Ask Alan Booth what it takes to make a successful North Sea oil and gas exploration company and he’ll tell you about drilling wells and making your own luck. For the chief executive of EnCore Oil (LON:EO.), having done it all before means he and his team have nothing to prove but a great deal to gain just by sticking to a tried and tested strategy - discovery, development and finding ways of cashing in on North Sea fields overlooked by larger players in the past.
EnCore is among a large number of cohorts in the North Sea looking to do a similar thing but what is notable about Booth is his focus on why they are doing it - everything comes down to shareholder value. With EnCore now enjoying the momentum that can only come with stakes in two highly prospective projects, it now wants to repeat its success with a new exploration company scheduled to float before the summer. EnCore will split off its exploration portfolio into a new AIM quoted company called XEO Exploration. It will take with it assets including interests in Hoylake, Tudor Rose, Buffalo, Spaniards and Merrow licences and leave behind EnCore’s two main development priorities at Catcher and Cladhan. The move sets the scene for Booth and his team to raise funding for an all-new exploration programme and leave EnCore to channel its resources into finishing off the development of Catcher and Cladhan.
Booth, together with CFO Eugene Whyms and exploration director Graham Doré, have got form for discovering oil fields in the North Sea. Back in 2001 they were behind the discovery and development of the Buzzard field while at EnCana UK, a company that went on to be sold to Nexen Petroleum for £2.1bn. With an estimated 700 million barrels of recoverable reserves, Buzzard was the largest North Sea field discovered for 25 years.
For those new to the EnCore story, Booth and his team brought the company to AIM in March 2006 with a plan to continue looking for fields that had been overlooked by larger North Sea players. Since then, it has been involved in numerous exploration and appraisal projects around the UK Continental Shelf. In June 2009 it pocketed £42 million from the sale of its 15% stake in the large pre-development Breagh gas discovery project to RWE Dea. Nine months later it sold its stake in the developed Ceres gas field and its onshore assets to AIM compatriot Egdon Resources (LON:EDR) in return for a 30% stake in the UK and Western Europe onshore focused oil and gas exploration company.
However, it wasn’t until a series of wells last summer that momentum really began to build at EnCore – and triggered a 100p rise in its share price in just short of a year. Having previously made a light oil discovery with its first well on the Cladhan prospect in November 2008 EnCore returned to exploration and appraisal drilling in May 2010. First came Catcher, a Central North Sea prospect 15% held and operated by EnCore, with partners including Premier Oil (LON:PMO) , Wintershall, Nautical Petroleum (LON:NPE) and Agora Oil & Gas. The discovery was followed by subsequent drilling at surrounding prospects at Catcher East, Catcher North, Varadero and Burgman. So far, the company will only say that the prospects already drilled offer very significant oil-in-place volumes but with a lot more upside from the next phase of drilling. Two months after the Catcher discovery came better than expected appraisal wells at Cladhan, drilled by the licence operator Sterling Resources (TSXV: SLG). That led to an independent resource evaluation commissioned by Sterling that put total P50 oil-in-place volumes potentially in excess of 250m barrels. EnCore holds a 16.6% stake in the licence with the other partners including Wintershall and Dyas. Sterling recently drilled the first of three appraisal wells on Cladhan as it moves towards drawing up a development plan for the project.
Alan, before we talk about the latest developments at EnCore Oil (LON:EO.), can I take you back to last Summer? You had the Catcher discovery in June and then two months later you discovered a great deal more at Cladhan than the original discovery well had indicated. What was going through your mind at that time - what was your view of the potential for these discoveries?
I think our view was that you are lucky to stumble across one decent sized discovery, having two clearly meant we had to think about how we managed the future for EnCore. Being involved in what we thought were going to be two reasonably sizeable developments was going to have its own challenges in terms of our strategy and how we pushed the business forward.
On a personal level you previously had a great deal of success with EnCana, things had been quiet at EnCore for a time, but this was a moment where the momentum and the profile of the company was really going to change, wasn’t it?
Yes. I guess from the moment we set up we always took the view that you had to drill a lot of wells to be successful or stand a chance of being successful. It would have been nice if they were earlier in the process but, unfortunately, it turned out to be four or five years in and there were two of them, which we are still coming to terms with understanding. Because of our strategy, of course, which is fundamentally to find and progress assets towards the development phase, I don’t think we ever thought “what would happen if two large ones came along?” because timing and value maximisation in this strategy is always key. To my mind it’s much harder to maximise value if you find and evaluate a large accumulation and then a little later you are lucky enough to stumble over another and one is appraised and the other is still largely unappraised. I think we are just extremely fortunate that both of them came along together and are now both at a similar stage in their appraisal/development cycle. So I just think we have been extremely lucky that the timing just happened to coincide, albeit after a number of years. That’s the nature of oil and gas, I’m afraid you never know when you are going to come across the big ones and I’m afraid to say we never truly know before hand where the positive surprises are going to be.
You have never made any secret of EnCore’s strategy of making discoveries, appraising them to a point and then, shall we say, selling them off to those whose business model perhaps favours lower risk development projects rather than exploration…
Well I don’t think we’ve actually ever said ‘sell them off’. I think what we actually say is moving them along to the appropriate point in their life cycle. People may interpret that as selling them off before we develop them but, of course, we have developed a gas field and there is always a right time to crystallise the best value for shareholders, it just varies from asset to asset.
Has there been a temptation to farm down the interests Catcher and Cladhan even further and be involved in production down the line?
We’ve farmed down quite a lot already, so we’re at 15% in one and 16.6% in the other, which meant that to actually get to the point where we knew we had something reasonable it was relatively cheap in terms of our actual capital exposure. I think we are now more than happy to fund at these levels but the recent announcement about the spin out of our exploration assets sort of speaks to our ongoing strategy. Everyone is focused on those two assets and there is, in our view, no inherent value, certainly in the equity market, for our exploration blocks because, quite rightly, they are very early stage, some of them maybe successful, some of them may not be successful. So it’s just nice to have one company that strictly focuses on getting those two assets further down the line and the other company will move the exploration assets forward and get some funding for those.
You have got a programme of potential further drilling at Catcher and Cladhan. At what point do you decide that the time has come to call a halt to that and how do all the partners agree on those sorts of ideas?
Well, that is always the hard bit of when you are in a group. Obviously every company has its own drivers both for the assets that they are involved in and also strategically. So it is always a case of discussing everything with your partners and hopefully you can all come to some sensible conclusion about what you want to do next. We are fortunate in both Catcher and Cladhan that there are no partners with a veto. In terms of when is the right time? I don’t know, it usually just becomes apparent when the time is right. The question I get asked quite often is: ‘Okay Alan, you’ve got these asset at Cladhan and the asset at Catcher, what are they worth?’, because all they want to know is there are ‘x’ number of barrels of oil which are all worth ‘y’ dollars per barrel. I think the reality of the world is it is not always as simple as that. The value of the assets will change, principally because the price of oil changes. Perhaps more appropriately right now, the tax situation will change, which means that the value of assets could go down because there is potentially more tax to be paid. Value also depends on any buyers’ appetite for the assets in question and that comes down to other people, where are their strategies and what are they trying to achieve, do your assets fit in well with that strategy, and what do they need to pay to acquire them, is there ‘competitive tension’ or just one buyer? I know most analysts would like me to say ‘I have x million barrels at y dollars a barrel’ but it’s a little bit more complicated than that.
What do you make of the George Osborne’s latest tweaks to the fiscal regime in the North Sea oil industry? Is it something that would upset a deal process?
Well changing tax like that never helps anybody in the North Sea to be honest because we are competing for capital, whether it be from a headquarters in Houston or Calgary or wherever, or from the capital markets. They want you to invest it where you get the best return and hiking the taxes up in an unexpected way just means they perceive more risk for their investment. One can quite clearly understand why the Revenue wants to take money from companies who are producing 30 year old assets at $125 a barrel when they actually developed them at $10 or $15 a barrel. But the unintended consequences are that you impact those companies who are actually trying find more oil and invest in the North Sea. I think the Treasury has made it pretty clear that they can see that there needs to be some consultation on Field Allowances, I guess, in code this is ‘For those of you who want to keep investing here we’ll make the environment more conducive but those of you who are going to sit here producing oil at $125 a barrel and not significantly re-investing we don’t really see why we need to help you guys’. I think that’s the hidden agenda out there. In terms of how it impacts us, obviously the value of the assets in purely NPV terms would go down. Of course, there are a lot of companies out there who, because of their current tax situation, now have a greater demand for development assets because it’s far more efficient now to re-invest your cash flow into developing new sources of revenue to grow the asset base rather than essentially making a distributable profit. So as I said to one of my institutions, the fundamental value of assets inevitably will go down but the demand for those sorts of assets will likely go up because a lot of companies will say: ‘Look, we need to do some development, where is there in the North Sea that we can spend a lot of money on developments?’ Well, I’ve got two of them!
The creation of XEO Exploration sets up a new exploration player in the North Sea. Once the floatation is off the ground, has the business got a timetable for operations? What are you most excited about?
Hopefully we will be off the ground pretty quick. We are hoping to drill Tudor Rose this summer but we have a reasonably good portfolio. Our view always is, of course, it’s just a portfolio and if further opportunities come along that we think are better we may want to invest in those. I know the City always likes to see that there is an active programme, that you are not just going to sit there for a year or two thinking about it. So we have a good portfolio, we have assets that need to be drilled, we have our eyes on other prospects that we are not involved in that we may want to get involved in. So the only real difference from EnCore I think is that we’ll try and target slightly larger equities. Our philosophy at EnCore was that you farm down to reduce your capital exposure and you drill more wells but then you finish up with a relatively modest equity. I think with XEO we’d like to do things a little bit quicker, with slightly larger equities, and by that I mean probably the 25% to 35% range. You always need to have partners and as much as everyone complains from time to time about “partner drag”, it is actually an important safeguard.
The oil industry, investors and analysts talk a lot about the importance of luck and lucky management teams. Following EnCana and EnCore; do you think you can be three times lucky with XEO?
If I knew the answer I wouldn’t need to go to the City to ask for more money. Who knows? I think you have just got to make sure you drill things for the right reason, which is to create realisable value, not just to create continued employment. As long as you keep your eye focused on what the shareholder wants, and the shareholder does it to make money, then hopefully you will be lucky. You have got to stay focused on why you are doing it. Quite often we see companies with management teams who are trying to prove something and that always makes us sceptics because we are not here to try and prove anything. We are just here to try and create value, so as long as you never lose sight of that you should be fine. We don’t run from news flow to news flow, we’re all shareholders and we all get paid out when the company is eventually sold, not as the share price goes up and down. I can only suggest that the philosophy will be the same at the new company, that is what it’s about, we will give it a go and if we are successful that’s great and if we are not we won’t keep coming back asking for more money to do more exploration, we would only come back if we have success and we need to evaluate it further.
Alan, thank you very much for your time.
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