The Energy Report: Garth, a year ago, Blackbird Energy Inc. (BBI:TSX.V) was a true penny stock. You were trading at about CA$0.07/share and your market valuation was below CA$11 million (CA$11M). Today your market cap is about CA$120M. How did you create so much shareholder value with energy prices plummeting?
Garth Braun: Let me start with the issue of falling energy prices. Blackbird is, at present, agnostic to commodity prices. Due to nonmaterial revenue generated from our noncore assets, we don't see the current commodity price environment as a negative, but rather as an opportunity to grow even faster. Because of that, we are not making our decisions based on cash flow fluctuations.
When we went out to raise capital in fall 2014, we attracted numerous institutions that deployed capital into Blackbird because of our ability to execute—not just on drilling, but also on land capture and solving infrastructure issues. To put this in the simplest terms, we are able to grow the company and move it forward.
Our Elmworth Block—where we are in the midst of testing our first two Montney wells—will not have production tied in until later this year (Q4/15 or Q1/16), if they prove as prospective as we believe. That's our core focus, and where we are delineating and derisking a very large contiguous block of land, up to 24 sections.
TER: I see that you have recently acquired an additional 11 sections of Elmworth Montney properties, for a total of 47 sections. In addition, you've acquired 77 sections of East Wapiti Montney land, as well as four more sections of Elmworth Montney properties that are noncontiguous with current Elmworth Montney properties. How much do you own? Do you have it all to yourself?
GB: We own a 100% working interest on all lands. The 11 sections of contiguous lands purchased in October and November amount to 6,710 net acres, and our 47-section contiguous block amounts to 30,080 net acres.
Blackbird Energy's Executive Letter
TER: Garth, tell me how you've been creating value. You've gotten a good deal on your land, haven't you? You must have gotten in early.
GB: Yes, indeed. The first step was to execute land purchases below market. We were able to do that because we were early movers in mapping the Elmworth corridor, and subsequently in purchasing land in what we determined was a liquids-rich corridor. At the time the play was in its infancy, with producers focusing on the dryer, westerly land. This allowed Blackbird to implement a proprietary land acquisition strategy that effectively blocks larger producers from acquiring contiguous land positions. We were able to get a toehold in the corridor.
Second, through our drilling program, we are able to validate and capture contiguous lands not being drilled by industry leaders. A significant producer in the area recently acquired lands approximately three miles from our land position for $2.9M per section (the company acquired 12 net sections for $35M), which we see as a significant acquisition for that company. Our vice president exploration, Craig Wiebe, views this industry leader's land and Blackbird's to be geologically the same. To date, Blackbird has paid approximately CA$5.7M for all 128 sections, or approximately CA$45,000 (CA$45K) per section. That works out to approximately CA$110K per section for its 47 contiguous Elmworth sections, and CA$315K per section for the recent 11 section purchase. The reason we have been able to acquire the land at what appears to be significantly discounted prices is, again, because we have been able to use our drilling program to validate lands that would otherwise expire.
After drilling and completion (D&C) costs on our first two Elmworth wells, we anticipate having CA$27M of working capital with which we can comfortably drill two more wells and build a battery. We look to drill up to four more wells by the end of 2015 if we have access to additional capital on share price strength, which will allow us to accelerate our capital expenditure (capex) program and enter a phase of self-sustaining growth.
TER: You currently have a very strong balance sheet, with about CA$42M in cash and no debt. I understand that each Elmworth well will cost somewhere in the neighborhood of CA$10M to drill and complete. How long can your existing cash fund your operation? Will it last through the current operating year?
GB: The funds on hand would allow Blackbird to drill two more wells and fund infrastructure. We plan to have the wells tied in by late 2015 or Q1/16. That being said, post positive results from our first two wells, we would look to raise further funds to facilitate a more aggressive drill program of up to six wells drilled and completed by Q4/15.
The question that should really be asked is not how long we can survive with our current cash on hand, but whether we have the ability to access additional capital to grow and accelerate our plans. To that question I can say, unequivocally, that if results are positive on these first two wells, our team will have the ability to raise capital and grow, which is what I believe investors need to know. We don't believe that staying still yields any utility or value, and thus our duty to shareholders is to continue our path of growth and delineation.
TER: There are some much bigger companies operating near your Elmworth properties—specifically Encana Corp. (ECA:TSX; ECA:NYSE), NuVista Energy Ltd. (NVA:TSX)), Apache Corp. (APA:NYSE), Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) and Canadian Natural Resources Ltd. (CNRL; CNQ:TSX; CNQ:NYSE). My understanding is that they have been successful in the area. Do you imagine that Blackbird investors think of these larger companies as potential acquirers?
GB: I had a discussion recently with a reserve engineer, and he gave me his opinion that only 5% of projects in Canada were economic at this time. I think we need to widen the field as to the companies that are interested in Blackbird's project.
As for Blackbird being a potential takeover target, even though companies have begun to batten down the hatches on capex, it should not go unmentioned that many large companies currently have less than stellar economic plays. During this down cycle in commodities, certain companies will inevitably decide to redeploy capital to the resources with the highest economic returns. Some will go one step further—acquiring companies with established positions in areas where highly economic plays still exist. With Blackbird targeting the high-liquids window in the Montney, a potential acquirer has an ability to take control of a large contiguous position in what is turning into a highly economic resource, one that is able to create value at these lower commodity prices. Furthermore, with cash on hand and no debt, Blackbird appears to be that much more attractive. A takeover is not so much a question of whether it happens, but when it will happen.
What Has Propelled Blackbird Energy Stocks So Dramatically?
Braun Sums It Up
- The vision to build a liquids-rich play, which Blackbird would own 100% of, that would have a scale that would be significant to institutional investors and would be in a corridor where drilling would be proceeding toward our lands, so that we could use other people's money to derisk and delineate the resource.
- We were early to the play. We needed to capture/acquire the lands prior to prices increasing beyond our ability to pay. We have paid for our total contiguous 47 sections of land, approximately $5.2M or CA$110K per section. Other companies have paid substantially more—up to $2.9M per section.
- We acquired land when the market thought it could not be done at affordable prices, and when we selected our well locations, we looked for multiple benefits. We not only wanted to prove up the upper and the middle Montney, we also wanted to capture 11 more sections of land adjacent to where we were drilling. These lands cost us less than CA$315K per section.
- Economies of scale. This project is based in three zones, four wells per zone, which would potentially have up to 564 well locations. The size of the prize is substantial. The multiple zones are being delineated by Encana, NuVista, CNRL, and soon by Apache and Shell.
- We can be a low cost supplier. A liquid-rich project, having wells that produce greater than 50 bbl/MMcf of gas, is very economic, and would result in Blackbird being a low cost supplier.
- We continued to build a high quality team that would allow the company to execute its strategy.
- We unlocked stranded value through disposition of a noncore asset, generating $8.9M net.
- We have a leading completion program that maximizes complex fracturing of the Montney. The completion program was designed to maximize liquids recovery, while reducing the risk of completion failure.
- Investors, including institutional funds, bought into our vision and execution strategy, and into the unrealized potential value of our Elmworth Montney Project.
- Finally, we have torque. We have a catalyst driven story. We have met and achieved significant catalysts to date, and we have several more catalysts in the near term, one being the announcement of the results of our first two Montney wells.
TER: Blackbird got an average price of $65 per barrel of oil equivalent ($65/boe) in the quarter ending October 31, 2014, versus $71.79/boe in the three months ending Oct. 31, 2013, exclusive of royalties. How will you manage in the current environment?
GB: The production you are referencing is from our Saskatchewan project, which is not material to our overall operations. The main project for Blackbird is Elmworth, and I will answer your question in the context of the two wells we just completed and will be testing this month.
At current commodity prices, which are approximately $50 per barrel ($50/bbl) for oil and $3 per million cubic feet ($3/MMcf) for gas, and based on numerous internally generated economic runs utilizing production rates that mirror results on trend, we still would achieve internal rates of return (IRR) greater than 15% and an economic ultimate recovery of approximately 1M boe. This puts Blackbird in the 5% of economic projects per above. The caveat is that these assumptions must be proven by production results.
This all boils down to reaching our goal of becoming a low cost supplier of energy to the market, which effectively means we can turn a profit at these lower commodity prices. But when prices begin to rebound, they will have a major impact on increased profitability. It is the types of projects based on higher liquids yields—75/bbl/MMcf or greater—that have the ability to weather shocks to prices and to flourish in more "normal" environments. Once again, I reiterate that these assumptions must be proven by production results.
TER: Production normally progresses with a sense of urgency. With energy prices currently so low, are you in a big hurry to produce? Are you trying to time production to higher prices?
GB: At the moment, with our commodity price-agnostic view, we are quite happy these wells are not able to be tied in immediately. Regardless, we do have some work to do before the tie-in can occur. First we have to build a battery that can handle the volume of high liquids associated with these wells, and then we have to tie into a pipeline. We see this all being completed by Q4/15 or Q1/16. We see this timeline as positioning the company exceptionally well for a rebound in commodity prices.
TER: What forecasts are you using for oil this year? You must be thinking of some dollar amount.
GB: We are taking a more conservative view regarding gross domestic product (GDP) growth, oil supply and oil demand. We see a U-shaped recovery versus a V-shaped recovery, meaning we think low prices will not lead to a sharp uptick midyear, but rather a slower, more gradual realization of higher oil prices stabilizing in the $70/bbl range come 2016, which is in line with many reserve engineering firms in Calgary. We believe that we are not only dealing with an oversupplied market, but we are also in a world environment where GDP growth is not going to be at the pace we have seen over the last 10 years. Furthermore, capex in the oil sector is being cut, but producers are utilizing this reduced capital to drill in their sweet spots, which will limit any supply reductions in the immediate term.
TSLR: With your market cap above CA$100M, Blackbird shares must be attracting attention from institutional investors who could not buy micro-cap stocks. Do you have any idea currently what percentage of your outstanding shares are owned by institutions? To your way of thinking, does institutional buying mean the next strong leg up for Blackbird shares?
GB: Blackbird actually began to attract institutional ownership before we hit a market cap of CA$100M. In the fall, when we raised approximately CA$37M of capital, institutional buying represented approximately CA$30M of the total. At the time of that raise, we were trading at approximately a CA$60M market cap. Today our institutional ownership is between 35% and 40%, and is probably still increasing as more investment banks begin to cover our company with research. We do believe this institutional support will give us a new leg up.
Once we have completed our first two Montney wells, we will get a revised reserve report prepared. This will allow us to begin the process of graduating to the Toronto Stock Exchange (TSX), which we believe will allow further institutional ownership to occur and enable another leg up in value for Blackbird.
TER: Do you foresee having to go back to the market in early 2016?
GB: Raising capital is not bad for existing shareholders if the capital is used to build value. Over the past year, I think we showed the market that our capital raises enhanced and accelerated our growth trajectory. The capital we've raised has put us in an enviable position with a strong balance sheet consisting of cash on hand and no debt.
Post the drilling of our two wells, if they come out with positive results, we will have to make the decision on whether we want to accelerate our growth. Certain institutional holders in Blackbird stock have made it very clear that they want us to continue on the path of growth through the drill bit and land aggregation, and would be very comfortable deploying capital into us so that we remain relevant and strong in periods of opportunity.
TER: Your stock performance over the past 52 weeks is stunning, considering such a challenging environment. That says something about management. What do you think sets you apart from other CEOs?
GB: First, I would say no company gets created because of the CEO. It gets created because of the team. One thing I can tell you is that I've been very fortunate to have aggregated a very, very good team. What I've given them is leadership. This has not been about cheerleading, it's leadership based on work ethic. It's one thing to get out and be a cheerleader, but it's another thing entirely to develop a team that is executing on a solid, strategic plan. I want our team to differentiate what we were and what we are about to be. We were previously a micro cap, and we are rapidly becoming a junior, as we drill and complete these first two wells. Each day, when I speak to my team, the No. 1 thing I say is to strive for perfection and deliver excellence in everything we do.
TER: Garth, give me an example that would give investors an idea what that strategy means in the real world, in terms of executing on something tangible.
GB: In the last two months, as we've seen commodity prices roll back, some of our suppliers have actually extended their payment schedules for us, moving it out as far as 120 days. They are trying to be accommodating during tough times. I met with my team three weeks ago and said, in an environment like this, where you have commodity prices moving back and suppliers potentially feeling the pinch of delayed receivables coming in, I want to convert to a 15-day payment schedule. Now, we have to make sure that there is firm and final agreement on the payables, but the message I'm sending to the marketplace is that if you do business with Blackbird, you're going to be paid in a timely fashion, and that we want premium—their best—pricing as we go forward and on current accounts. I'm getting every single team member to focus on the details and making everything we do exceptional. That's what makes a company successful.
Cycling: Braun's Obsession, Not His Hobby
In December, Garth Braun finished 355th out of 72,000 riders in total distance on Strava (a cycling social network, online training log and competition) for the month of December. ''When you're developing an oil company, you can't just forecast that oil is going to stay above $100/bbl," he says. "When you're out cycling and you're going out for a 180-kilometer ride, if you expect that it's only going to be flat and the wind is going to be at your back, you are naïve." Braun rode Doi Inthanon in Northern Thailand. It climbs 47km over 2,400 meters, and cycling enthusiasts agree it's a brutal ride. "It took me 3 hours and 35 minutes to get to the top. Once you're on it, it only gets more difficult—to the point that slopes are up to about 24 degrees. If you're not leaning down onto your handlebars, the bike will lift up and do an involuntary wheelie. It's that steep, and there's no option. You can't even turn around and go downhill because you'll get a flat tire applying the brakes so much. So you have to get to the top so that someone can load you in a vehicle and take you down. Once you start riding, you're committed. That's how I see the oil and gas business, and that's how I see Blackbird. We've committed to making a company successful. We've put our heads down, and we're going to get to the top."
TER: You have to maintain relationships for decades to keep and hire the best people. Do you start leadership training with your people the moment they come in to the company?
GB: Absolutely. In fact, I'll tell you something. There are three young gentlemen who recently joined the company. When I interviewed each of them, I said, "One of the most important things for you to do is take a leadership role in my company." I told each one, "I'm a mentor to you. I want you to have expectations and goals, and to achieve those goals. When I say I'm going to mentor you, that means you're going to get a lot more feedback from me than if you were just an employee who had a job to do." I'm not looking for a person to join my company and do a job. I want to give them the skills to become industry leaders. So, there's a greater burden here, and you have to be prepared when you join.
TER: Investors want to know about milestones that could move shares. Could you summarize the catalysts investors might look to?
GB: One near-term catalyst is the completion of, and announcement of results from, our first two wells in the Elmworth area, being our midland and upper Montney wells. But even prior to that, I think investors should be aware that as CEO of the company, I have been actively recruiting coverage or initiation of coverage on Blackbird by a number of financial institutions. We want to have more eyes on our company, more institutions to be aware of us, and more independent analysts to have formed their own opinions on Blackbird's assets and where the company will go. I think, even prior to announcement of our well results, you will see institutions beginning to initiate more coverage on Blackbird.
Next, I think you will see the results from our first two wells. Once the wells are completed, you'll see me proceed immediately to have those wells reserved. Third, once I get that reserve report, we'll announce the result, and that will be the last remaining requirement for us to make application to move from the Toronto Stock Exchange Venture (TSX.V) exchange to the TSX, which is the big board in Canada. That's critical, because it opens up a whole new corridor of institutions that may be limited to investing only in TSX companies. Once you're on the big-time board, you're open for them to evaluate and invest in you.
TER: Garth, thank you. It's been a pleasure.
Garth Braun has more than 30 years of diversified business experience in oil and gas, finance and real estate. Over the past several years, he has led Blackbird through the successful acquisitions of Ruger Energy Inc. and Pennant Energy Inc., the divestiture of the Bigstone Montney asset for proceeds of $8.9M, the accumulation of a significant, 47-contiguous-section, Elmworth Montney land position and the drilling of the first two Elmworth Montney wells. In addition, Braun was instrumental in raising over $50M of capital. He was previously chairman and CEO of an international oil and gas company, and a principal of a private real estate development company that completed over $1B in development.
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DISCLOSURE:
1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the company mentioned in this interview: None.
2) Blackbird Energy Inc. paid Streetwise Reports to conduct, produce and distribute the interview.
3) Garth Braun had final approval of the content and is wholly responsible for the validity of the statements. Opinions expressed are the opinions of Mr. Braun and not of Streetwise Reports or its officers.
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