Mako Energy looks to unlock the huge potential of Duvernay shale holding

The Duvernay shale play in Alberta, Canada, is still in its infancy. However, judging from the level of excitement it is generating, the area is about to explode into life. 

The investment bank Macquarie, which recently published a report on the play, its economics and its geology, has already dubbed it the new Eagle Ford, drawing parallels with the hugely prolific south Texas formation.

If this analogy is correct then brace yourself. Eagle Ford has gone from nought to 140 rigs in little over two years, while attracting all the big hitters in shale; companies such as Chesapeake (NYSE:CHK), Anadarko (NYSE:APC) and Petrohawk, now part of the BHP mining empire (LON:BLT).

To date only 35 wells have been drilled or licensed in the Duvernay, according to research carried out by Macquarie.

But this is merely the calm before the storm. Over C$1.4 billion has been invested on land acquisition in this foothills province – and over half of that was spent in one frenetic day. 

More is anticipated to be spent in two further Crown auctions to come during September and October.  

“Over the next decade, we believe the Devonian-aged Duvernay shales will emerge as one of the most promising oil and gas resource plays in Canada,” said Macquarie analyst Ray Kwan in a recent research note. 

Where the Duvernay differs from its Texas cousin is that it has so far failed to draw the interest from the shale majors mentioned earlier.

I say so far, because there are rumblings that the big boys are on their way. However, with most of Duvernay acreage taken in the land grab, the only way in will be to buy a slice of the action.

All of this creates the perfect storm for Australia-listed micro-cap Mako Energy (ASX:MKE), which along with joint venture partners Kilgore and Transerv has 90,500 acres of land in this tightly held fairway in west-central Alberta. 

They not only hold rights to the Duvernay horizon - some 82,000 acres or 128 sections - but also a shallower tight sandstone light oil play above the Duvernay horizon.

This second zone, the Rock Creek formation, comprises over 84,500 acres or 132 sections, and is already proven to contain light oil and natural gas liquids. This was the original target for Mako’s land acquisitions in the area.

The package makes the trio the 13th largest landholder in the Duvernay, and it is just approaching the right size to be picked up on the radar screens of the majors. Mako owns 50 per cent of the JV. 

The plan is to ride on the back of the wave of interest in the Duvernay to farm down. The blue-print the partners are using is the one deployed with great effect by Aussie compatriot Aurora Energy.

Its deal with Hilcorp, now part of Marathon Oil, was a farm-down of Eagle Ford acreage. 

It transformed Aurora from a small-cap to a billion-dollar enterprise that last year ranked as the ASX’s fastest growing company.

It must be remembered, however, that Aurora’s land package was smaller than that held by Mako and its partners and did not contain an additional productive zone such as Rock Creek.

In attempting to emulate the success of Aurora, the trio is targeting a farm down to retain a material working interest and the involvement of a partner with the balance sheet and expertise to properly exploit the opportunity.

A deal on the Duvernay may well be struck with just one company, and it will almost certainly be a corporation with very deep pockets.

“This may be of real interest to a major American player with experience in other significant unconventional resource plays,” says Mako executive vice-chairman Simon Owen.

“It’s a big boy’s play. It is $10 million a well and minimum three wells per section. That’s $1.3 billion drilling programme in the next four years just to retain all of the lands. With downspacing, it is conceivable that up to 6 wells or more could be drilled per section over the full life of the play”.

“We are looking at various structures for the potential farm-outs to ensure an aggressive drilling program and to shelter Mako from some of the inevitable early engineering risk of the play,” Owen adds.

Of course the Duvernay is only really half the story here. There is the Rock Creek horizon too.

Here a deal will be slightly different with a number of mid-cap partners being sought. 

“We also hope to be able to announce a small Rock Creek farm out - by that I mean less than ten sections for a three-well drilling programme - in the next four weeks,” the Mako executive vice-chairman reveals.

Things are moving apace and the farm-out process for both plays is being handled by Macquarie.

The teaser and the formal request for offers have been released, and data room will be open on September 20 for a month. 

“We would hope that we will have proposals on the table for Rock Creek and the Duvernay by second half of October,” Owens confirms. 

Mako is currently gearing up for a Toronto Venture Exchange listing, which is running in parallel with the farm-out process and is also considering a OTC-QX registration as well. 

This will give it exposure to a savvy and receptive investing audience au fait with the full potential of the Duvernay.

The only other thing to look out for is the 80 million or so options that vest at 25 cents and take the fully diluted equity base to 250 million.

However most investors who have piled in over the past month as the stock has crept up 25 per cent to 15 cents a share will be looking not at the options, but the disconnect between the company’s market cap of A$24 million and value of its land holding.  

A back-of-the envelope calculation shows Rock Creek and the Duvernay together are worth around US$390 million, valuing Mako’s holding at US$190 million.

This is based on the raw land value in recent transactions and Crown auctions of US$1,200 an acre for the former and something in the order of US$2,300 an acre for the latter. 

In the Duvernay, packages near the known NGL hotspots have been going for as much as US$5,755 an acre in the recent stampede. 

Mako’s land position cost it an average of around than C$40 per acre. “We were both clever and lucky, and the timing was right also,” Owen admits.