Energy to burn
Junior oil company Enterra hopes to make the big leagues. Can it go the distance?
http://www.canadianbusiness.com/features/article.jsp;jsessionid=DMCLJPPONBMP?content=20030609_54481_...
There are hundreds of tiny oil and gas companies in Canada hoping to make it into the big leagues. In the mid-1990s, Big Horn Resources was one of them. When Reg Greenslade (above) became CEO of Big Horn in 1995, it was listed on the Vancouver Stock Exchange and produced a piddling 30 barrels of oil a day. The company grew at a steady pace under Greenslade but, because it started so small, it never attracted much attention. Five years later, Big Horn was still a penny stock. But the wheel of fortune began to turn in late 2001, after Big Horn merged with Westlinks Resources and the company's name was changed to Enterra Energy Corp. (TSXV: ENT). Greenslade spent the first nine months of 2002 plotting strategy and drilled just eight wells. Then, the Calgary-based company took off like a rocket. In the last three months of 2002, Enterra drilled 54 wells in Alberta. In the first quarter of 2003, it drilled another 13. The company claims a drilling success rate of over 90%. By the end of March, Enterra was producing more than 6,500 barrels of oil equivalent per day.
Production gains and high oil prices are a nice combination. Enterra generated greater cash flow in the first quarter of 2003 than it did in all of 2002. The financial gusher caused its share price to increase more than 160% in the 12 months ending April 4--the 12th-highest return on our Investor 500 list of Canada's largest publicly traded companies. When our researchers calculated Enterra's stock performance, it was trading at $12.67. The share price has since climbed another 30%, closing recently at $16.55. Despite the blistering growth, few Canadians have heard of Enterra. "I think it's because we've grown so quickly," says Greenslade. "In the last quarter of 2002, we really started to become what Enterra is today."
Enterra isn't the only supercharged energy stock in Canada. In our annual ranking of the best-performing stocks, 21 of the top 100 were small and medium-size firms involved in oil and gas exploration. First Calgary Petroleums Ltd. (TSX: FCP), a junior with production in Algeria, led the energy sector with a one-year return of 247.5%. By contrast, some large oil and gas companies had a mediocre year. For instance, EnCana Corp. (TSX: ECA) and Canadian Natural Resources Ltd. (TSX: CNQ), posted returns of -2.8% and -4.9%, respectively.
The data confirm what we already knew: small energy producers offer the potential for big gains--and equally big losses. One notable absentee from the list is Gauntlet Energy. A couple years ago, it led our ranking with the highest one-year return of any company in Canada; today it's in the process of being dissolved. But if your timing is good, and you invest in the right management team, you can do quite well. The juniors aren't all one-year wonders, either. Several oil and gas stocks on the list had impressive three-year returns.
Gastar Exploration Ltd. (TSX: YGA) led the way with a total return of 5,558% since April 2000. But that number is misleading; most of Gastar's gain occurred in a speculative frenzy during the summer of 2000, when the company was converted from a moribund mining firm into a gas exploration play based in Michigan (but registered in Ontario). In the space of a couple months, Gastar's share price went from 4¢ to more than $7. Since then, shareholders have been on a downhill ride. The thinly traded stock recently closed at about $2, and it could keep falling. Management touts some exciting prospects (deep gas wells in California and East Texas and coal-bed methane reserves in Wyoming), but Gastar has yet to turn a profit.
Gastar is an anomaly, however. Other energy stocks with eye-popping three-year returns reported steady gains in production and earnings. Case in point: Ultra Petroleum Corp. (TSX: UP). Its share price has climbed 1,433% since April 2000. The BC-registered, Houston-based natural gas producer operates in Wyoming and China's Bohai Bay. Meanwhile, gas driller Peyto Exploration & Development (TSX: PEY) delivered a three-year gain of 1,100%, continuing a spectacular run that began in 1998. In 2001, it had the highest three-year return on our Investor 500 list, and its founder, Don Gray, appeared on the cover. How long can Gray keep it up? Good question. No cycle lasts forever. But if oil and gas prices remain strong over the coming year, as expected, Peyto could be in for another blockbuster year.
Whether Enterra can duplicate its success and become a reliably strong performer like Peyto is an open question. So far, Greenslade is making all the right moves--increasing production, lowering operating costs and minimizing share dilution.
Running a public oil and gas company wasn't Greenslade's first ambition--but it's worked out well for him. Through Enterra, the 39-year-old entrepreneur has become a paper millionaire. A native of tiny Shaunavon, in the southwest corner of Saskatchewan, Greenslade was planning a career in the aerospace industry when he left home to study mechanical engineering at Montana State. But he abandoned that idea after completing his degree and moved back to Canada to start a career in oil--a business he grew up in (his father was an oil patch entrepreneur). "All my buddies went to work for Boeing," says Greenslade. "But it's a big company. They do a shift change and they have to co-ordinate the streetlights."
Before landing at Big Horn, Greenslade worked for Saskoil and CS Resources in Alberta. The opportunity to run Big Horn was presented to him by a longtime acquaintance, Walter Dawson, one of the company's major shareholders. For the rest of the 1990s, Greenslade slowly built the company. But it was after Big Horn's merger with Westlinks that everything fell into place. In 2002, Enterra made a large oil discovery on its Clair property in northwest Alberta. The oil field is on the shallow side, so relatively easy to exploit, and it contains valuable light crude. Rapid exploitation of the field allowed Enterra to beat its forecast production for the end of 2002 and the first quarter of 2003. At the same time, Enterra says it will lower its operating costs by $2.20 a barrel on the Clair property by installing pipes to move the oil to market (currently it has to be trucked--a costly exercise).
Greenslade has proved to be a capable manager in other ways. Enterra hedged about 40% of its daily oil production in February, when the pending war in Iraq caused a spike in crude prices to the US$37-a-barrel range. Greenslade had the option of locking in at about US$30 in February, but didn't want to leave US$7 on the table. So he took US$29.65 effective April 1. "I've been over to the Middle East," says Greenslade. "Once you get past April you're not going to be doing much over there. It's too hot." He made a good call. As the war wound down in April, prices dropped to the mid-US$20s.
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