Growth Oriented Oil and Gas

Bellatrix Exploration Ltd.

In 2009, as advances in multi-stage fracturing technology and horizontal drilling increased the ability of energy companies to recover oil, drilling in the Cardium Formation of the Pembina oil field increased. Although oil has been recovered from the area for decades, the renewed interest made the field once again the epicentre of the oil industry in the province…

Calgary based energy producer Bellatrix Exploration has been in the thick of it as the province develops its light oil and liquids-rich natural gas reserves.

Bellatrix has been focusing on its two core resource plays in Western Alberta. In geology, a play is a group of oil fields in the same region that were created through the same set of geological conditions. The extensive Bellatrix plays are located within the Cardium and Notikewin/Falher formations in the province. Those two areas are rich with resources which have proven to be quite predictably found and make for prolific wells with an initial production rate that is quite high in relation to the capital invested in them. In a mere five to seven months, wells drilled in the formation will pay back the complete drilling costs.

The company had an amazingly busy 2013, not only developing drilling sites, but forming three joint ventures, constructing pipelines, beginning construction on a gas processing plant and acquiring another company.

Vice President Brent Eshleman says that the reason for the joint ventures was simple: “The reason we did the joint ventures is because we have a tremendous amount of inventory. With our cash flow it would have taken thirty plus years to drill it, so we looked at how to get access to capital to cycle forward that inventory to add value now for our shareholders.”

The problem of too many high-return drilling locations to invest in is one of which other exploration companies can only dream. Although a relatively small company, Bellatrix owns the rights to roughly two thousand potential drilling locations. In the Spirit River Formation there are 381 drilling sites; the Duvernay Formation has 415 sites and the Cardium Formation has 742. Altogether, these would not only take decades to bring to production, but need more than $10 billion to develop.

So, in a move designed to increase the rate of development on Bellatrix’s extensive undeveloped drilling areas and bring rewards for shareholders a lot sooner, the company formed several joint ventures in the past year. In exchange for covering a larger portion of the drilling costs, the partners acquire the rights to some of the inventory.

In the first of these, to develop the West Central Alberta areas of Willesden Green and Brazeau, the company formed a $244 million joint venture with Calgary-based investment management firm Grafton Asset Management. “They put in $200 million and we put in $44 million. It’s on a promoted basis,” says Brent. Under the terms of the agreement, Grafton, contributing 82 percent of the drilling costs, will earn 54 percent of the proceeds from each well until payout (the recovery of its capital investment plus an additional 8 percent) and 33 percent after.

Another deal was made with South Korean company Daewoo International Corporation and Devonian Natural Resources Private Equity Fund. “They bought into some assets on a 50/50 basis that we had in our Ferrier – we call it the Baptiste – area. They spent $52.5 million, and bought in on some land and assets that we had purchased the prior year at a significantly lower price.” This agreement saw Bellatrix sell fifty percent of its working interest share in the Baptiste area which produces roughly 268 BOE per day. The venture will jointly develop seventy wells in the area.

The third partnership of 2013 was a joint venture with Troika Resources Private Equity Fund specialty vehicle TCA Energy Limited. In the $240 million deal, each party contributed 50 percent towards the drilling of an expected sixty-three wells in the Ferrier area of the Cardium Formation. TCA will also be receiving a share from a further fourteen wells that had been previously drilled since the start of the year, a thirty-five percent working interest in the wells –until recovery of its investment plus fifteen percent – and twenty-five percent thereafter.

The win-win strategy of joint ventures has led to a meteoric 670 percent increase in production from the fourth quarter of 2009 to 2014. The coming year is expected to average a production of approximately 43,000 BOE per day. (A BOE, or barrel of oil equivalent, is a unit that approximates the energy released by burning one barrel of crude oil.)

Last but not least, of the company’s major developments of 2013, was its acquisition of Angle Energy Incorporated – including debt – for $576 million. The purchase doubled Bellatrix’s land in Alberta, adding more than five hundred sites to its two main plays in the Mannville and Cardium areas.

“We picked up approximately 10,000 BOEs per day. It was a very synergistic acquisition and it added a significant amount of base production along with another five hundred drilling locations to our inventory.” The increase in drilling inventory has made Bellatrix a dominant player in that part of the Pembina fairway.

The $281 million that the company spent during 2013 in developing its resource play assets and $518 million spent on acquiring further development and production sites has led to massive increase in its net asset value (NAV). Bellatrix’s NAV now stands at $1.95 billion, an increase of 82 percent. As this was achieved without diluting shares, the per share growth rate has also been impressive and is equivalent to $11.40 per share.

“In 2014, we are really into the execution mode. Our budget is $610 million; $240 million comes from the joint venture partners and the rest from us. It is a very active program. We expect to drill approximately 146 gross wells.” One of Canada’s largest oil resources – the Cardium Formation – accounts for 115 of those 146 wells. Of the $610 million investment, $490 million is being put into drilling, $100 million into facilities and another $20 million into seismic exploration and related activities.

Bellatrix processes its gas from the Ferrier area through a number of third party operated gas plants. Due to successful drilling programs in the area, the plants are over capacity and the operator has had to restrict processing. This, and issues with infrastructure, have meant that the Bellatrix processing capacity has been limited to 38,000 BOE per day. Although this is expected to limit first quarter production, as a result of higher fuel prices, cash flow forecasts for the year will remain unchanged.

A number of steps are being taken to minimize further disruptions. The company recently completed a an eighteen kilometre pipeline project that crosses the North Saskatchewan River to deliver to underutilized plants (including the soon to be expanded Alder Flats plant in which it owns a share) and it is currently installing a sixty kilometre pipeline to the Blaze Gas Plant in West Pembina which should be operational in early April of this year.

“Numerous pieces of the puzzle are falling into place with a tremendous amount of activity and excitement!”

In November, Bellatrix also began construction of a plant in the Alder Flats Area. Equipment with a long lead time has been ordered and the plant will be built and operational by the beginning of July, 2015. Plans are in place to further double the capacity of the plant by the following year to 220 millions of cubic feet of gas per day.

“We find that’s what you have to do in order to be successful in any business is that forward looking, being innovative and trying new things. You can’t be afraid of failure. Without it you never drive to the next levels. We never just sit back and wait for others to do things. We get out there and push the envelope. You want to move from the fear of making mistakes to the fear of missing opportunities.”

Directional drilling has been part of the oil and gas industry for some time, yet the technology has recently improved a great deal and Bellatrix has been taking full advantage of this. One type of directional drilling is used to drastically increase production, by as much as twenty times more than vertical drilling.

“Although this is a finite resource, and inventory has limitations, with all this new technology, the inventory becomes unlimited for generations. This is why we had the gas bubble over the last few years. It is due to all the horizontal drilling and completion into these unconventional reservoirs whether they are tight sands or shales and it’s really opened all that up, accessing all the resources that used to be uneconomic to produce.”

Brent explained that the company likes to give its people the freedom to come up with ideas and try new things in order to push the business forward. “Our business is extremely technology driven and you have to be on top of that.”

And Bellatrix employees are about more than just their work. “We try to promote a real community spirit with our staff whether it’s here, in the head office or out in the field because it’s all about the people.” Encouraged by the company through a matching gifts program, many employees donate time and money to support charities in their local communities. It also regularly engages Aboriginal communities and groups to establish sponsorships, training, employment and business development opportunities, believing that maintaining these relationships is both mutually-beneficial and essential to the long-term success of the company.

The boom in production has led to some challenges. Higher production volumes mean keeping costs in hand in order to be able to generate a high rate of return, and the company has been more than successful. A 100 percent success rate in its 2013 drilling created a record high level of production for the company. As a result, Bellatrix posted a rise in profits for 2013 with a net profit of nearly C$71.7 million up from a profit of C$27.8 million in 2012. More than doubling its proved and probable resources (the quantity of recoverable energy sources estimated with reasonable certainty) over the previous year has also led to share values rising. Bellatrix remains one of the top picks on the energy side as it continues to control operating costs yielding an excellent rate of return on the wells.

Brent attributes the success of Bellatrix to the culture of the company. “Without culture you are powerless. Without strategy you are aimless. But, when you marry your strategy and culture together you have a vision and you are able to execute.”

For more information about Bellatrix Exploration Ltd., please visit http://www.bellatrixexploration.com/

August 18, 2017, 11:29 PM EDT

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