I settled in this morning to review the Q4 earnings release from a company that I own indirectly through its parent company. The company is Petrobakken Energy (PBKEF.PK) and the parent company is Petrobank (OTCPK:PBEGF).
Petrobakken operates exclusively in two unconventional light oil plays in Western Canada and also has significant undeveloped acreage in two shale gas plays in British Columbia.
To be honest I was less than thrilled with Petrobakken’s Q4 results, but I will get to that in a little bit. What really caught my attention was what I heard in the related earnings call later in the morning.
Yesterday I wrote an article on Seeking Alpha about EOG Resources(NYSE:EOG) and some comments that its CEO Mark Papa made about the amount of oil or gas that can be recovered from unconventional reservoirs:
“Regardless of new discoveries, Papa believes the next phase over the next decade will be in recovering a higher percentage of the hydrocarbons trapped in the rock. As an example, he illustrates that in the Barnett's Johnson County in North Texas, five years ago the recovery factor was 10%. Today it routinely exceeds 40%.
Similarly, EOG is capturing about 3% to 4% of Eagle Ford oil in place today. We'll focus on how to get that recovery factor higher. Not so much finding new plays; it's how to get improved recoveries out of these plays.”
It is hard not to shake your head at the huge increase in the amount of hydrocarbons recoverable in the Barnett. Imagine owning a company that you thought could recover 1X of the oil or gas in place, only to have it eventually recover 4X. If that company was originally valued by the stock market based on 1X recovery, I bet you as an investor would do pretty well when the market realized that 4X is the appropriate figure.
In early January 2011 Petrobakken first mentioned some experimenting with Enhanced Oil Recovery (EOR) that it was doing. The results from this experimentation have been encouraging and Petrobakken has moved the EOR process to the pilot stage. On the conference call Petrobakken’s CEO expanded on EOR, and what the company has seen and thinks is likely.
Results From Initial Experimentation
- For a 2 Day Period in 2010 Petrobakken injected CO2 into a horizontal well
- The offsetting horizontal well immediately doubled its rate of production
- After 10 months the offsetting horizontal well was still producing at a rate 50% higher than it had been prior to the injection
- In the following 10 months each offset well recovered 5,000 more barrels of oil than it would have if left to its natural decline curves
- The CEO believes that with a full EOR application that a double or even a triple in production could be the near term result (remember the experimentation involved only 2 days of CO2 injection and the results were dramatic)
As you can see, the initial results from a production standpoint are extremely interesting.
On the conference call Petrobakken’s CEO also suggested that EOR application could reasonably be assumed to increase the amount of oil recoverable from the Bakken from the 15% (the current basis for Petrobakken’s booked reserves) to more like 25% to 30%.
He said an increase of 66% to 100% in the amount of oil that can be recovered. This is not the first time I’ve heard numbers like this as Crescent Point Energy (CSCTF.PK) has mentioned similar increases in oil recovered from its waterflooding EOR efforts.
In the pilot program it is now going forward with, Petrobakken will inject natural gas instead of CO2-- because it is cheaper and readily available. That injected natural gas will eventually be recovered through production.
I listened to this part of the call a few times just to make sure I was getting my head around this. If these EOR techniques double the amount of oil that can be recovered, then companies like Petrobakken are unquestionably going to be excellent investments at current prices.
Q4 2010 Petrobakken Results
I’ve written previously about Petrobakken for Seeking Alpha,so I’d also like to provide a bit of an update on the earnings results from Q4. See the original article here.
The Q4 numbers were basically in line with expectations, which isn’t surprising given that Petrobakken updated production last week. I was, however, disappointed in some of what I learned today.
Specifically, the company provided a breakdown of production by area for the first time. For most of the year production had been disappointing and most of this was blamed on the lousy weather that Petrobakken faced in the Cardium in Alberta. But from the breakdown that was provided today we could see that Bakken production was actually also a significant factor.
Bakken production by quarter was as follows:
Q1 – 28.7k per day
Q2 – 25.8k per day
Q3 – 23.8k per day
Q4 – 23.9k per day
I didn’t expect growth from the Bakken, but I did expect production to remain flat during the year. Petrobakken also provided details on the cause of the disappointing production as follows:
“The northern part of our Bakken acreage has had its challenges, with increased water cuts reducing well performance. These increased water cuts are associated with completions where our fracture stimulation had broken out of zone into overlying water bearing formations.
To mitigate this issue we have experimented with various new completion fluids and techniques, including producing wells unstimulated and purposely delaying fracture stimulation until a later date.
Early results utilizing a new fracture stimulation (“frac”) methodology suggest we can now contain the frac within the Bakken formation and substantially reduce the water cuts. We now are applying this new frac methodology in all Bakken completions and focusing on optimizing the production from our current inventory of 15 producing, but un‐stimulated, Bakken bilateral wells.”
Basically what the company is saying is that in the northern portion of the field production was disappointing, and this was compounded by its choice to delay fracking a large number of wells (15) until it figured out how to fix the problem.
The good news is that the company seems to have fixed the issue. The bad news is that I don’t feel Petrobakken was as forthcoming about these issues during the year as it should have been. It almost felt like the company waited until it had solved the problem before telling shareholders that there was one. In my opinion, that is strike one for this management team in my log book. I’m very impressed with the Petrobank's (Petrobakken’s parent) management team and own a large position in the company. This is the first instance where I’ve felt a little uncomfortable, but it is noted.
Petrobakken reconfirmed its earlier guidance of an exit rate production level for 2011 of 46k to 49k per day, which is roughly 15% higher than today. So it appears that the company thinks the issues in the Bakken are behind it. The Cardium play which Petrobakken moved into aggressively in 2010 is actually showing very encouraging results, with production now up to 9.5k per day and results that are in the top decile of operators.
Long Term View
As an investor I try and focus on the big picture, and today I think the disclosure that EOR techniques could potentially double the amount of oil that Petrobakken can recover is the important message. If EOR pans out as Petrobakken and other companies are suggesting, this is going to be a very rewarding space to be invested in over the next 5 to 10 years.
Disclosure: I am long PBEGF.PK.