TORONTO (ResourceInvestor.com) -- Shares of West Energy [TSX:WTL] offer investors substantial leverage to one of the hottest plays in the Western Canadian Sedimentary Basin - the Pembina Nisku fairway in west central Alberta
West was formed in late 2002, with a seasoned exploration team quick to identify the potential of the Pembina Nisku.
In March 2004, the company purchased 50% of privately held Rubicon Energy Corp. for C$52 million. In addition to gaining 55,000 net acres of undeveloped land in the Pembina area, West also received a 3-D seismic database measuring approximately 270 square kilometres. The company's shares went public on the Toronto Stock Exchange in October 2004 through a reverse takeover.
West's strategy is simple - growth via the drill bit in the Pembina Nisku fairway.
The Nisku Bank consists of a series of carbonate patch reefs, 20 to 30 metres thick, lying between 2,200 and 3,000 metres below surface. Oil and gas were discovered in the Pembina Nisku approximately 100 kilometres southwest of Edmonton more than 30 years ago, but only in the past few years has the advance of 3-D seismic imaging allowed geologists to determine the interconnection between reef bodies, and hence target in on new pools.
The reefs are situated above an aquifer that puts upward pressure on any present hydrocarbons. As a result, any wells hitting petroleum experience high initial production rates.
For example, the GG pool, discovered by Rubicon in 2001, averaged 2,200 barrels of oil equivalent per day (boe/d) from four wells for the six months ending February of this year. In contrast, analysts Geri Greenall and Steve Larke at TD Newcrest estimate in a report dated June 20, 2005 that the median production after three months for a well in west central Alberta is only 30 boe/d.
Favourable pricing for the light oil recovered from the Pembina Nisku, combined with high flow rates, can generate a low cost, high netback production stream, resulting in the potential for significant cash flow.
As a result, almost every scrap of land in the fairway has been claimed, with a few remaining parcels of crown land fetching prices as high as a ridiculous $5,000 plus per acre. This makes West's land and seismic data valuable to any would-be player attempting to consolidate a large package.
Highpine Oil and Gas [TSX:HPX] is now the dominant player in the Pembina Nisku following its late May acquisition of Vaquero Energy.
A challenge for companies in the play is the high sour (18% to 30% H2S) content of the associated gas, as vividly witnessed in the release of hydrogen sulphide during the initial start-up of Highpine's Violet Grove satellite facility earlier this month
In March, the Alberta Energy and Utilities Board (EUB) ordered that all Pembina Nisku wells be licensed under a so-called "critical sour" designation, which includes notifying all residents within a 6.9km radius of any drilling activity. As a result, licensing in the play remains a time consuming process.
In addition, production delays can result from limitations in sour gas processing and oil battery capacity. This means control of facilities can be used strategically to preferentially develop a company's discoveries at the expense of a competitor's. West is limited with regards to infrastructure relative to some of its rivals, but does have a 15% interest in the Easyford battery and is planning to construct a battery at Paddy Creek
West has three discoveries in the Pembina Nisku fairway - one at Lodgepole and two at Violet Grove. Current production stands at 1,100 boepd, primarily from the GG pool, with estimated capability of 4,500 boepd pending facilities completion and receipt of Good Production Practice (GPP) at Lodgepole. Under GPP, an operator can produce at rates that are not subject to any predetermined maximums, as long as they maintain stated minimum reservoir pressures. The company is targeting a 2005 exit rate of 4,700 boe/d
The geological data to date appears to indicate that the interior patch reefs at Violet Grove generally have better reservoir quality (e.g., thicker pay, higher permeability and porosity) than the initial barrier reef discoveries of the play. Though the area has witnessed an increase in drilling, the pace of development will likely be moderated by the area's proximity to the nearby town of Drayton Valley, which will make licensing a challenge.
West's focus on one play gives investors a high risk/high reward bet. Barring a plunge in oil and natural gas prices, the main risks facing the company are exploration success, escalating expenses for accessing the deep patch reefs and delays in getting further production on-stream.
If the drilling plays outs, the resulting surge in production growth per share, a key metric in determining the market price of a junior's stock, could make this bet payout handsomely.
