Junior oil and gas stocks are won—or lost—at the start, when the company is just formed. Land position, cash position, and management quality are almost always solid predictors.
High North Resources [HN:CA] has started with the right pieces—especially with management and the land position.
Previously to High North, CEO Colin Soares developed and sold a land package to Petrobank (now amalgamated with Touchstone Exploration) for $55 million.
Now Soares and his team were able to tie up a huge land position—totalling 125,000, acres, for no money down through an option. Let's repeat that to let that sink in: High North secured 125,000 acres of land for no money down... just an option!
The option initially entailed an 8% GORR, however after a $1 million payout, that number is only 5%. The terms of the deal are actually getting better and better.
And beyond that, they still have very few shares outstanding.
You couldn’t have a better starting point than where they are. They’re armed with a 2014 drilling budget to truly move the needle, and are sitting on a massive land position in one of Western Canada’s top plays: the Peace River Montney.
Now the question is, can they repeat the success of their Montney neighbours?
Already this is a stock that’s gotten on everyone’s radar screen because of the quality of the play.
The basics on the play are quite simple to comprehend:
- The wells are only $2 million to drill, complete and tie-in.
- They’re paid back within 12 months.
- Rinse and repeat.
So now it’s just a case of watching them play out their growth model into a possible 2,500 barrels a day to close out the year. And judging by this area’s lead examples, that’s not a far-fetched prediction.
This is the same play that made $630 million Long Run Exploration [LRE:CA] what it is today. We’re currently seeing other Montney player Donnycreek Energy [DCK:CA] make the same strategy—big land position, fast payouts—work as well. While Long Run is well established and already producing approximately 10,000 barrels per day out of its Peace River assets, Donnycreek is playing catch up with estimates of averaging 1,700 boe/d by year-end.
So with two other successful juniors in the Montney to point to, High North’s starting position’s benefits are quite apparent. They have one of the best land positions in the region that are right in Long Run’s corridor. Now they’ve got a 15-well drill program to focus on in 2014, and work towards possibly catching up to Donnycreek—now trading at $2.10 with roughly the same number of shares out and just 1,500 boe/d production.
The question is, will they be able to afford the journey to 2,500 barrels a day?
Typically what separates a good company from the bad is—how management can grow the company on a per-share basis. High North currently has less than 50 million shares outstanding, so in theory they could still raise drilling money through dipping into the equity market.
But the company played a different hand at the beginning of this month by announcing a $10 million debenture with a strike price above market—at 85 cents, which helps reduce dilution. If they do end up hitting $0.85, it’s the equivalent of doing an $0.85 equity financing, without the warrants or overhang.
“We feel that the recently announced convertible debenture financing will provide High North with the necessary funds to move forward,” says Colin Soares, President and CEO of High North Resources. “It helps with our development plans, while keeping dilution to a minimum for our existing shareholders”
Putting on debt this early in the game is a little risky. One year payouts make all the difference—you make this type of move you can make as a junior when you’re confident in the low-risk nature of your assets.
Once they get a few of these wells online and cash is coming in the door, High North should be able to get a more favorable line from the bank. It would take about 3-6 months of steady cashflow for them to gain that kind of recognition. The move is indicative of how low-risk these wells are, and how repeatable management believes them to be.
And these wells are only $2 million each. Low costs assets that pay out in a year are hard to come by, and High North has them in spades. With a recent $1 million payout to stakeholders, High North reduced their GORR down from 8% to 5%, further improving the economics at play.
“We’ve seen payback periods on Montney oil wells drilled in the area continue to improve,” says Soares.
“Long Run used to report them as taking 18 months, but now are comfortably stating they’re averaging 12 months payback per well.”
Today’s progress speaks to management’s smart decision to sneak in and put together such a solid position in this region before the land grabbers caught wind. Now it’s time to make hay with the land they have, and grow without bloating their share structure
This debenture keeps the share structure in a sweet spot for the time being. Should the economics of these wells be as good as their Montney predecessors, High North would then pay out that 12% debenture fairly quickly.
“Production rates on our first three wells to date have exceeded our expectations,” says Soares. “Additional funds raised through the convertible debenture financing will enable High North to fully test these assets the way we intended.”
Already we’ve seen that the early stages of the 2014 drill program are commercially successful. The first two horizontals (9-2 and 16-2) have shown good pressure and have a combined sales production rate of more than 350 bbls/d—and that’s with each well being currently restricted by surface equipment limitations.
The third Montney well (9-26) is currently testing and flowing with similar pressures at the wellhead. Once the well is cleaned up and the fracking water evacuated, we should be getting results on that one as well.
Now, their fourth Montney horizontal well is where investors want to keep their focus. It is going to offset Long Run's 5-01-76-21W5 M producer. That well had an IP 30 rate was 360 barrels per day, and was the best section 1-76-21W5 producer to date.
Initial production wise, High North's first two wells are right on target with what Long Run built its empire upon. Removing their surface equipment restrictions would improve them further.
According to Long Run’s own website:
“A typical horizontal 20-stage fracked Montney oil well in this fairway has a $2 million on-stream capital cost. The results are: 170 BOE/d 1-month average production, 107 BOE/d (70% oil) 12-month average rate, 152 MBOE estimated ultimate recovery.”
Long Run built up approximately 6,000 of its 10,000 boe/d in the Normandville-Giroux fairway that stretches not just into, but around High North’s most valuable property. Normandville Giroux is the central component to Long Run’s initial two-year development plan that includes 90 horizontal Montney wells. In Long Run’s latest presentation for March 2014, they state the payouts on these wells is down to 12 months.
Lately Long Run's wells have been getting even better. A lot of Long Run's recent activities have fit snugly up against High North's lands. LRE applied for a hold on sections 28 and 31, which each are abutting the top 5 sections in High North's Block H. Two of Long Run's wells had great IP 30 rates of 330 bopd and 360 bopd on 13-01 and 12-01 respectively. They haven't drained the area yet, and are looking to drill another one. In total they've done 5 wells across the top of High North's 7-section Block H.
It is quite remarkable that High North was able to lockdown such desirable real estate prior to Long Run's winning streak. Now the High North team is sitting directly next door to some of Long Run's top producing wells of late, on land they didn't have to payout a penny for up front to acquire the rights to.
On those lands, High North hopes to drill 15 wells in 2014. Should they continue to average around 175 boe/d like they did off of the first two wells, then they could see themselves in a ballpark of 2,000-2,600 boe/d when the year closes out.
Under a scenario like that, one could see them being able to close out the 12% debenture quickly, and moving on to a bigger program in 2015.
It’s far too early to focus on Long Run as a comparable. But Donnycreek at its 1,500 boe/d production and similar share structure (51 million outstanding) is more realistic. Currently the company is trading at $2.10 per share, and has seen a 52-week high of $3.20.
Currently High North is just above $0.50, and has a chance to surpass Donnycreek’s current status by 2014’s close.
Just so long as they can increase oil production without watering down the stock, High North shareholders should be able to benefit from the running start that management and a big land position (at no up-front cost) gave them.
G. Joel Chury
Publisher, The Hydrocarbon
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