Dougal Ferguson – Managing Director, Elixir Petroleum, Australia
The managing director of Elixir Petroleum, Dougal Ferguson, describes the strategic value of the Australian junior’s pending acquisition of AWE’s 57.5% stake in the Cliff Head oil field and how this transaction will provide the company with cash flow and significantly leverage the company to the oil price. He also elaborates on the Elixir’s intention to use the cash flow generated from Cliff Head to advance its conventional oil play in Colorado – the Petra project – and pursue other exploration opportunities in the Perth Basin.
Elixir recently announced the acquisition of AWE’s 57.5% stake in the Cliff Head oil field (Perth Basin). Although still pending, can you elaborate on the significance of this agreement and how it better positions Elixir to drive shareholder value in the current environment?
With consideration of the unusual situation and the unique challenges the oil and gas industry is currently facing, Elixir Petroleum, which has been thus far focused on exploration, began a process of looking to strengthen and de-risk its portfolio by acquiring producing assets. We approached AWE, which more recently has become a more domestic gas focused business and was thus interested to consider a divestment of its stake in Cliff Head. Late last year, we reached an agreement, and we hope to be able to close the transaction in the upcoming months.
This acquisition is a game changer for Elixir, as it clearly separates us from the pack of small explorers and places us squarely in the list of Australia’s limited pool of producing companies. With estimated production of six to seven hundred barrels a day net to Elixir, this acquisition provides us with cash flow which, for a company of Elixir’s size (capitalization of A$ 1.7 million), is very substantial. Cliff Head could continue to produce for a further ten years or more and will provide us with the cash flow to pursue other growth activities.
What have been the recent developments on this field?
There hasn’t been much development activity on the field during the last few years despite the joint venture being in agreement, albeit at different times, on the necessity to progress field development projects. Our priority will be to review the various development projects that have been considered and to progress some of these projects at the appropriate time, such as enhanced oil recovery and potentially infill drilling. There is also an exploration project (Mentelle) within the license, which has up dip potential, but has never been followed up after the initial exploration well encountered a small oil column. Therefore, it constitutes an opportunity we could potentially chase which will extend the life of the Cliff Head oil field even further into the future.
What pitfalls do you see in retaining non-operatorship versus operatorship?
One of the main disadvantages is obviously that we will not be able to directly control the operational costs. We are nevertheless particularly confident about the cost-effectiveness of the operations and ROC has demonstrated its ability to successfully and, more importantly, safely run this field since its inception. We will obviously collaborate closely with ROC to ensure we still have an input into the cost control of the field operations.
This acquisition provides us with an opportunity to demonstrate that a player of our size can meaningfully contribute to the future of the asset via a non-operator position. It also opens up all sorts of other opportunities to Elixir and broadens our knowledge base through taking an active role in our non-operated position.
Does this acquisition represent a shift from your historically exploration-centric focus to a greater emphasis on production?
We are interested in acquiring other producing assets, but it will of course be subject to capital availability and to the different opportunities that come our way. The current industry downturn is nevertheless proving quite favorable for this kind of acquisition: for instance, AWE’s stake in the Cliff Head oil field would have been valued at around USD 20 to 30 million at $100 oil and out of the reach of a company of Elixir’s size, but it is currently possible to acquire it for less than a million based on future oil prices remaining “lower for longer.”
We are currently in an interesting period of the commodity cycle for our industry that increases the attractiveness of such opportunities because, of course, as the prices recover, which based on fundamentals I expect they will, these opportunities will automatically become more difficult and expensive to execute. Other production acquisition opportunities will probably arise in the near future as companies continue to rebalance portfolios, generating cash flow that would allow us to pursue further exploration activities in the future. Presently though, production acquisition opportunities remain our focus because the availability of capital for exploration activities will probably remain extremely limited for the next two to three years.
Looking at exploration activities, our core model has substantially evolved over the past few years. We were among the frontrunners in chasing shale gas opportunities in France, but because of the country’s regulatory hurdles—particularly in regard to its fracking ban—we moved to Colorado, USA, to pursue conventional exploration targets. We decided to focus on conventional prospects, as the oil prices had already showed signs of weakness and conventional plays were more appealing from an overall return basis, with lower up front capital commitments and higher returns in a success case. Our strategy on exploration will mainly focus on conventional resources in the upcoming years, but we analyze every opportunity with a very rational mindset. As a result, we could also invest in unconventional opportunities, granted that these opportunities display sustainable cash flows or technology changes that make these plays economical at lower oil prices.
What is the current state of development of the Petra project in Colorado?
In Colorado, we were initially chasing a new trend that had resulted in some new discoveries including Nighthawk Energy’s Arikaree Creek oil field. Our objective was to find a cheap, close to ground floor entry, and most importantly, find the right operating partner. Apollo Operating is a successful and experienced operator that had been successful in the past and became our partner of choice for the Petra project. The operating environment in the US is efficient, has significant depth with respect to the number of alternative suppliers making it relatively cheap to operate, and has a regulatory environment that allows progress to be made in a timely manner. It is possible to drill an 8,000-foot vertical well for less than half a million US dollars on short notice, which is significantly less money and time that it would take here in Australia.
We have already conducted two rounds of seismic in our core area and three wells have been permitted. Nevertheless, the project is currently on hold until we get more visibility on the future direction of oil prices – a strategic decision that has been agreed upon by our partner. In the meantime, we are taking advantage of the weak commodity prices and moving forward on the Cliff Head project in Australia in order to leverage the cash flow generated there and reinvest some of that cash flow in Colorado. Contractually, we are required to drill the first exploration well in Colorado before the end of 2016, but with our excellent relationship with Apollo, the starting date of the project could be extended further. Conceivably, we could start drilling within several weeks if we so desired, but at present we have agreed to defer drilling on the Petra project.
As managing director of Elixir, how do you go about mitigating shortsighted pressure from investors, while building up the company’s long-term capabilities?
My first and most important responsibility is certainly to chase the opportunities that would generate shareholder returns for our current investors, whilst also ensuring the company’s long-term viability. In the current environment, it is definitely possible to build a very good company. There are plenty of good people out there who have extremely valuable skills and who have a very good understanding of the industry. We would like to be in a position where we have a sustainable cash flow that will allow us to bring together additional capital, the abundantly available industry skillsets, and the new opportunities, which will ultimately deliver shareholder returns.
What is your perception of the competitive landscape for Australian juniors?
Australia’s massive resources, particularly offshore gas, have attracted a large number of significant E&P companies in recent years, despite the very high-cost environment we operate in. Regulation wise, the Australian framework can sometimes be difficult to navigate. The Cliff Head oil field is located offshore for instance, so it falls under the jurisdiction of NOPTA and NOPSEMA – the two federal organizations in charge of title administrations and safety and environment respectively. But, as the operating plant is located onshore, it also falls under jurisdiction of Western Australia regulators. Looking at the broad picture, however, Australia still stands as one of the more secure places to operate from a political perspective.
Regarding the junior E&P sector, it is very difficult to venture an overall statement on the entire Australian industry. Like probably any other industry, the oil and gas sector has been through major changes of late and the true oil and gas professionals within the junior sector will continue to be entrepreneurial, whilst promoters looking for a quick turn will come and go. I think that a lot of current juniors will disappear in the next twelve to twenty months, and I firmly believe that if we follow and execute our strategy, Elixir Petroleum will be one of the companies that will survive and prosper.
Where would you like to have taken the company in the next three to five years?
First of all, we want to establish ourselves with a long-term production base. Depending on the evolution of our France and Colorado projects, we may be focused on a fewer number of projects in the future, with the Perth Basin remaining as our primary focus in Australia in the short term. However, we will continue to adapt and be both realistic in our ambitions but take an opportunistic approach to evaluate assets as they present themselves in order to further grow the company – both organically and through strategic acquisitions.