use through rejuvenation of the older oil fields. But we’d like for those discussions to focus on evidence-based results and prior achievements, rather than hypothetical assertions.
Leveraging your longstanding experience on both the institutional investor and operational sides of the industry, what have been the most fundamental lessons that you would pass on to individuals looking to maintain optimism and confidence in the face of a downturn?
Succinctly, I would advise them to step back, look at the facts, gain some perspective, and not give up. The reality is that average oil prices only rose above $30 per barrel and stayed above that level in 2004. Yet, even before that point, we still had a thriving industry with a constant stream of investment and projects being built.
From my perspective, there are three essentials to modern life: air, water, and oil. Fundamentally, the clothing we wear, how we are transported from one place to another, or even the food we eat all come back down to the use of hydrocarbons. We are certainly becoming more efficient in how they’re utilized, but as populations transition from emerging to established economies, the energy intensity of every single person is increasing—further driving up total energy requirements, despite efficiency measures. Hybrid technology helps control point source emissions, but many of these methods still require hydrocarbons at the primary energy production point. There are some convergent themes that are actually quite complementary to each other from a holistic standpoint. They don’t necessarily point to us using less hydrocarbons moving forward, but using hydrocarbons more wisely.
Where do you envision yourself and the company in next three to five years?
I was initially exposed to Elk when leading the oil and gas institutional banking division at the Commonwealth Bank of Australia. At the time, I was able to have an in-depth look at their assets from a project financing perspective and immediately understood their inherent potential. Now, almost a decade later, I can truly help harness that potential for shareholders and investors alike. With our current and prospective pipeline of asset plays, Elk will be a far different company albeit with the same core focus on EOR.