Proven area for big conventional crude finds
New seismic technology has identified series of targets
First exploration well at Woodrush field now permitted; drilling imminent
First oil pool at field still producing today
Experienced and engaged management
It's well known that oil is a cyclical business, and as we all have experienced, what goes around comes around.
So, it’s fair to say, for example, that new investment in the E&P (exploration and production) industry in Western Canada, though it has a rich and lucrative history, has become virtually non-existent in recent years.
That's due to numerous factors — investor money moved elsewhere for better returns and leverage, and Canadian-made pipeline and distribution issues, have really added vagaries not needed, among others. This has, of course, all hit crude and gas prices, too.
Big opportunities to be tapped
But this picture will inevitably change, albeit not overnight, and these investment opportunities will surely have their day again. Because, no doubt, there are big oil opportunities still to be tapped.
At the vanguard of revitalizing at least part of this region is microcap DXI Energy (CVE:DXI), which has owned the Woodrush project in northeastern British Columbia for over a decade, and which, it believes, still has plenty of fire left in its belly.
Company Chairman Robert Hodgkinson, who first became a director in 2004, explains that the Woodrush field encompasses 13,000 acres and lies 65 miles north of oil and gas hub Fort St. John.
It is a conventional field in what's called the Halfway play and is host to high-quality crude. The area is flanked by the Montney gas shale areas on one side and the Alberta rich deep gas basin on the other.
"There's a big opportunity here. Some of the biggest oil wells ever hit in Canada have been hit in this area and we think more are a real possibility," says Hodgkinson. "For a very small amount of money, we can really build something substantial here very quickly."
And he should know because he's an executive with the first-hand experience.
First well still producing
The first well sunk by DXI at Woodrush in 2007/8 started at up to about 700 barrels per day and is still producing oil, though now at much-reduced levels, from that same pool today (about 50 bpd). That first oil pool has generated around 700,000 barrels to date.
Hodgkinson highlights that more than 2,500 wells have been sunk in the Woodrush region since the mid-1950s to 2010 and 500 of them have returned more than 500,000 barrels each (the average well in Canada returns around 100,000 barrels). Moreover, a few of them have returned 5 million barrels plus.
He believes there are at least another two pools to tap at Woodrush and new state-of-the-art seismic developed in Israel has identified the next potential series of targets.
Indeed, this is the first time this highly sensitive seismic technology run by a firm called Absolute Imaging has been used anywhere in North America.
The firm hopes to start drilling the first exploration well at this new target within weeks — in a pool, which Hodgkinson says could contain up to 5 million barrels of crude. And he reckons DXI will be able to get half of it using waterflood enhancement. So, this is potentially very exciting stuff.
The group has now received the necessary permits and work on an access road and drill pad is underway. It is also expanding a capital raise announced last month from the original C$1.8 million to C$2.4 million through to March 29, the increase meaning it can fund 99.0% of the completed costs of the well.
Infrastructure is in place
What makes DXI's footing all the more sound is that the infrastructure at Woodrush is already in place.
In 2008 the company also built a $12 million oil and gas facility there, from which potentially 2,000 bpd and 5 million cubic feet (mmcf) of gas can be shipped.
So, if this new exploration well is a success and three of four offsets can be drilled, that key 2,000 bpd production level can be reached, which optimizes the process facilities and gives the group a "payback of about six months on everything," explains the chairman.
This, in turn, will give DXI the opportunity and financial firepower to continue its exploration effort to the east.
Hodgkinson says that such good oil discoveries are hard to find but once they are, they can run on and on for years, as has already been seen at Woodrush, and in an oil and gas market, which has been so badly 'trashed' as he says, sticking to a known area rather than trying to reinvent the wheel could prove crucial.
It is worth noting that above that first pool at Woodrush, there is also significant gas — at around 3,000-foot depth, which was shut in by DXI a few years ago when the gas price tanked.
But when prices head in the right direction again, Hodgkinson says the firm has probably 10 BCF of reserves to press the green light on — all adding to the exciting mix at Woodrush.
Hodgkinson would appear to have crude running through his veins. Starting out as a corporate financier, he came to found Optima Petroleum, which had production assets in Alberta and the Gulf of Mexico and merged to form New York-listed Petroquest Energy, which rose to a $3 billion market cap. He also founded and was CEO of Australian Oil Fields, which later became Resolute Energy/Cardero Energy Inc. and sold to two energy trusts for a combined $600 million.
He took control in 2005 of Dejour Energy, which would later become DXI, where he has been a director, CEO and chairman. He resigned as CEO last year when Sean Sullivan was brought in to take over the reins and help to rejuvenate the team.
Sullivan also has a big history in oil, having built an oil and gas plant construction group, Wyoming based Elkhorn, from $10mm in sales to over $400mm in sales, selling it for a return of 165x the invested capital to its employee shareholders..
The two men also have a large interest in DXI's future progress. Hodgkinson says once he has converted the latest tranche of debt, he will own around 45% of the company. He and Sullivan are the two largest shareholders.
With the increased placing to fund the well, Hodgkinson said that DXI has decided to drill the full extent of its interest without a farm out. That’s 99%.
Strengthening the balance sheet
Indeed, strengthening the balance sheet has been a key plank in DXI's new-look strategy and last month unveiled three transactions to reduce interest-bearing debt, increase operating cash flow and improve financial viability.
Hodgkinson had said the agreements effectively remove over $11 million of company debt and cleared the way to raise new capital.
As well as its assets in British Columbia, it is worth noting that ticking along in Colorado, DXI has 12 producing gas and liquids prone wells, generating about 1.5 million cubic feet a day, providing positive cash flow. And these wells will continue to produce for at least another 10 years.
Though there are no current plans to expand at the field, that could change on a gas price rebound. However, at least 22 more wells can be drilled using the same infrastructure, thus bearing the little additional sunk cost. It all depends on the gas price.
So, even though it's extremely early days of its reinvention, DXI and its team look to be entering an exciting stage and could well be a small oiler to watch in forthcoming months.