Beating The Index / March 7, 2014 / High North is in the enviable position of having a small share float, a large land position in a proven oil play and a low-risk multi-year drilling inventory with over 150 locations. Better yet, it recently drilled 2 successful oil wells that are expected to payout in one year or less!
High North HN.V optioned its 173 sections in the Montney oil play in the Peace River area of northern Alberta when the play was just starting. In just over a year, the play has moved southwest, due to the aggressive drilling by Long Run Exploration, an intermediate producer that has been drilling neighboring acreage like Swiss cheese. Now High North’s land is in the heart of the play.
LRE drilling aggressively around block A
Long Run first hit success on this Montney play—Normandville/Giroux–in 2011. It has become so successful—with a 12 month payout on its wells–it has drilled more than 90 wells to date. This is now their primary asset, and LRE will drill 44 of its 80 well drilling program in 2014.
The Montney formation here is about 1,000 meters deep and costs about $2.5M to drill, complete and tie-in a well. These wells produce 30 degree API oil and payout in about a year with 12-months on-stream costs at $16,000 per flowing boe. That is stellar. Usually it costs just over $40,000 per flowing boe—that gives investors an idea of how profitable Normandville/Giroux can be.
These numbers translate into a recycle ratio of 3.9x according to LRE. That’s $3.9 created for every $1 invested in the ground. The quick payout also helps the company recover its investment quickly and recycle it into new wells.
This indicates the play is predictable and repeatable enough to power production growth and fund a dividend.
Last July, LRE published an independent resource assessment of its Montney oil lands at Normandville/Girouxville. The assessment assigned 301 MMBBL of DOIIP in place across about 92 net sections of land in the play.
DOIIP is equivalent to discovered oil resources contained in known accumulations prior to production. Based on the 70/30 Oil/Gas mix, the estimate is more like 430 MMBOE 5 MMBOE per section. The assessment could easily apply on High North’s acreage. Since the Montney is not a blanket formation, if half of its 173 sections are prospective, HN ends up with ~433 MMBOE (5 MMBOE/section * 86.5 sections).
These resources cannot be recovered at 100%. Investors could use primary recovery to estimate the un-booked potential upside per share—what the pump jack brings up before adding waterfloods or chemicals.
If investors assume primary recovery at 10%, then add a 50% risk and assume only 5% recovery factor excluding any other form of recovery (like water flood):
433 MMBOE * 5% = ~22 MMBOE
National Bank values resources in the ground at $16 per boe which translates into
$16 * 22 MMBOE divided by 65.4M fully diluted shares = ~$5.40 per share!
That’s a very nice RISKED upside potential based on what I believe to be conservative numbers. LRE estimates recovery at 15%-25% for primary + secondary this estimate used 5%.
HN’s first 2 wells are producing in excess 350 barrels of oil per day combined. That follows Long Run’s type-curve even though these rates have been restricted due to surface facility constraints. A third well is undergoing production testing.
The stock doubled following these results. With the first results out, the market took notice as High North plans on drilling 16 wells in 2014.
This is the perfect play for a junior because it can quickly ramp up its production above 1,000 boed. The top tier economics of this play also attract attention – particularly with institutions. It shouldn’t be long before the first investment reports roll out.
At $0.60 per share, the company is trading at $65,000 per boe. That’s an EV of $35M ($0.60 * 65M – 4.4M cash) divided by 540 boed of production (IP 365 of 180 boed * 3 wells). That does not take into account the upcoming 2014 drilling program.
The drilling program requires approximately $35 to $40 million in capex. That will get paid for through cash flow, equity and debt—and possibly joint venture money.
These 16 wells would contribute a total of about 2,800 boe/d based on 12 months average production rates (180 boe/d per well).
Furthermore, what’s really interesting is that the Normandville/Giroux fairway is moving towards the south west where the Montney gets deeper. At 1,500 m depth, the oil is lighter and the zones are potentially more productive. Long Run has now staked land all around High North.
Montney play moving SW – Block A surrounded
It makes sense for LRE to just buy HN now, which would be very accretive for LRE in the long run—with HN just starting on their multi-year drilling inventory. The longer LRE waits, the more expensive the acquisition ends up being as more acreage gets proven along with production growth. These junior dividend payers like LRE are the only group in the Canadian oilpatch doing acquisitions now.
There is a wild card here–HN holds 188 sections (120,800 acres) of Duvernay oil rights. Land sales since 2012 varied from $2,700 per acres to $8,500 per acre. Selling just 50% of these acres at $2,700 per acre translates into $163M or $2.50 per share.
A more realistic outcome would have a senior producer farm in as a JV partner. Since the Duvernay is more of an exploration play with expensive wells, it’s the blue sky down the road. The Montney is what it’s all about right now.
The market is just discovering the story. Unlike many junior peers, HN enjoys a solid ground for high production growth. As long as Mother Nature cooperates with predictable and repeatable results, the ending is potentially very rewarding. The CEO sold his last company returning to investors 3x their initial investment.
Beating The Index