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Deep Focus

IMG Auteur
Published : November 28th, 2012
1458 words - Reading time : 3 - 5 minutes
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Category : Investing





Talk about geological focus. Ninety percent of intermediate producer Trilogy Energy Corporation’s reserves, prospects and production come from a shallow segment of the Kaybob area. Worth $3 billion on the markets at time of writing, Trilogy’s geographically concentrated assets are a classic illustration of the value of geological knowledge. Besides infill drilling opportunities, they have easy access to infrastructure and processing facilities.

President and CEO John Williams, a 25-year oil patch veteran, and Chairman Jim Riddell, who has about twenty years’ experience, are both professional geologists. They are also adamant that for a company to be a success, geology comes first. An understandable irony is that both men credit new completions technology – the realm of the engineer – with the oil and gas sector’s recent industrial transformation. According to Riddell, “recent technology changes have had more of an impact on our industry than anything else.”

Growth and Dividends

The assets that formed the basis for Trilogy were carved out of Paramount Energy in 2005 as the company took advantage of the energy trust model to reduce taxes for unit holders. Geographically, Trilogy’s primary assets are located in the shallowest part of the Deep Basin. According to Riddell, “The Western Canada basin is essentially a natural gas basin. To focus on oil you have to be really focused on where you hold your assets.”

The company’s strategy involves organic growth, developed through the drill bit. Trilogy’s Kaybob-area holdings, according to Riddell, have “multi-zone potential…. As other people are converting from dry gas to liquids-rich gas, we are converting from liquids-rich gas to oil. Also, we have used the latest technology to develop our assets. In two years, we will have taken (one property) from zero to about 10,000 barrels per day. In 24 months we will have invested over $300 million in that property. Its cash flow is about $200 million. We have also high-graded some of our other properties based on liquids.”

Like many other successes in the oil patch, Trilogy’s business was built on a framework of low-risk, high working interest, lower-decline properties. Trilogy has five gas plants and three oil batteries, so “we are in control of our own destiny,” according to Williams. “What’s more, we have low G&A compared to our peer group.”

In response to revised tax rules, in 2010 Trilogy converted from an energy trust into what Riddell called “a growth-oriented, dividend-paying corporation.” As part of the transition, the company started putting more capital into growth.

What is the split between growth and income? According to Williams, “This year we’re going to spend roughly 300 million bucks (on development). We still have a dividend, which pays people to wait.” At recent share prices, the company’s annual dividend, paid monthly, is about 1.6%. Especially for an industry that doesn’t have a long history of rewarding its shareholders with cash, that’s a good return – especially in a low interest-rate environment. That isn’t what is transforming the industry, however.

Rather, new technologies and a greater willingness to spend money are making companies start to grow again. “It was completions that really revolutionized production,” according to Williams. “We could drill horizontal wells a long time ago. Multistage fracturing really made the difference. It gives you the value of a vertical well for a fraction of the cost. A horizontal multistage frack well might cost three or four times what a vertical well used to cost, but it provides 10 or even 20 times the value….You’re getting much better economic results from this kind of completion.”

This seems to be one of his favourite topics; his enthusiasm is almost palpable. “We used to drill eight vertical wells per section. Eight vertical wells with one frack per well gives you eight fracks per section. Your recovery rate is about 10%, maybe. Now we’re drilling horizontal wells with 20 fracks per well. That gives you 160 fracks per section rather than eight. We’re getting so much more oil out of the ground, and gas.” Now he’s on a roll. “We’re saying the recovery factor will be 20% to 30%, but we think it could be even 40% to 50%. Now you can go back to some of these legacy pools and use horizontal drilling and completion technologies to get a great deal more oil out of these assets. We are going to be employed doing this for years.”

Never drifting far from his excitement about the new technologies, Williams said “Today we have this slick ball-drop system that enables us to do up to 20 fracks in a single day.” Used by a number of operators in areas where Trilogy has its assets, ball-drop technology leads to highly efficient fracture stimulation.

Infinite Oil and Gas

According to Jim Riddell, “there’s almost an infinite amount of oil and gas you can produce. The real issue is which oil and gas fall into the lowest supply/cost part of the spectrum.” Like other top tier companies, fiscal discipline is a key focus for Trilogy. It isn’t the company’s top priority, Riddell stressed: “Safety, adding production and cost control: those are our three priorities” and in that order. “We have a good safety record, a good production record and good cost control.” As far as the latter two are concerned, he added, “If we can’t do it at a reasonable price, we just don’t do it.”

Williams has no doubt that Trilogy has some of the best assets available. “We have two of the five top oil plays in Western Canada. We are really focused on the Montney and the Duverney. We’ve already proved you can get the gas and oil out of the ground. (Once you’ve done that,) the real focus becomes what the cost factors are to get it out.”

Quizzed about his enthusiasm for the new engineering technologies when his background is in the earth sciences, Williams argued that “Geologist can do engineering but engineers can’t do geology. It isn’t an accident that we have done as well as we did. We made strategic investments in the best parts of the basin, geologically. We have a lot of good engineers in the company, and it’s definitely a team approach we use. We do want to maximize production. But if you can’t find it you can’t produce it. You have to be in the sweet spot.”

Both men acknowledge that the company’s decline in production is getting steeper, but they stress that that’s from drilling numerous many horizontal wells that are now rapidly aging. No worries, though: “Our ability to replace those assets each year is easier, because we get so much delivery out of horizontal wells.”

Trilogy has roughly 80 people in the office and another 80 in the field. Williams himself has a warm and friendly personality, and that temperament seems to reflect on his assessment of company employees, whom he calls “loyal and hard-working. People need to know that they have to career here, not just a job. Having long-term assets really helps. We want to put in a 5-10 year development plan for each of our major producing assets. We have good people and they understand our long-term strategy.” They also understand that “We didn’t grow this company overnight and we don’t plan on selling it tomorrow. We have a lot of people with longevity. Just a couple of days ago Jim and I took three people out for their 10-year service anniversary. They take pride in growing the company,” and that means keeping costs down. “Everybody in this company takes pride that we’re a low-cost operator,” he added.

To illustrate, Riddell pulled out the company’s latest annual report. The text-heavy content and tables were produced in Microsoft Word. The full-colour cover uses a few photos and minimal (but effective) design. “The annual report used to cost us $50,000” he reported triumphantly. “Now it only costs $3,000.” The company takes pride in these reports, and frames the cover art to hang in the board room. Savings on that scale aren’t easily come by, but they illustrate the direction Trilogy and many other companies are headed.

What is the future of the natural gas sector? Like other CEOs, Williams sees a near-term future of spikes and crashes. “We’re firm believers that nobody is making money at $2-$3 gas,” he said. However, “if gas goes up to $4-5 there will be a big switch to gas production, but bear in mind that you can’t just flip a switch and then start producing gas again. You have to redirect your capital into gas. I think that when gas prices go up to those higher levels the industry will turn around, begin overproducing, and then we’ll see gas prices overcorrect again.” Trilogy is sticking to oil.

Peter McKenzie-Brown

Language Instinct






Companies Mentionned : Earth Sciences | Paramount Energy | Strategic |
Data and Statistics for these countries : Canada | All
Gold and Silver Prices for these countries : Canada | All
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Peter McKenzie Brown is the vice president of a resource company. He has written several volumes of history, and has worked in the corporate and academic worlds. He is British by birth, American by upbringing and Canadian by choice. Disclaimer : Although the writer is a director and officer of Stratabound, the thoughts and views herein are his only and not those of Stratabound. He is not registered in any jurisdiction as a broker or investment adviser, so nothing herein should be construed as advice on whether to buy, sell or hold shares of Stratabound or any other company mentioned herein.
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