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Hillcrest Petroleum Ltd: THE INVESTMENT CASE

Upbeat Hillcrest Petroleum set for landmark year

Hillcrest Petroleum Ltd eyes big footprint in Saskatchewan and Alberta
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INVESTMENT OVERVIEW: HRH The Big Picture
Lots of opportunities in North America

Big things are on the horizon this year for Toronto-venture exchange listed Hillcrest Petroleum (CVE:HRH).

The company has just been awarded an operator’s licence in Alberta, Canada, and expects to receive similar status in Saskatchewan shortly.

That should allow the completion of a deal announced in February to acquire licences in both provinces that will put Hillcrest back on the path to meaningful production.

In itself that will be a transformational event, according to Don Currie, Hillcrest’s chief executive, but it has the potential to be dwarfed completely if the company’s plans to make a sizeable purchase in Texas come to fruition.

Heading down to Texas

Currie makes no secret of the fact he is looking for something to cost in the region of US$10-30mln.

That may seem ambitious given that Hillcrest is worth just C$5.2mln (£3.1mln) at 7c per share, but it has already walked away from one near US$30mn deal as it was uncomfortable over the haste the other party wanted to complete.

Since then it has also formalised an arrangement with resource-focused and Ontario-based merchant bank WC Capital, an affiliate of Wade & Company.

Described by Currie as a ‘giant step’, as well as financial firepower and access to funds WC has brought with it a financial, legal and marketing nous.

Enquiries are in already for two sets of assets in Texas where the owners are currently in Chapter 11 and Chapter 7 bankruptcy situations respectively, but Currie concedes that the process of dealing with companies in this position in the US moves slowly.

Until then, the attention will be Alberta and Saskatchewan.

At their peak, production from the two licences was about 400 barrels per day. They were subsequently shut-in but Currie believes a very achievable first step for Hillcrest will be quickly to restore production to that level.

In revenue terms, that would equate to revenues of about C$400,000 per month gross with Brent crude currently priced at about US$50 per barrel

And at that price, Currie expects to make good money from any oil produced.

Extraction costs are C$9.50 per barrel in Saskatchewan and C$8 in Alberta and, plus transportation, all-in-costs are well below US$30 per barrel.

Hillcrest will pay C$2.2mln for a 75% stake in the two assets, but the way the deal has been structured means that US$1.3mln is in the form of refundable bonds that Currie expects will be repaid within six months of a production restart.

“Effectively that means we are paying C$930,000 for the 400 barrels per day,” he says.

Around and about

But there is more to Hillcrest’s plans than just restoring production to previous levels.

The licences contain two wells in Alberta and five in Saskatchewan, but there are development sites on both with the potential to add to production, while surrounding areas in both provinces contain other bolt-on possibilities.

Negotiations have started with neighbours about taking those on as well and Currie is confident enough already to be talking about 1,000 barrels per day within 12 months, though he admits getting to that level of output will not be easy.

“We are fairly certain we can get the assets producing about 400 barrels per day and there are assets around us, where we are negotiating, which can take us up to 1,000.”

Every junior wants to get to 1,000 bpd, he adds. “It’s where you start to get noticed.”

Opportunity to double or triple

The possibility to double or even triple production is something that will also be crucial for any larger purchase, says Currie.

 “We look for assets that have room to grow a minimum 2-3 times within a three year period.”

Some of that will come from basic attention to detail. A lot of assets were neglected before and during the current oil crisis in the US/Canadian onshore business and so production has dropped but they can be brought back with a little work, he says.

“You can’t run an oil field without putting in some effort,” he adds.

Choose carefully

Choosing fields that offer real upside potential is another skill that Hillcrest’s experienced management team believe they possess.

Oil fields comprise PDP assets (proved and developed in production) and PDNP (proved and developed not in production).

It is in the PDNP area where the real upside exists, says Currie:  “Known zones in existing wells that literally a perforation will bring out [the oil].

 “Key to any acquisition is to buy the asset at around PDP value while knowing the PDNP to access.”

He adds even in the worst of times recently there was always a market for oil assets. The question was proof of funding and having the capital to close a deal.

Now that the arrangement with WC has been signed, that is not a problem for Hillcrest.

“We were working with them for eight months previously already and they are a sizeable fund.”

Management heavily invested

Importantly, Hillcrest’s management are also heavily invested in seeing the junior make progress.

All of have extensive experience in the oil business.

Executive chairman Michael Krzus built up Emerald Oil after a long spell at Aussie giant Woodside Petroleum. Jason Oden, chief operating officer, meanwhile was in charge of exploration at Gulfsands Petroleum after long stints at BHP Petroluem and Suncor.

Between them, Currie and the two other members of the senior team own 34% of the equity.

“Having some skin in the game is important,” he adds and especially so  if this year proves to be as transformational as he hopes.

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