The following is a transcription of the above video, and The Market Online has edited it for clarity.
Fiddlehead Resources (TSXV:FHR) is a Cardium-focused energy company producing 1,750 barrels of oil equivalent per day. The company has an inventory of more than 50 low-risk Cardium development locations with additional upside in the Belly River and other horizons.
Here to discuss the company’s strategic positioning, financial position and investment opportunity with The Market Online is Chairman, President and CEO Brent Osmond.
TMO: Fiddlehead strategy is focused on upstream assets. What does that mean?
Osmond: Upstream assets in the oil and gas business refers to the actual production of oil and gas right from the ground. We drill for, prospect for, drill for, and produce oil and natural gas right from the rock, right from the earth out here in Alberta. So that would be the upstream business.
Midstream is more the gathering and the marketing, pipelining, that sort of thing. And then downstream would be more of the refining and then retail, of course, as you’re at the gas pump or right to the end consumer. But we’re at the front end of that spectrum, and we get it out of the ground basically.
TMO: The company announced the closing of the previously announced underwritten private placement of subscription receipts for aggregate proceeds of about 10 million in a secured credit facility with a private lender for $13 million. What was the need for the raise at this time?
Osmond: Our team has been looking for assets in that Cardium fairway that we would consider anywhere from, call it Carstairs or Cochrane on the north edge of Calgary all the way up to Grand Prairie.
We’ve been prospecting in that fairway, looking for an initial acquisition for the better part of two years now, and we’ve been really focused on being very disciplined in our deployment of capital and looking for that right opportunity to start off our company with that low decline opportunity, very low abandonment liabilities or no large inventory of wellbores that we have to put away.
Once we found that right opportunity here, we were pretty aggressive in our pursuit of that, and we were able to close the financing with our partners, Research Capital, to be able to put that deal together and get it closed just a few short weeks ago.
TMO: On your recent acquisition, South Ferrier, Strachan assets in Alberta, why was that an attractive purchase that around $20 million?
Osmond: We’ve been, again, very focused on the area and very strong in our conviction that the 2-2.3 times cash flow multiple is what we should be paying for these assets.
And while we had identified other opportunities, anytime you want to get to a transaction, a buyer has to be willing to buy and a seller has the willing to sell. And at this point we were able to find that willing seller in a very large-cap Canadian company where this was just a non-core asset for them but for us, of course, it’s our whole world right now and we’re very focused on developing that.
It does have a very low abandonment liability, meaning there are very few non-producing well bores on the asset. There are no spills, there are no problematic things to take care of or put away on that asset base. For us, when we come in, the capital that we raise and the capital and the money that we make on these producing assets going forward, we can redeploy that right into the ground to grow our reserve base, grow our production, and grow our cash flow.
That was why it was so attractive to us. We managed to get our multiple of 2.2 times cash flow and when you look at where we are in the cycle of commodity pricing, I mean going through the summer here with relatively low AECO (Alberta Energy Company) prices in that 65-70 cent range, we feel that buying right now at two times cash flow is going to look really, really good when we look down the curve here at the gas price forecast and the oil prices to see that we have $2 and change on our screen for next year and then $3 beyond that. And depending on who you believe, it could be even higher in 2027 and 2028.
And so we feel that buying now at somewhat of a trough in the commodity price environment will bode very well for our shareholders going forward as prices continue to appreciate.
TMO: Your initial position is a producing oil and natural gas asset acquisition near Rocky Mountain House in Alberta. Tell us about that asset and its play in your overall financials and strategy.
Osmond: Rocky Mountain House is a really strategic hub in the Western Canadian Sedimentary Basin. We have access to a number of different services. We have great field staff in the area who are very knowledgeable and experienced and really are coming over with the asset.
So we’re quite happy to welcome them aboard as new members of the Fiddlehead team, and they bring with them that history of operating the asset in the area. They’re local, so we’re looking forward to being a part of that Rocky Mountain House community in central Alberta.
The hub, I mean there are rigs, there are service equipments, if anything is needed in the field, that’s a great supply base and it’s also only about an hour from Calgary. If any of us need to go out to the field, it’s right there. It’s a quick, short drive away on paved roads, very accessible, very easy to get to.
It was a really strategic hub, and it does happen to be right in the middle of that fairway that I referred to before between, call it Cochrane in the south and Grand Prairie in the northwest.
So again, it’s a strategic hub geographically but also the assets tend to be a little oilier in that area, and it generates a little more cash flow rather than being a little bit deeper into the basin where you get a little more gas.
So again, we’re focusing that commodity mix of oil and gas with upside in gas pricing but we do like the near term economics of the oil assets that come with the acquisition.
TMO: Let’s narrow in on the financials. The reports indicate a strong cash flow and production with development upside. What are some of the company’s financial highlights?
Osmond: Again, we’re buying at that low multiple of 2.2 times cash flow. We’re very reasonably levered I’ll say with one-to-one debt-to-cash-flow ratio. Sometimes you see other new startups come into the market and really lever up their balance sheet.
But we do have a consolidation strategy that we see as an opportunity going forward and we wanted to be very cautious about how we structured our capital asset base or our capital stack going forward. I think one-to-one debt-to-cash-flow is very healthy.
We’re not putting ourselves in any danger there from a cash flow standpoint on the lending side of things, we’re not in jeopardy if commodity prices were to stagnate a little. We’re in really good shape there, and then of course with any sort of recovery and commodity prices, our debt-to-cash-flow ratio drops substantially. As we add more molecules, more cash flow, again, that ratio goes much more in our favour, and it also is very low at a 1.3 times debt to cashflow and so as we continue to bring more cash flow on, drill and complete more wells, we can pay down that debt very, very quickly. And for an investor, really the only place for that enterprise value to shift is to the share price. We would expect to see that appreciation as we pay down the debt.
TMO: Now just a little bit more on the cash flow side. Can you explain the flexibility with development drilling, which can be expanded or contracted depending on the commodity prices?
Osmond: Well the beauty of oil and gas in situ is that when it’s in the ground, it’s not going to go bad and nobody’s going to take it from us and so we can increase or decrease our drilling program as commodity prices dictate.
We’re under no obligation to drill. We own the land base. It’s all held by production. It is all in Western Canada; once you have producing assets in the area, the adjacent assets are basically yours until you abandon those wellbores. And so we aren’t under any drilling pressure or expiries where the land is going to be returned back to the Crown. We own this stuff as long as we want to keep it, and so we can drill at our own schedule.
And if commodity prices ramp up, if gas comes to $3 and it makes more sense to drill some of the deeper, more gassy horizons that we do have in our asset opportunity set, then we’ll do so. But right now we’re focused on the oil-weighted Cardium assets.
We have some drilling that we’re excited to get after here later in the fourth quarter of this year where we will be basically turning our eye to development on existing well pads where we have the ability to drill wells on existing well pads with all the tie-in equipment right there. And that obviously reduces our time from spud to first cash flow and also our overall drill complete equipment tie-in costs because of course the pipe is there that carries the product to the facilities that we also own and control.
We’re in a great position to be able to choose our own destiny here and control our own schedule where frankly we can dictate the pace of development and nobody can back out our molecules. We own all the infrastructure where everything will flow through and so really it’s our own choosing and whatever the economics dictate, then we’ll pursue that.
TMO: What else is in your acquisition pipeline?
Osmond: There are a number of different players in Central Alberta at various stages in their life cycle. We’re happy to talk to bigger players, much like we did on this where this area is a non-core asset for them and we were quite happy to take it off their hands and work on that development.
I mean, what may not meet the economic hurdle rate for a much larger company makes a lot of sense for a small startup like ourselves. We’ve identified already a number of different wells that simply need artificial lift.
We’ve found that the fluid is actually building up in the column in the wellbore and it’s just not being pumped down and by adding a very inexpensive plunger lift system, you’re talking about anywhere from $40,000 to $70,000 per wellbore, you bring on 50 or 60 barrels of liquids production and that’s a very high value product.
When we see a number of different wells in our inventory that we can go in and right away add this plunger lift, I mean there’s a very real opportunity here to add 200 to 300 barrels a day of production of that high-value liquid production in our inventory set. We’re going to get out and get after that as soon as the Alberta government approves and finalizes the transfer of those assets to us.
We own them but we’re just waiting on the regulatory change of operatorship. As soon as we get control here, we’ll be taking the wheel and putting those plunger lifts in and then getting the drill bit in the ground.
TMO: How does that translate to investors?
Osmond: Again, it’s very short-term payout, very quick cash flow. If you take a middle of the road assessment where we say it’s $50,000 and it adds roughly 50 barrels a day of production, each one of those barrels comes in at around a hundred dollars Canadian top line revenue with very little operating costs of about probably $11 or $12 a barrel. And so the payout on that is days if not weeks, and so it’s very quick turnaround to cash flow and quick payout because all these wells are already tied in.
So it’s just a matter of getting the plunger lift in, putting the well back on production, and that can happen in a couple of days. And so you’re looking at a two- to three-day operation, immediate increase of 50 barrels of high-value production, plus the already producing gas that comes out of the well as it is, and that pays out in about 11 or 12 days, I think it is, by my back of the envelope.
TMO: Is there anything else you’d like investors to know?
Osmond: I think ultimately Fiddlehead is an undervalued opportunity for investors right now. We believe in the story, long-term management and directors. If you check the set filings, we were buying stock last week. We’ll continue to do so and I’m very long Fiddlehead and we encourage anybody else to take a good hard look at it.
You can find Fiddlehead Resources Corp. on the TSXV under the symbol FHR, or head to its website at fiddleheadresources.com or at Stockhouse.com.
Company shares were last trading at $0.160
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