Galleon Energy’s more than 1 million acres of land holdings, concentrated in one region, give it the production necessary to rise from a junior to a mid-cap, according to Vice President of Exploration East Jim Iverson.

The three most important things in real estate are location, location and location, but Galleon Energy is putting that principle to good use in oil and gas, as well. The company’s strategy has given it one of the most concentrated land bases in western Canada, and production has been increasing ever since it took over that land four years ago.

Vice President of Exploration East Jim Iverson says Galleon Energy has brought a great deal of operational expertise and an aggressive drilling program to its land base, and it stands to benefit from the rising price of oil. The company has a strong position thanks to its land base, and Iverson says Galleon reached that position by taking advantage of the pessimistic nature of many other companies in the industry.

He says the company capitalized on a period four years ago when large exploration and processing companies were rationalizing their land positions, and the results it has shown so far are making many majors think twice about giving up any more acreage. Galleon has made the most out of the opportunities it has found, Iverson says, bringing it up from a small start-up only a few years ago into a company on the verge of reaching the next rung of the ladder.

Iverson says Galleon Energy is one of only a few companies in the industry in its position. The company’s strategy plus the results it has yielded have brought it there.

Growing Stronger
Founded in 2003, Galleon Energy came from modest beginnings. The company’s initial placement was only $10 million, but things have changed a lot as the company prepares to celebrate its fifth anniversary in 2008.

“Currently, our market capitalization is close to a billion dollars, so we’ve come a long way,” Iverson says. “We’re still a junior, but we are working towards being a mid-cap. Right now in the industry, there aren’t a whole lot of people in that spot.”

Production averaged more than 13,000 boe/d for the second quarter of 2007, which is an increase of 12 percent from the first quarter of the year and a 56 percent increase over the second quarter of 2006.

Give Me Land, Lots of Land
Iverson says Galleon’s greatest strength is in its property base. Galleon’s land consists of approximately 1 million gross acres concentrated in a multi-zone fairway on the south flank of the Peace River Arch in northwestern Alberta. “I think the biggest thing that we have always had as an advantage is our land base,” Iverson says.

Galleon early on benefited from large firms selling off non-core holdings. “Since we started, the market has changed quite a bit in that most of the majors are no longer divesting of large tracts of land,” Iverson says. Even though those companies are no longer selling off land, Galleon is still in a good position thanks to their earlier jitters.

The company made some large commitments to building a strong land base early on, including one 100-section deal and a 150-section deal. Galleon’s bold strategy of acquisition has increased its holdings more than five times their original size in just a few years. In December 2003, the company had holdings of 191,000 acres. Three years later, it had more than 1 million.

‘Simple Strategy’
Robert Fitzmartin, an analyst with FirstEnergy Capital Corp., says that since Galleon made its move to secure its land, the rest of the industry has recognized the value of having a concentrated land base.

“It follows on a simple strategy that people try to emulate,” he says. “What is unique about Galleon is that they’ve assembled this in a highly prospective area,” he continues. “[It’s] unique in that they’re largely aggregated in an area that was formerly the domain of a company called Anderson ... and the M.O. of Anderson was a natural gas exploration vehicle.

“Anderson largely focused on natural gas assets,” Fitzmartin says, “and they never really got past the deeper horizons, and that’s what Galleon has been able to do.” He notes that Anderson, being focused on natural gas, never attempted 3-D seismic imaging of the land.

Galleon, on the other hand, has been very aggressive about shooting 3-D seismic for both exploration and development purposes. This has proven to be a godsend for Galleon, as it has allowed the company to tap resources that the previous owner of the property was not able to exploit.
 
Strong Portfolio
Market conditions have made some majors skittish about drilling, but that hasn’t bothered Galleon as much. “We’ve always been big drillers from the beginning,” Iverson says. The company’s strategy for 2007 included the drilling of 125 new wells. Having much of its land concentrated in the same area makes it easier for Galleon to explore without spending too much.  “Some of the good things about that are that it gives you some operational efficiencies,” he says.

According to a presentation made by Galleon in June, the company had a 90 percent success rate in drilling to date, and Iverson says it has made some significant discoveries along the way. “Our sort of crown jewel is the discovery that was made in the spring of 2006,” he says.

This discovery was the Puskwa Beaverhill Lake deep light oil play. Iverson says the discovery has been recognized as the largest discovery of light sweet oil in western Canada in 10 years.

Paying Off
Because the land was originally explored only for natural gas, it has taken a while for Galleon to install the infrastructure needed to produce the oil. However, Iverson says that phase of the work was recently completed. “We had to build the plant and we’re just beginning to reap the rewards,” he says.

The site has a production capacity of more than 11,000 boe/d, and Iverson says the company expects Puskwa Beaverhill Lake to account for nearly a quarter of the company’s total production once it hits its full potential. Iverson says that the company is also trying to get the word out that it has an equally strong legacy asset in the Montney gas play at Dawson. “It looks like it could be as much as 300 BCF recoverable,” he says.

Galleon’s Dawson Montney is expected to produce more than 60 million cubic feet of natural gas per day by 2010, according to the company. Iverson says an added bonus is that the gas is relatively shallow and does not require the high drilling and completions costs that other Montney plays farther west do.

“The strength of it is that it’s only at 1,000 meters, and that drilling, completion and tie in costs are on the order of $800,000 (Canadian),” Iverson says. “Payouts average less than eight months and the reserve life of the wells exceed 10 years. That’s a lot of free cash flow.” More than 50 wells are planned for that site in 2007.

‘An Up-And-Comer’
Another booming production area for Galleon is Eaglesham. This area has grown from 150 Boe/d last year to more than 1,800 Boe/d currently.         Eaglesham is a large multi-zone oil and liquids-rich gas exploration project, and one that is starting to pay off for Galleon. “It’s an up-and-comer, and it continues to show that the fairway we’re in has real strength,” Iverson says. “[We really do] have a couple of things on the [move] here.”

Galleon says Eaglesham has 20 identified drilling locations over and above what will be drilled this year. Galleon believes this area should yield the equivalent of 80 billion cubic feet of recoverable reserves, the company says. So far this year, 11 locations have been drilled with 91 percent success. Eight more locations are to be drilled by year’s end.

A Good Position
Even though Galleon Energy is finding a lot of success in its land base, Iverson says a conservative market is making it difficult to capitalize on its full potential. “At this particular juncture, I think the market attitude toward oil and gas is one of the biggest issues,” Iverson says.

Without the market’s support, Galleon can’t make the most of all the opportunities in its portfolio. Iverson says the market has shifted its attention in recent years to oil sands and tight gas because of the stability of those two products and the rising price of oil. “It seems the market is truly looking for predictability,” he says. “Lots of smaller companies are struggling with the fact that the market support is just not there anymore.”

Planning Ahead
Fitzmartin says Galleon’s future will remain bright if the company can keep its eyes on the horizon. “Ultimately, it’s like any conventional E&P; it will have to shift its cash flow into projects that companies like to invest in,” he says.

In Canada, this typically means oil sands. Although Fitzmartin says he doesn’t necessarily see Galleon taking that approach, he does say he believes it will have to transition from shorter reserve sets into higher-quality reserve assets. “That’s something that they are currently doing and something that they have done successfully in the last year-and-a-half,” he says.

Iverson says Galleon has the resources in the form of cash flow generated from long reserve-life projects such as Puskwa and Dawson. The company has not lost sight of the need to be successful, he says. “That’s our mantra right now – ‘Do good business,’” Iverson says.

Leading By Example
This is a lesson Iverson says is often lost on many in the energy business, as they tend to focus more on talking a good game for the market than playing a good game to guarantee their own success.

“Many times in the resource business, people get carried away with trying to promote, and that’s not really good for anybody,” Iverson says. “I think the first thing that I would recommend is that people always focus on making good business decisions and not focus on what the market is trying to achieve,” he adds.

Iverson says the energy industry is in a unique position to serve as an example for the rest of the business world by promoting good business practices. Because so many other industries depend on the energy business, they all see what it does and can learn something from it. “The oil business is a ground zero for the economy, so we have to take a little bit of stewardship,” Iverson says.

Diversified Player
One thing that counts in Galleon’s favor is the fact that the company is diversified in both oil and natural gas, giving it the flexibility to survive when market conditions of either falters. “We actually have the ability to shift our focus a bit from gas to oil,” Iverson says.

He says the company will continue to focus on drilling for light oil in the coming year, and notes that it had already made five deep light oil discoveries this year alone. "I see a lot of strength in conventional oil and conventional gas, as well,” he says.

Even though the rest of the market might be drifting toward oil sands, Iverson says Galleon will be able to stay afloat thanks to its assets. Being aggressive in land acquisition while others were less confident has proven to be a winning move for Galleon Energy, and one that will provide it with the foundation to sustain profitability for a long time yet to come, he says.

“We have the land base, we have a strong portfolio in that we have development opportunities [and] we have some really strong exploration plays on the [way],” Iverson says, adding that the company is prepared for any future growth that comes its way. We have a clear vision for growth for the next three to four years.”

Even though Galleon Energy isn’t in the real estate business, it knows that having the right properties in the right location is going to be the key to the company’s success today and into the future. Iverson says the company understands what its most valuable resources are. “In order to have sustainability, you have to have land, and we have the land,” he says. �