Highpine Oil & Gas

Swinging for the fenceWith an enviable cash flow, Highpine Oil & Gas is looking for new opportunities, reports Gary Toushek. Highpine Oil & Gas Limited is a Calgary-based company engaged in the acquisition, exploration, development and production of crude oil, natural gas, and gas liquids in western Canada, and currently focused on the Pembina Nisku Fairway in central Alberta. It was incorporated as a private company in 1998 and went public three years ago. After going public, Highpine wrestled with a few issues, including not being able to deliver on performance promises made to investors, which in part could be attributed to regulatory hurdles delaying access to certain wells. In February 2008 Jonathan Lexier was brought in by the board as the new president and CEO, with solid industry experience in western Canada and beyond. ÔÇ£I came in to give the company a fresh start,ÔÇØ he says. ÔÇ£In our first quarter this year we exceeded our guidance, the second quarter looks great so far, and weÔÇÖre in the process of gathering well licenses that we need for drilling. There has been a misconception that weÔÇÖre short of licenses, but we have at least nine or ten at hand that weÔÇÖre executing in the third quarter, so I think those misconceptions are in the past now. Highpine is a different company today than it was a year ago.ÔÇØ Highpine is an intermediate-size petroleum company, with a market cap close to $1 billion. Seventy percent of its products are light oil and natural gas liquids, and 80 percent of those are from its Pembina Nisku wells. Through both organic growth and acquisitions of properties and other companies, Highpine has increased its output from 1,000 barrels per day six years ago to about 20,000 barrels per day today. ÔÇ£Highpine has been a regional consolidator in the Pembina Nisku area for the last four years,ÔÇØ says Lexier, ÔÇ£and today we have a dominant land position as well as access to most of the critical infrastructure facilities. We also have several townships of undeveloped land in the Pembina Rock Creek. Many of our Pembina wells are high volume, so it gives us a great core asset, in terms of reserves and cash flow. It also gives us the chance to diversify the company and build it up. For a company our size, weÔÇÖre in the enviable position of having a tremendous amount of free cash flow.ÔÇØ Lexier expects that with the price of a barrel of crude continuing to rise on the global markets, HighpineÔÇÖs cash flow for 2008 will be between $350 and $400 million, and with a capital budget around $150 million, that still leaves a fair chunk of change to invest in new opportunities. Since a number of observers and industry analysts are curious as to what those might be, heÔÇÖll say only that the company has been looking at everything from corporate acquisitions to asset acquisitionsÔÇölarge land dealsÔÇöin Alberta and beyond. ÔÇ£Highpine has been successful as a full-cycle exploration company,ÔÇØ Lexier says, ÔÇ£so weÔÇÖll continue to focus on conventional exploration opportunities. We believe those still exist in the Western Canada Sedimentary Basin [covering southwestern Manitoba, southern Saskatchewan, northeastern British Columbia, southwestern Northwest Territories, and most of Alberta]. In some corporate presentations weÔÇÖve identified a couple of those opportunitiesÔÇöwe call them ÔÇÿswinging for the fenceÔÇÖÔÇöwhere the risk/ reward profile is quite compelling, and weÔÇÖll continue to take advantage of those. With the kind of cash flow we have available, weÔÇÖre obviously looking to get into new areas, and I think itÔÇÖs important for our shareholders to know that we expect to increase both the range and the number of new opportunities available to us.ÔÇØDue to the nature of HighpineÔÇÖs production, the company became embroiled in the controversy around the ÔÇ£new royalty frameworkÔÇØ unveiled by the Alberta government late last year, which plans to increase the existing share of the revenues from the sale of the provinceÔÇÖs petroleum resources to the citizens of the province. The amount of royalty increase depends on future prices of petroleum commodities and the amount of production output by each of the various oil and gas companies in the province, i.e., the higher the production, the greater the royalty. Slated to begin at the start of 2009, the response from petroleum producers in Alberta has been expectedly raucous; some have threatened to shut down their operations there and go elsewhere.Lexier notes that ÔÇ£Alberta is like a microcosm of many other, different oil and gas jurisdictions globally; for example, unilateral changes in AlaskaÔÇÖs government take have also moved the goalposts for producers. Our issues in Alberta had more to do with process than substance; these royalty percentages were decided by a committee of non-oil-and-gas interests, as well as some competitors. The royalties arenÔÇÖt based on risk factors or the amount of investment thatÔÇÖs been made in order to achieve a high production rate. It was the lack of consultation, which is not good business practice, that irritates Alberta oil producers. One can invest up to $15 million to drill a successful Nisku well. So thereÔÇÖs the cost and risk involved to find the wells and the capital required to achieve high rates of production. And these new royalties donÔÇÖt respect either of those factors. ÔÇ£I realize that often business is accused of being in collusion with government,ÔÇØ he continues, ÔÇ£but in reality itÔÇÖs best to work together on determining policy and solutions that are workable for all interests. That was one of the shortcomings of the new royalty framework, one thatÔÇÖs been readily admitted to by the government, which has since declared that in the future, any royalty changes will be done in consultation with industry.ÔÇØHow will the royalty increases affect Highpine? Since a lot of its wells are high producers, itÔÇÖs being hit with some of the higher increasesÔÇöin some cases a 35 percent royalty goes to 50 percentÔÇöbut LexierÔÇÖs attitude is that Highpine will bite the bullet, so to speak. ÔÇ£A lot of industry people have spoken emotionally about leaving Alberta and investing elsewhere. We believe there are still very good opportunities here, and itÔÇÖs our intention to continue driving value for our shareholders. If we find it in Alberta, weÔÇÖll continue to invest here, and if we find it elsewhere, thatÔÇÖs where weÔÇÖll go.ÔÇØ ┬á