Only the fittest can survive in today's market for junior oil and gas companies, which must demonstrate a great deal of ingenuity in the balancing of risk and reward. Nothing but the most exceptional oil and gas projects will win capital, and, in the words of one junior, this means "finding plays before they are exciting." Being a junior in this market means being the best of the best, or being shut out entirely. The question is: Who is up to this make-or-break challenge, and who has the secret weapons to take it on?
In this exclusive interview with Oilprice.com, Garth Braun, CEO of Blackbird Energy, which operates assets in Canada's high-value Montney Resource, discusses:
• How the market has changed for junior explorers
• The importance of rerisking projects without denuding the balance sheet
• How to get ahead of the "curve" in attracting capital
• Why there is a renewed interest in junior companies
• Why juniors will get nowhere without an elite team
• Identifying trends before they become trends
• Why banks are becoming more sympathetic to the juniors
• Who is playing in the junior market sandbox these days
• What investors should look for in a junior
• Why relentlessness is the prize virtue
• Why the junior market is ripe for consolidation
Interview by James Stafford of Oilprice.com
Oilprice.com: How has the market changed in recent years for junior explorers now that the unconventional has become the new conventional, but the cost of unconventional drilling is often prohibitive?
Garth Braun: For junior oil and gas companies, this is probably one of the most daunting questions of the decade. First of all, capital has become more focused on finding the best plays with the quickest—and the best—returns. Secondly, juniors have to be focused on finding exceptional projects—and this is a particular point of emphasis--that can attract both start-up capital and the majors. Thirdly, juniors have to build strong teams that understand how to de-risk projects without denuding their balance sheet. And finally, juniors have to be more vigilant in attracting capital and getting ahead of the "curve", which means finding plays before they are exciting to others.
OP: How difficult is it for juniors to compete not only for the best new plays, but for the capital markets?
Garth Braun: This has become exceptionally difficult over the past several years as flows of capital have been attracted to the best of the best in the mid-cap to large-cap stocks. These companies have access to capital, which in turn allows them to pay-up to get into the right resource plays with the best economics.
As a result, in order to compete, juniors have to assemble very strong teams—both technically and financially—that have the wherewithal to attract capital from both conventional and unconventional sources. They also have to source the absolute best plays before the larger-cap companies have found them. A good example is our Greater Karr and Bigstone acreage—both oil- and liquids-rich resources in Canada's Montney play--which we got into before the majors recognized them as high-value.
OP: What does the current Canadian oil and gas market look like and what does this tell us about access to capital?
Garth Braun: In a capital-constrained market, money will go only to the prettiest girl in the room. The current oil and gas market is binary: quite simply, we have those who are in favor, and those who are not--in other words, those who have access to capital and those who do not. This creates the need to source projects that investors feel are the best, which means those with the best resources and the quickest and highest payout.
OP: Are junior companies becoming stranded?
Garth Braun: In difficult financial markets, investors scrutinize and examine companies in much greater detail before deploying capital. Junior E&P companies were out of favor for a while, but now there is a renewed interest in the sector.
Investment philosophies have always been based on the premise of risk-versus-return, and this will become more prevalent as investors consider this sector, and examine management teams, the assembled asset base and future growth potential.
But there are definitely a substantial number of junior companies out there stranded for various reasons—from debt, which is a big issue, to not having the right project or that one extraordinary play.
For juniors to fight in this market, they really have to work harder than the next company and have the ability to differentiate themselves through a more ingenious sourcing of technically great projects. They also need to be able to finance themselves with capital looking to be deployed in great assets.
OP: How are juniors balancing risk with reward? What is essential here?
Garth Braun: The trick here is to balance risk and reward with finding strong partners to farm out projects to. They must also demonstrate exceptional vigilance with using the balance sheet to fund opportunities. A junior team must be elite—and I cannot stress the significance of this enough. The risk/reward ratio is managed best by an elite team capable of guiding the company to growth.
OP: How you can increase the value of a junior E&P company without taking on extra risk?
Garth Braun: Again, we're talking about an elite team—and secret weapons. The right elite team will include individuals who possess exceptional talent and uncanny ability to identify trends before they become trends.
OP: When your acreage is surrounded by major oil companies who can afford to drill more wells, how do juniors leverage this for their own potential?
Garth Braun: For Blackbird, this question pertains directly to our Montney real estate, which has vast potential. Here, in the Greater Karr region, we are surrounded by large-caps such as Kelt Exploration, Encana and ConocoPhillips all in close proximity. This is the indicator that we are sitting on something very valuable, and our acreage continues to grow in value as our neighbors continue to drill and make progress. Their expensive drilling directly boosts our value and the attractiveness of this exceptional project.
OP: Have the banks grown unsympathetic to the juniors?
Garth Braun: Not at all. Actually, the opposite is true. Banks have begun to move down markets as the capital markets have become more competitive. Big banks have particularly moved down the market, so to speak. I would say that investors are more unsympathetic than banks to the juniors.
Banks have started to consider becoming advisors for junior E&P companies, as well as examining financing opportunities. We saw this same shift happen in the mining sector a few years ago, where banks came down in market cap requirements from financing the big caps to focusing on the little guys. They are definitely playing in the junior market-cap sandbox now, along with other brokerage firms.
OP: What should investors look at when determining whether to include a junior in their portfolio?
Garth Braun: The number one element here is to find a junior with the best project and a team that will fight relentlessly to get it developed and de-risked. In volatile markets--or markets that seem less friendly than in days gone by--the fundamental core of the company becomes the central apex of investment consideration. How strong is management? Have they had previous success? Do they have a vision of growth? Have they assembled the right asset packages, or have a plan to do so? It has never been cheaper to get into the natural resource sector, but what is your risk-reward tolerance?
OP: What is the biggest challenge in the Montney Resource?
Garth Braun: The biggest challenge here is the capital-constrained environment—finding the best resource to attract drilling capital.
OP: How much pressure is there right now on juniors to deliver something immediately or disintegrate?
Garth Braun: Extreme pressure is always evident in the market. People's impatience is something of a self-fulfilling prophecy in which investors have to understand that value achievement does not happen with one or two well, rather with finding a resource that others will pay huge premiums to acquire.
Delivering something immediately speaks to having a multi-pronged growth strategy, and management needs to think 2, 4, even 10 steps ahead of the rest. While developing strategy 'A', they need to work on other items at the same time so that news flow stays prominent in the market place. You're in competition for the attention of investors here, staying in front of them with news, and demonstrating that management continues to work at increasing the company and shareholder value. Failure to provide news and transparency will ultimately cause the demise of the company—not from collapsing under pressure, but from loss of interest and therefore capital from the investment community.
OP: Blackbird recently announced plans to acquire Pennant Energy in a "friendly share exchange deal". How does this deal increase Blackbird's value, and what are the anticipated growth prospects?
Garth Braun: For Pennant shareholders, this deal will provide increased value by combining the Bigstone Montney and Mantario interests, as well as the opportunity to participate in a growth-oriented emerging oil and liquids producer, which is Blackbird. For Blackbird, it allows us to advance our strategy of growth through acquisitions, with a management team that has had much success growing and selling emerging producers. The deal gives Blackbird assets in both Alberta and Saskatchewan, which we believe will provide opportunities for drilling and leveraging capital efficiencies. Blackbird intends to continue to grow through appropriate acquisitions that are accretive on a per-share basis.
OP: What can such a merger tell us about junior E&P trends and the junior struggle to grow in an increasingly competitive market?
Garth Braun: It tells us that in order to survive, junior companies have to be creative, but also vigilant in acquiring assets at great valuations. There is a large part of the junior market that is ripe for consolidation; and all it takes is a company with the ability to navigate mergers and acquisitions and to act as a consolidator in the face of a market that is waiting for the next growth company.
OP: What can we expect from Blackbird over the next 12 months?
Garth Braun: Blackbird is a small cap with large cap aspirations, and right now it is an emerging oil and gas company that is poised to incur significant value achievement over the next 12 months. This is an identifiable trend within Blackbird, which over the past 18 months has built projects analogue to some great projects of other companies, such as Delphi Energy in Bigstone, among others. This has allowed Blackbird to build up a portfolio that is financeable, attractive to investors and capable of brining on strong partners through farm-outs or joint ventures.
What is most interesting is Delphi is currently drilling right up to Blackbird's property, which is validating and de-risking the resource potential of the land. There are a multitude of other parties surrounding Blackbird's land position as well such as Trilogy, Athabasca Oil Corp. and TAQA; It would not be surprising if any of the parties surrounding Blackbird's Bigstone play eventually took over it given the incredible results that are being achieved from wells in this area. Blackbird would also look to be extremely creative in monetizing the Bigstone asset which would most likely net a greater return. This is what it's all about for the juniors, and when you look at a junior today—you look at who is doing what right next to them. We could coin a new phrase here—"analog investing".