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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
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