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| Advantage Offers More Than Capital |
| Cover Story | |
| By Fernie Grace Tiflis | |
| Tuesday, 02 January 2007 | |
 Advantage positions itself in the oil and gas market by pursuing corporate and property acquisitions. This year, it obtained Ketch Resources Trust, forming a $2.7 billion enterprise. "Advantage and Ketch believe that the merger will create a stronger single entity with a more balanced portfolio of assets," says Kelly Drader, CEO of Calgary, Alberta-based Advantage, an oil and gas royalty trust. "It is expected that the merged trust will be well positioned to create long-term value for unit holders through a high-quality, long-life asset base and an extensive drilling inventory. "Advantage and Ketch employ a similar focus on technical exploitation of large resource pools, utilizing the same operating and administration systems, and bringing together strong technical, field operations and administrative teams, which is expected to lead to a smooth integration of the two entities into one stronger organization." In addition, acquiring Ketch will help Advantage's work force. "Ketch has a management team that has outstanding skills," Drader says. "With shortages of people in the industry today, we feel that [merging with Ketch] is a tremendous advantage for [us]." The combined trust will be led by key personnel from both Advantage and Ketch, with Drader continuing in his current position. Drader has more than 27 years of experience in financial management, oil and gas acquisitions, investment analysis and income tax issues in the oil and gas markets. Prior to joining the company, he served as vice president for The Enerplus Group, where he helped supervise a $4 billion (Canadian) gas acquisition. He has also served as treasurer and corporate tax specialist for Westburne Petroleum & Minerals Ltd. Ketch President Andy J. Mah will join as its president and COO. Mah says Calgary-based Ketch had been looking forward to the partnership. "We concluded that becoming larger was necessary to stay competitive," he said in a statement. "Higher valuation multiples for larger trusts and U.S. interlisted trusts were beginning to differentiate the sector, and the economies of scale – including service and supply efficiencies – will benefit larger companies. Ketch's proactive internal screening led us to favor the numerous complementary synergies and development drilling upside found in the Advantage assets. "An initial inquiry was made to Advantage in December 2005, and after a thorough due diligence review, we concluded that the benefits of merging with Advantage would provide the stability and upside that will position us for longer-term value creation." Ketch, whose areas of interest are in northeast British Columbia and northwest, central and southern Alberta, says actively pursuing assets and acquisitions of oil and natural gas properties has been one of the company's goals. "[We believe the merger with Advantage] will provide a larger, more balanced asset platform to pursue additional growth opportunities from," Ketch explains. Drader adds that the acquisition will give Ketch more opportunities for infill drilling. "[Merging with us], Ketch will become part of a larger company," he says. "It will give them more liquidity and lower declines. They have higher risks, and we have lower risks. By putting us together we have a good balance." Drader notes Ketch will also have access to low-cost capital through Advantage's listing on NYSE. According to Advantage, other benefits of the acquisition include: • A production mix of about 70 percent natural gas and 30 percent light oil and natural gas liquids with high operating netbacks • Proved plus probable reserves in excess of 122 million barrels of fuel oil equipment (mmboe), with a reserve life index of approximately 11 years • A greater weighting in the Canadian indices • Greater exposure to U.S. capital markets through Advantage for Ketch unit holders • Strong synergies from the combination of Advantage's longer-life reserve base and Ketch's large undeveloped land base and significant prospect inventory will lead to increased diversification, growth opportunities and complementary winter and summer drilling programs • A strong management team through the combination of Advantage and Ketch executives, management and highly qualified technical groups CanRoys Advantages Advantage says it has been successful in growing its oil and gas reserves as a result of: • Five corporate acquisitions, one significant property acquisition and several smaller transactions since its inception five years ago • Total capital expenditures of approximately $1.1 billion, which resulted in reserve additions of more than 92 mmboes on a proved plus probable basis • Drilling 313 gross wells with an average success rate of 92 percent With a primary objective to "provide investors with a low-risk investment in the oil and gas industry while generating superior returns compared with investment alternatives," Advantage believes investing in a Canadian Royalty Trust (CanRoys) is a plus because: • The Canadian oil patch is one of the strongest in the world with the majority of production coming from the three most-western provinces – Alberta, British Columbia and Saskatchewan. The industry is supported by a vibrant, technically advanced service sector. • More than half of all Canadian oil and gas production is exported to the United States, which is the largest energy market in the world. In return, Americans have long relied on Canada as a politically stable, secure source of oil and gas in an uncertain world. • Royalty trusts have been a part of the Canadian oil and gas industry for more than 20 years. There are currently more than 35 CanRoys with market capitalizations varying from approximately $400 million to more than $14 billion. In addition, the reserve life index of a typical CanRoy varies from 4.9 to 18.9 years. • CanRoys pay a significant portion of cash flow to unit holders on a monthly basis providing investors with a high yield investment with the potential for capital gains through exposure to oil and gas prices. • A typical CanRoy directs the majority of its investment dollars toward the acquisition of producing oil and gas properties. Additional investments are made to enhance production and reserves of oil and gas through low-risk development drilling combined with a small component of exploration. The Advantage team stresses its experience with CanRoys, such as: • Prior to forming Advantage in 2001, the three founders of the fund were senior executives with Enerplus, which is the oldest royalty trust in Canada, and one of the largest oil and gas income funds in North America. • As a group, the senior management team has more than 150 years of experience in the royalty trust sector, including more than $5 billion of corporate and asset acquisitions; finance, capital markets and investor relations; and production operations and exploitation. • Advantage currently has 135 employees and consultants with extensive experience in production and field operations, reservoir engineering, finance, geology, geophysics and land management. Advantage Properties According to Advantage, it has increased its reserve life index from 7.2 years in 2001 to approximately 11 today. Its assets include gas, oil and coal bed methane (CBM) properties in western Canada. In 2004, Advantage acquired more properties to increase its cash flow and production. Highlights of the 2004 property acquisitions included: • Production of 49 percent light oil, 40 percent natural gas and 11 percent heavy oil • Properties located in central and southern Alberta and southeast Saskatchewan • Acquisition of approximately 13.9 mmboe of proven and probable reserves based on an independent engineering determination • Minimal capital expenditure allocations over the past several years and numerous low-risk infill and development locations and optimization opportunities to enhance production and reserves • Acquisition of approximately 80,000 net acres of undeveloped land supported by a combination of 3-D and 2-D seismic data. • Full tax pools, up to the purchase price of assets, were included in the acquisition, which increased the value for unit holders in the form of tax deferrals on cash distribution Today, Advantage's gas production comes from properties located at Medicine Hat, Bantry, Shouldice and Wainwright, all situated in southern Alberta and occurring between 500 and 1,200 meters deep. "These reservoirs consist of low-permeability strata, requiring fracture stimulation to enhance and induce productivity," Advantage explains. "The wells are gathered by an extensive network of low-pressure pipelines which, feed into large central gas-compression facilities. All of these properties have been downspaced to allow for multiple gas wells per section, ranging from just two per section at Wainwright to the current 16 per section at Medicine Hat." Medicine Hat, considered the largest property in the fund, has 14 percent reserves and 13 percent production. This property, which has 24 sections of land, is located in the southern shallow gas field, the largest natural gas fields in North America. According to Advantage, production is obtained from 385 wells that gather at least 10 psi for individual wells and 900 psi for wells that are compressed in the field. With 86 sections of land, production at the Bantry property typically occurs from Basal Colorado and Upper Bow Island Formation sandstones. It has a varied work interest of between 50 and 100 percent. "It straddles the TransCanada highway at the town of Brooks, located about a halfway between the cities of Calgary and Medicine Hat," Advantage says. "Production at [2005] year-end was 7.7 mmcf/d from the 87 Advantage operating wells. In 2005, five wells were drilled in four new gas wells coming on stream and one being abandoned." Covering 34 sections of land, the Shouldice property operates with about 130 wells, which represent a total production volume of 90 percent. One new well was drilled in 2005, which produces at a rate of about 500 mcf/d. The company says additional drilling is planned for this year, with up to 10 wells to be drilled. The Wainwright property, located in east-central Alberta, operates at more than 95 percent with an average working interest of 85 percent. With 175 sections of land, the property primarily produces from the Cretaceous Viking Formation and others from various intervals at the Mannville Formation. Advantage drilled one new gas well in 2005 and re-completed several uphole zones in the existing wells the company states. According to Advantage, its portfolio is comprised primarily of oil and gas properties, operating more than 80 percent of its resources. The Nevis property is located just 60 km east of the city of Red Deer, not far from the Great Bend of the Red Deer River. This property is Advantage's most active property in terms of drilling and capital, the company says. With a primary zone of 1,600 meters deep, the Nevis property produces both oil and natural gas. Advantage drilled 13 horizontal wells in this property in 2005. "Wells are drilled horizontally into the three-meter-thick oil-bearing dolostone of the Upper Wabamun Formation out an average horizontal distance of 900 meters," Advantage explains. "[We have] developed considerable expertise in successfully drilling horizontal wells of this length and depth into this three-meter-thick reservoir. This is aided with 3-D seismic data, which covers the entire property. The reservoir characteristics allow for large oil in place volumes with relatively low production rates. This has necessitated that the pool be developed using horizontal wells so that enough rock face is opened up for adequate inflow." In addition to the existing horizontals, four vertical wells were drilled, with one 50 bbl/d Ostracod oil well, one abandoned step out well and two gas wells. The Chip Lake property, located 125 km west of Edmonton, produces light crude oils. Acquired in 2004, Advantage faced a challenge upon obtaining the property. "Prior to the acquisition, the previous owner had constructed central sour oil and water-handling facilities without the appropriate Energy Utilities Board [EUB] approval," Advantage explains. "[We are] involved in extensive discussion with the EUB and public stakeholders to resolve these issues, which should be finalized [by this year]. The property continues to produce from single-well batteries under maximum rate limitation allowables until these issues are resolved." The Sunset/Valleyview property produces gas and oil from Triassic Montney sandstones. Consisting of three pools, this property is located about 100 km east of the city of Grand Prairie. Its three pools are: • Sunset Triassic A – It produces 32-degree API oil and is one of Advantages' longest-life properties, the company says. Advantage states that it recognized the area's potential for developing the pool on a downspaced basis. "[We] drilled two new wells in the unit to assess the viability of downspacing," it explains. "The two wells have performed very well. Advantage plans to drill an additional 14 wells to this pool [this year]." • Sunset B – Producing mostly gas with small amounts of oil, Advantage has a 100 percent working interest in this area. Additional drilling for this pool will be considered by the end of the year. • Valleyview – Located in the north end of the area, this pool produces natural gas from three separate sand reservoirs. Advantage has a 93 percent average working interest in this area, and plans to drill two new wells this year. The Stoddart/North Pine area produces primarily natural gas from the Permian Belloy Formation. Advantage owns an interest in 30 wells and operates about 80 percent of the natural gas production. Southwest Saskatchewan operates within the Williston Sedimentary Basin, which includes Ordovician Red River Formation oil at Midalem Hardy and Froude, Devonian Winnipegosis Formation oil at Steelman and oil from Mississippian Midale/Frobisher Formations at Steelman, Weyburn and Workman. The Open Lake property is located 35 km north of the Rocky Mountain House in Alberta. The zone of interest in this area is the Glauconite Formation, Advantage says. "[We] re-completed and tied in one well and drilled a second well in 2005 targeting the Glauconite Formation," it explains. "Each of these wells is producing at average rates of 500 mcf/d. Also in 2005, Advantage participated in one non-operated, 50 percent working interest Belly River oil well in this area. Advantage will participate in a farm-in well at 35 percent working interest and drill an additional 100 working interest [this year]." Increase in Coal Bed Methane Coal bed methane (CBM) projects are becoming more prevalent across Alberta, Advantage says. "The industry is drilling more and more wells and dedicating significant capital resources to target this unconventional gas resource," the company states. One area that Advantage is targeting is the Horseshoe Canyon Formation, which supports 10 to 20 individual coal seams at average depths of 800 meters. "The Horseshoe Canyon coals are dry, which allows the CBM to be produced free of associated water production," Advantage says. "This simple fact makes these projects economical in the current price environment, particularly in those areas where optimal net coal thickness occur at optimal depths. "This happens in the area east-northeast of the city of Red Deer, coincidentally in areas where Advantage has a concentration of land assembled with conventional operations. This concentration of land is essential to the economics of a CBM project so that the low-pressure gathering and compression facilities necessary to produce CBM efficiently can be concentrated and constructed economically. "To produce CBM, each individual coal seam is fracture-stimulated with nitrogen. Anywhere from six to 10 fracs per well are required to make a CBM well ready for production. "Initially, only one well per section is drilled, but after suitable pressure and sampling work is completed, application to drill to four wells per section can be made. In Advantage project areas, per-well rates are expected to range between 100 and 300 mcf/d." Advantage says it has allocated about 10 percent of its 2006 budget to work on CBM areas at Chigwell and Nevis. The company recently drilled nine wells, with five of them on production of about 100 mcf/d per well. This year, Advantage plans to further consolidate its existing North Chigwell areas, which have an average production rate of 90 to 110 mcf/d on a per-well basis. The Nevis property has a working interest that averages 47 percent. Three wells are being produced, with Advantage expecting to drill six to eight CBM wells by the end of the year. Ketch Properties Ketch, during the first quarter of the year, was focused on operations in Martin Creek, Fontas, Worsley, and central and southern Alberta. Ketch drilled 14 wells on its property in Martin Creek, British Columbia. These wells are situated on the northern portion of its extensive land position and identified as significant pool extensions in the Baldonnel and Bluesky formations. At Fontas, located in northern Alberta, Ketch's 13-well program was completed and pool extensions in the Elkton formation were confirmed. In addition, five wells were also drilled at Worsley. In central Alberta, work on the Bamff C oil pool located at Westerose was recompleted, and it increased oil production to more than 800 boe/d from 500 boe/d in August 2005. In southern Alberta, Ketch says a new light oil pool was discovered at more than 280 b/d of 48 degree API crude and a shallow gas zone was tested at 1 mmcfd. Always Acquiring A challenge facing Advantage is the decrease of gas prices. "Gas prices are extremely low," Drader notes. "The market is more competitive and there's always greater volatility in pricing. We have a strong hedging program in place for winter 2006 to 2007, and that should help steady our cash flow." In addition, he says Advantage adapts by concentrating on its core properties. "We're always looking for acquisitions," Drader explains. "We're always looking for [companies] who have a steady cash flow and high quality of properties." Although a majority of Advantage's employees have an average of 15 years of experience, Drader says training is still important. "We work together and make sure everyone knows what the game plan is," he continues. Since the Ketch merger, the company has developed a training program to develop its combined people and strategies, Drader explains. "When we were small, we didn't have to do [extensive] training," he says. "Before, you could just give people a 15-minute notice before a meeting. We can't do that today anymore. We need formal training." Before the acquisition, Advantage had 91 employees. Now, it has 135. Drader emphasizes Advantage also spends a good amount of time on safety training. "We are constantly upgrading to go above and beyond on the current safety laws to ensure the facility is operating safely. Advantage is committed to providing a safe working environment for employees, consultants, contractors and the general public and to minimizing the environmental impact of its operations. With this commitment, Advantage will continuously review and improve policies to maintain and ensure ongoing compliance. "Advantage is aware of environmental regulations on the release of emissions produced in association with its crude oil and natural gas operations, and believes it is in compliance with all required legislation and is taking steps to ensure this compliance is maintained." In addition, Advantage works with the Alberta Energy Utilities Board in Alberta, the Oil and Gas Council in British Columbia and the Saskatchewan Industrial Resources in Saskatchewan. |
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