From its inception in July 2009, Legacy Oil + Gas Inc. wanted to grow up
fast. As a mere 14-month-old toddler, it was already hanging out in the
back alley with the older boys, having just completed nine transactions
including a $15.6-million recapitalization and consolidation of Glamis
As Legacy exited 2010, it was producing around 13,000 barrels of oil equivalent a day. It had risen 25 tiers on Oilweek´s Top 100 listings to proudly sit mid-table as the 56th largest Canadian oil and gas producer in 2010, pumping out an average 8,765 barrels of oil equivalent per day over the year. (In 2009, Legacy was 81st on the list and produced 1,882 barrels of oil equivalent per day.)
To be a contender in resource plays, Legacy perhaps better understood than most companies that it needed size and running room to have a chance of achieving the efficiencies of repeatable, manufacturing-style drilling, completions and production. Conveniently, the downturn turned out to be an opportune time for a proven, well-financed management team with well-defined oily strategy to do acquisitions. Through the course of 2009 and early 2010, Legacy completed over $1 billion of acquisitions, and the growth spurt was a major factor in the company being named Oilweek´s 2010 Producer of the Year.
That said, however, Trent Yanko, Legacy´s president and chief executive officer, makes the point that organic growth is the true engine of its growth strategy.
"We spent about $165 million drilling and completing wells in 2010," Yanko says. "And we´re going to spend about $254 million this year on our organic growth."
Having coined the term "light oil resource play" in the Bakken, Yanko was also among the first to identify possible analogues for multi-frac horizontal well technology across the Western Canadian Sedimentary Basin. Consequently, Legacy has built up a promising portfolio of assets in southeastern Saskatchewan and southwestern Alberta. In 2011 it added further acreage to guarantee it would have plenty of drilling prospects for years to come, in some of the continent´s most promising oil plays.
Some recent asset acquisitions were in the Spearfish formation, giving Legacy a significant 80,000 net acres of land on both sides of the border in Manitoba and North Dakota. It has also ventured into northeastern British Columbia´s Maxhamish and, closer to its traditional stomping grounds, it added exposure to 183 sections of land in the Alberta Bakken.
"We continue to augment our resource play component but, in the meantime, and all the way along, the organic component of development drilling is marching along, whether it´s in the Mississippian, or Bakken, Three Forks, or the Turner Valley plays," he says.
In Turner Valley, where it acquired private-equity backed CanEra Resources Inc.´s "high netback, long-life, light oil and liquids-rich natural gas assets," Legacy has taken several strides forward. It drilled some vertical wells, and last April it completed an existing horizontal well with multistage fracture stimulations.
"We´ve had a nice positive result on that," Yanko says. "Now we´re lining up to drill at least six new horizontals that will be completed with multistage frac technology. So far, the investment thesis that we can redevelop that field with fracked horizontals is looking positive, so we´re kicking it up a notch here as we get through spring breakup into next year."
So as Legacy´s cannonball pace of growth over the last two years settles in for the longer run, its pace of development and acquisitions is now set to ease and yield more steady production, reserves and cash flow per share growth of between 10 and 15 per cent per share over the next five or seven years.
"That´s a year-over-year 10-15 per cent growth strictly out of the development profile we´ve identified today," he says. "If we have any success in the North Dakota Spearfish or in the Cardium or in Turner Valley or the Maxhamish play or the Alberta Bakken or even in any of our water floods-all that would be incremental to that."
Well-defined geology, repeatable results and well-understood economics effectively turn resource play development into manufacturing. It´s the polar opposite of wildcat, big production well hunting of the past.. Those days are long gone, just as is the once-lucrative synergy between junior companies and income trusts where start-ups grew to a few thousand barrels a day and then sold to a trust, or pressed on to build a company of 10,000 barrels a day and converted to a trust.
That exit strategy may be shut and bolted, but a new iteration of a potentially symbiotic relationship may be emerging. Former income trusts in the process of reinventing themselves as exploration and production companies may yet be interested in what juniors have to offer, Yanko says. After years of being focused on very low-risk drilling and favouring acquisitions over drilling to generate growth, some former trusts are now finding themselves with their cupboards somewhat bare of drilling inventories.
"So you´re seeing them over the last almost two years start to position themselves with acquisitions that bring back inventory," Yanko says. "Daylight [Energy Trust]did that when they bought West [Energy Ltd.] and Highpine [Oil and Gas], and NAL [Energy Corp.] did that when they bought Breaker [Energy] and Alberta Clipper [Energy]…."
Yanko sees this trend continuing and possibly turning into a symbiotic relationship between a new generation of juniors and intermediates, but only if those juniors have visible, high-quality development inventory.
"If it´s lower quality assets that don´t have running room, I think it could be a really tough row to hoe because that´s not a very attractive asset base for these bigger companies that are very focused on quality assets and inventory where they can have that day-in-and-day-out repeatability for a number of years," he says.
That said, building for a quick-flip sale to a bigger company doesn´t seem to be the strategy behind Legacy´s hard work in recent years. Granted, it made sure not to build a white elephant by focusing exclusively on oil, a commodity destined to be a perennial favorite. While Legacy isn´t married to its assets, Yanko also says its management team doesn´t have an expiry date.
"Now, if somebody wants an operated, focused, concentrated asset base with runway five to seven years, we may get on people´s radar screens," Yanko says. "But we´ll deal with that as it comes along. At this time though, there´s no necessity to put the ‘For Sale´ sign up on the lawn because of our focus on the quality assets and the runway that we´ve aggregated in the last 20 months or so."