An unfortunate side effect of the program is that smaller companies, typically financed through debt, are bearing the brunt of the problem. As oil and gas prices plunge, so do the asset values of these companies.
“The program worked well enough in a high price environment. But like every other facet of the industry, the program is not functioning as intended with current prices,” says frequent BOE Report contributor Terry Etam. “The LLR program requires posting of security deposits if estimated liabilities, at a company level, exceed an approximated value of production and so you can see where the problem starts: even if liabilities stay the same, the value of production may plummet as a result of market forces.”
While large companies with thousands of wells have flexibility, scale, and diversification to better handle the LLR issue, it is the smaller, more entrepreneurial companies that have been hit hardest. In addressing this problem, a simple solution would be to ramp up production and thereby increase asset values. However, to do so would require healthy internal cash flow, a prudent capital budget and access to capital; each difficult to come by in today’s market.
Yet despite these challenges, there are oil and gas companies out there that have used alternative means to resolve such problems and continue as a going concern. “Companies really have no where to go for support as everything is stacked against them,” says Linden Achen, Project Manager at Western Petroleum Management. “But our group has the ability to give these companies (depending upon their unique mix of assets) hope by providing them access to capital and experienced operational personal to optimize assets, bring on production and decrease their liabilities within the LLR program.”
The Western Petroleum Management (WPM) group has substantial experience in property optimization, negotiating and purchasing mature fields, and major acquisitions and corporate mergers. “Individuals within our team have managed oil and gas operations and profited when oil prices were consistently below $20 per barrel in the mid to late 1990s, during the last major downturn” says Achen. “And so we pride ourselves in being able to assist with financing, management, optimization and resolving LLR issues.”
Recently, WPM engaged with Marksmen Energy to help the company improve their LLR rating. “Our team reviewed Marksman’s assets and developed and presented a proposal to their management,” says Achen. “We came up with a solution whereby WPM would finance the optimization of their current assets and subsequently improve Marksmen’s LLR.”
Ultimately, WPM’s capital injection and operational experience enabled Marksmen to recover money that was tied up in a trust at the AER. “We are pleased to say that the proposal was successfully implemented by our team and that it met the full expectations of Marksmen’s management,” comments Achen.
“Marksmen’s relationship with WPM, both financially and operationally, was critical in allowing us to improve our LLR and recover money from the AER,” says John McIntyre, Marksmen Energy’s Chief Financial Officer. Adding, “we would not hesitate to recommend them to other oil and gas companies who are in need of restructuring expertise.”
Going forward, as oil prices continue to hover around the forty-dollar mark, junior producers will continue to look for means to alleviate issues caused by the low commodity price environment. But you can be sure that using the same fortitude and innovative thinking that is a hallmark of Alberta’s oil patch, utilizing the solutions offered by companies like Western Petroleum Management will only increase in frequency.