Bellatrix Exploration Ltd

Growth by drill bit

In 2009 Ray Smith was parachuted in as CEO and president to rescue True Energy Trust. Now 18 months into the job, he talks to Gay Sutton about the remarkable turnaround, about renaming the company Bellatrix Exploration Ltd., and about his ambitions to make it the rising star of the Western Canadian Basin.

There is much in a name. Indeed, many corporations over the past 10 years have spent billions rebranding their businesses and re-engineering them to take advantage of the globalized marketplace. Bellatrix Exploration Ltd. is an emerging oil and gas company operating in Western Canada. Bellatrix, led by a new management team, stems from the conversion of True Energy Trust into a corporation in November 2009.

Bellatrix operateswith integrity and conducts its operations in a safe and environmentally responsible manner. When Ray Smith was appointed CEO and president of True Energy Trust in January 2009, the oil and gas exploration and development company had gone into serious decline. Operating as a trust, it had made a series of acquisitions. But with lethargic oil and gas production and limited exploration success, the company had accrued a debt of C$215 million against a projected cash flow for 2009 of just C$28 million.

“As a result, the company asked me to come out of retirement and take over,” Smith explains. With some 41 years of oil and gas exploration, development and production experience in the Western Canadian Basin—many of them at the helm of successful businesses—he was tasked with turning the company around. 

Just 18 months into the process, the company’s debt has been slashed from C$215 million to C$73 million and cash flow has increased from C$28 million to C$70 million. “We’ve turned the corner, and we’re now into a continuous growth mode,” Smith says. Moreover, this dynamic and forward-looking ethos has also been beautifully articulated in the rebranding of the company at the end of last year as Bellatrix Exploration Ltd, named after one of the brightest stars in the sky. “Bellatrix is the name of a bright star sitting on the left shoulder of Orion, which is some 10,000 times brighter than our own sun. We feel this company will be a new rising star,” Smith says.

The road to recovery, however, has been rough, and Smith has tackled the turnaround with a four-pronged strategy aimed at setting the company on a strong operational and financial footing, reinvigorating its exploration activities and beginning the process of establishing a balanced portfolio of operations to offset the risks of volatile prices. 

His first step was to create the strongest management team possible to lead this change, and he swept most of the old management away, appointing a new suite of vice presidents, all of whom had 30 years or more of experience in the Western Canadian Basin. Only the CFO was retained from the previous team.

Smith then looked to optimize production across all levels of the company and drive down the corporation’s cost base. “We made significant changes to our field staff. In actuality we changed out about 50 percent of the field staff, appointing individuals we felt possessed the skills required to accomplish the goals and objectives set for them,” Smith comments. Of the original 100 employees and consultants company-wide, over half were replaced by just 30 new appointments.

Today the company operates with roughly two-thirds of the original staffing levels, and economies have been made across all departments. “By streamlining the business and taking care of the paperclips, if you like, we’ve driven our general and administrative costs down from $18 million to $11 million, which is a 40 percent decrease.” Looking at the broader canvas, overall lease costs have been reduced from C$66.5 million for fiscal year 2008 to C$45 million for 2009, and these are likely to be further cut to C$36 million this year.

The second step was focused on stabilizing the cash flow. Given the highly volatile commodity price environment facing the oil and gas industry in 2009, his primary strategy was to maximize the company’s hedge position as it pertained to gas prices. In early 2009 the company hedged out about 68 percent of its gas at C$7.26 per thousand cubic feet. This, combined with production optimization, delivered a cash flow of C$36 million for 2009—more than 28 percent above the original forecast.

The third prong in Smith’s plan was to reduce the company’s enormous debt, providing financial flexibility by reducing the ratio of debt to cash flow to one year. In three separate transactions, the company sold production of 3,600 barrels of oil equivalent per day and some minor overriding royalties paid to the company for approximately $102 million. The  combination of cash from the asset sales and excess cash flow received due to the gas price hedges enabled him to pay down a considerable amount of debt, reducing it from C$215 million to C$107 million by the end of 2009.

However, the sale of assets had the adverse effect of reducing production to 6,200 barrels of oil equivalent per day. “In the fourth quarter the company initiated its exploration program, which has been very successful; we’ve rebuilt our production to 7,000 barrels of oil equivalent per day by year-end 2009.” The final act of 2009 was to convert the company from a trust to an exploration and production company by way of a plan of arrangement and take on the name Bellatrix Exploration Ltd., which was approved by shareholders on November 1, 2009. 

To complete the financial element of the turnaround strategy, an equity financing was made in January 2010 under the new company name—Bellatrix Exploration Ltd. This raised C$45 million and was followed by successfully closing a C$55 million convertible debenture at an interest rate of 4.75 percent and a maturity date of April 30, 2015. The combined financings were used to further reduce debt, provide additional capital for the 2010 exploration program, and facilitate the buying out of the company’s C$85 million convertible debentures that had a 7.5 percent coupon. The result is a lower cost of capital as a base component of Bellatrix’s overall debt structure. “We’re moving forward with a $75 million exploration budget based on $60 to $70 million in cash flow, and we’re looking at the 2010 year-ending debt forecast to be approximately $80 million,” Smith says.

The fourth element of Smith’s turnaround program focuses on achieving stability for the future by shifting the production portfolio toward a 50/50 mix of oil and gas production. “We are therefore spending about 75 percent of our $75 million exploration budget on oil plays this year and an equal percentage in 2011. It’s anticipated we can achieve our goal by mid-2011, which should provide the company with a more stable cash flow base during years of additional price volatility,” he explains. “Meanwhile, we have a very large inventory of development opportunities on our existing properties in the Cardium oil and Notikewin liquids-rich gas plays in central Alberta.”

To enable it to dramatically drive down the costs of finding new oil and gas and to increase the productivity of the wells, Bellatrix has been harnessing some of the latest technology. Over the past five years, new completion techniques have been developed that allow horizontal drilling in multistage completions in reservoirs, resulting in a much higher productivity rate and ultimate recovery rate. Until last year, that technology had been applied exclusively to non-economic vertically drilled reservoirs and shales, increasing productivity and making them economically viable. “This of course has led to the massive advancement of shale gas in North America,” Smith says. “At the end of last year, however, we began to introduce this new technology to existing quality reservoirs in Western Canada, and the results have been nothing short of phenomenal.” The application of this new technology is proving to be a “game changer” for the Western Canadian Basin; the wells’ production rates have been improved dramatically and the ultimate asset recovery is enhanced, resulting in substantially improved economics and return on capital. 

The technology has not only increased the productivity of new wells but also has had a more complex long-term impact on costs. The Cardium reservoirs, where the majority of this investment is being spent, has a relatively shallow long-term annual decline in production of just 6 percent; the industry average in recent years is 20 to 22 percent. “By adding a large block of this lower-decline asset, we’re bringing our corporate decline rate down to 15 to 16 percent. So the mathematics are simple; we can deploy less capital replacing annual production and more of our capital for growth.”

Looking to the future, the company does not foresee making any acquisitions unless they fit well with the existing asset base and provide additional drilling opportunities. “We can provide our stakeholders higher sustained rates of return for their investment in Bellatrix by growing the company with a successful drill bit program, and we have the ability to do just that,” Smith concludes. “We believe we can double the company over the next three to four years through development drilling alone.”