Josef Johann Bauer Discusses Junior Energy Companies

VIENNA - Nov. 20, 2013 - PRLog -- Long gone are the days of easy money, so it seems. Junior energy companies are finding today’s capital to be more expensive and harder to access.

In the current market, juniors are fighting an ongoing battle just to balance sustainable growth, manage debt, and to compete with peers for dollars that just aren’t there. When assessing a junior, one must look at how they put their budgets together and maintain them if they’re to survive out there in the wild.

This isn’t a new phenomenon either, as a 2011 study of post-recession capital markets performed by the Society of Petroleum Engineers inferred that, “Upstream energy companies now compete not only for preferred access to the best new hydrocarbon resources but also for credit from capital markets.”

It’s time to point out the obvious. There’re not a lot of positive scenarios out there for these small caps.

The problem today is that many companies have to strap themselves in and take on debt, which puts them at great risk: Deliver or die.

The reality is that the rise of unconventional resource plays, along with the increased use of horizontal drilling and complex completions have driven prices through the roof. A company going to the street to raise $5-10 million for one horizontal well is really exposing itself. Even if they hit on their first well, the market can be unforgiving when a company comes knocking on the door of the coffers once again.

Lord help you if the well is a bust. When you’re a junior, you can’t bury the past behind 6 or 7 other wells with a huge capital budget. In reality they only raise a big enough budget for one high-cost well, and there’s no room for error.

The banks have also been unsympathetic, as the disposition market continues to dry up. Companies don’t have the opportunity they’ve had in the past to sell assets in order to get cash like they used to. That option is also closed.

So what’s a junior to do?

“This is where it might be beneficial to look at two peer companies coming at the same problem with different methods, but similar strategies: Blackbird Energy [TSX.V: BBI] and Edge Resources [TSX.V: EDE], says Simon Blake, Senior Portfolio Manager at Josef Johann Bauer in Austria.

“Both are completely aware of the challenges ahead, and share roughly the same market cap while at the same time run programs consisting of lower-risk growth plans.”

“This is quite frankly the biggest ‘show me’ market I’ve ever seen,” added Ben Mason, also of Josef Johann Bauer.

“If energy companies can succeed in actually showing people their potential through their results, only then will they see movement. So they must show the investor that not only can they make them money, but that they have a suitable portfolio of assets and a stream of activity to come that they can sustain.”

“The only way a junior can truly capitalize their program and fund their growth is through internal generation of cash,” added Blake.

“Unfortunately, most juniors have to deal with Recycle Ratio, which is in a sense, the profit to investment ratio. If you put a dollar in, how many dollars do you get out?”

James Spence, who specializes in energy strategies at Josef Johann Bauer, says “Typically right now the average profit to investment ratio that companies are operating under is approximately 1.5. That means for every $1 they put into the ground, they get $1.50 out over the life of the well.”

“Recent news from both of the companies we were researching has shown a different strategy in terms of raising money. Edge Resources has gone the debt route, while Blackbird went the equity route. The debt option was still open for Edge, perhaps because of the healthy recycle ratios, which don’t scare the bankers away from the teller window. For Blackbird’s strategy, there was still quite a bit of interest when he went to the market with some valuable additions to the company portfolio that lured in new investors”

Mr. Spence adds, “Blackbird’s most recent operational update hints towards a new milestone on Mantario. Production on it's A15-6 well has officially been announced, with results soon to come in the next 15 days. As well, the company picked up an additional 18 sections (11,520 acres) of P&NG rights in the Greater Karr area, all of which include deeper rights like the highly prospective Duvernay formation.”

Simon Blake concludes, “One thing is for sure, should Blackbird continue to drill Mantario while dangling the Duvernay, they should be able to continue to make their investors very happy.”