The following is a Stockhouse Q&A with Brad Gabel, President and CEO of Canamax Energy (TSX-V: CAC
The company has attracted considerable interest in recent months as it continues to consolidate financially distressed oil and gas microcaps while exploiting low risk development assets. By the end of April, Canamax will have completed three acquisitions and one farm-in – all in the last nine months. With excellent access to capital and additional potential prospects identified, the company is well-positioned to act on the current opportunity in the western Canadian junior oil and gas sector.
Q: There are a lot of distressed micro caps out there right now, why do the oil and gas juniors represent such a great opportunity?
The oil and gas micro cap sector is in a very exciting place for a consolidator with our M&A and operations skillset, especially now with the significant number of acquisition candidates available.
Basically, a lack of access to capital (equity and debt) over the last three years, combined with low natural gas prices, has prevented many junior companies from exploiting and maintaining their assets. In the oil patch that’s a serious problem. If you can’t put money into your wells then, over time, production is going to tail off. As production decreases, so does your cash flow and eventually you become financially challenged.
What we have in Canada right now is a number of financially distressed oil and gas juniors with quality assets and that’s where the opportunity lies. Providing you have the knowledge and experience, you can grow faster and at lower cost by acquisition than chasing growth through the drill bit. We’re talking materially lower prices – less than $20,000 per flowing barrel of oil equivalent.
What’s even more exciting for us is that many of these companies haven’t been able exploit their assets for quite some time. That’s a substantial point of value because oil and gas reserves decline over time but they do so at a reduced rate when money isn’t spent on them. So, not only are there strong assets to be picked up but, for some of these properties, the cost to ramp up production is low and the long term potential is high.
Q: What is your acquisition and exploitation strategy? What will ensure Canamax continues to grow at its current rate?
We are investigating a number of prospects comprised of juniors with attractive financial metrics. By that I mean at or below $20,000 per flowing BOE or less than three times cash flow. These targets also have potential core assets for us which include high working interest, contiguous land positions with significant development potential.
When it comes to exploitation, our base strategy focuses on development of low risk opportunities which typically have logs from existing wells on the property and a lot of producing wells offsetting our properties.
When we acquire companies, there are typically three types of assets involved: Core properties, cash flow assets and assets outside of our core areas. Core properties represent those with substantial low risk, long-term growth potential. Cash flow assets have low-cost, medium-term growth potential and are useful in helping us to maintain a strong balance sheet. The final category covers assets that for one reason or another make more sense for us to monetize. This approach has been used with considerable success by members of our management team and several of our directors so it’s a model we know how to excel with.
Q: You’ve got a clear strategy and have already made some impressive acquisitions. How are you identifying and acquiring the best targets?
Well let me start by pointing out that Canamax has been restructured specifically to take advantage of the current conditions in western Canada’s junior oil market. We have excellent access to capital and have already raised over $8.0M in capital in the last eight months. We are currently in the process of completing a $5.0 million financing and also have a number of potential opportunities comprising multiple targets in the range of 100-500BOE/D.
However, with a business like ours, success is ultimately driven by the quality of the team. A look at our Management and Board of Directors will show you we are well suited for M&A activity and operations. Several key members of the team have strong track records of building companies from start-up to 4000-5000 BOE/d with liquidity events at peak production.
I also believe a key factor is we are able to combine long standing experience in growing and running public companies with a strong entrepreneurial approach.
For example, I have founded and/or grown and sold several companies, the most recent of which was Pure Energy Services Ltd - acquired by Houston-based FMC Technologies Ltd for $300mm. In addition, our executive chair, Kevin Adair, who’s had an incredible career in the oil patch, is the President and CEO of Petrus Resources Ltd and Co-Founder and VP Engineering of Spry Energy Ltd. We also have Hugh Ross on the Board, President and CEO of Novus Energy Inc. which recently s sold for $320mm to Yanchang Petroleum of China. Mr. Ross was previously the Founder, President and CEO of Gentry Resources Ltd.
Q: Based on results so far, your asset exploitation strategy is proving very effective. Can you explain why your approach is different?
It’s not so much about being different as it’s about keeping it simple and getting things right the first time. If you have enough operations experience, and you’ve acquired the right assets, then there’s a lot of low hanging fruit. In fact, much of it comes down to maintenance and optimization of wells. By the time we’ve acquired the assets everyone on the operations side of the team already knows what needs to be done because of the level of due diligence we carry out prior to the acquisition.
There have also been a few instances when we’ve had the advantage of being able to see where the previous company tried a certain operational approach that didn’t work out so we know to use a different tactic. In a way, we’ve been able to benefit from their hindsight before spending any money. In the end, it comes down to having the right experience. We know what to do and we have the money to do it.
Q. You’ve already made three acquisitions in the last eight months. What are the highlights?
We’ve already established our first core area at Flood, with significant ability to exploit Montney oil potential. It’s a large land position (37 sections) on trend with Worsley, Dixonville and Grimshaw Montney oil fields and has strong development potential. A 7,500 bopd Oil Battery is already in place to complement our new water disposal facilities which is expected to be completed in June. At that time, we plan on bringing four wells on production at a combined, estimated oil production rate of 100 BOPD.
We also have two great cash flow assets at Brazeau (which came to us via acquisition) and at Wapiti, where we just drilled and completed a successful farm-in well. The new Wapiti well came on production at the end of March at an estimated 30-day initial production rate of approximately 217 BOE/D (our net 70% share). As at mid-April, our total corporate production rate (using the Wapiti IP 30 rate) was approximately 650 BOE/D.
Q: Canamax has already met with strong initial success. What milestones do you expect to reach in the next twelve months?
Our goal for the next year will be to expand into two or three more core areas that have substantial low-risk exploitation potential. We are already making good progress with our first core asset at Flood and have two strong cash flow assets to support the exploitation of that core asset. It’s really a case of continuing to establish a very solid base for future growth and developing strong and sustainable value for our shareholders.
Disclosure: Canamax Energy is a Stockhouse client