Saratoga Resources finds Louisiana offers abundant low-risk opportunities
AN INTERVIEW WITH THOMAS COOKE, CHAIRMAN AND CEO, AND ANDY CLIFFORD, PRESIDENT, OF SARATOGA RESOURCES
From left: Andy Clifford, president; Thomas Cooke, chairman and CEO
Photo courtesy of Saratoga Resources
Don Stowers, Editor, OGFJ
EDITOR'S NOTE: I first talked with Tom Cooke and Andy Clifford several years ago and was impressed with their business model for Saratoga Resources. As explained below, the company was forced into bankruptcy in 2009 but emerged in good shape a year later. They invited me to meet Louisiana Gov. Bobby Jindal when he was in Houston for a fund-raiser a year ago, and this set the stage for this month's interview.
OIL & GAS FINANCIAL JOURNAL: I see that Saratoga Resources recently made a corporate presentation at the IPAA OGIS West investment conference in San Francisco on Sept. 27. What message do you want to get across to investors?
TOM COOKE: Well, Don, we have a new listing on NYSE Amex under the symbol SARA. Saratoga has now positioned itself for vastly improved access to capital. This will allow us to further accelerate our future capital expenditure requirements and pursue more expensive acquisition opportunities and drilling projects in the near future. We have strong institutional and retail participation in our equity and a growing market capitalization. We have attractive, conventional assets located in state and parish lands of Louisiana with an abundance of low-risk development opportunities. We are converting our reserves with an active development drilling program and there are no permit delays or obstacles, and we are weighted towards oil in our current production with LLS/HLS premiums to WTI at up to $28 per barrel. In addition to all this, we have tremendous upside with shallow exploration targets above 5,000 feet with 50 bcf of potential and deep exploration targets with 10 tcfe of potential, all under our large HBP (held-by-production) lease holdings.
OGFJ: As many people know, Saratoga Resources was forced by one of its creditors to file bankruptcy in March 2009. My understanding is that Saratoga emerged from that bankruptcy in May 2010 stronger than ever. The company not only paid off all its creditors, but you increased production during that time. How did you manage to accomplish this?
TOM COOKE: First, let me say that we went to the mat for our shareholders during the recent bankruptcy and prevailed, preserving shareholders' equity. We also paid all of our vendors in full with interest and legal fees. We exited bankruptcy in a little over one year with unprecedented results. When we filed Chapter 11 in March 2009, we had experienced a "perfect storm" of collapsed commodity prices, two named storms in late 2008, a severe downturn in the credit markets, and a hostile lender who blocked our ability to draw funds from a recently renewed revolving credit facility. We had never had a monetary default. We continued to stockpile cash throughout bankruptcy and prevailed in litigation during which time valuation of the company's assets was successfully defended. During bankruptcy, we spent enough capital on low-risk recompletions, through tubing plugbacks and workovers, to keep production steady. This was essentially maintenance capital of between $6 million and $7 million. We took advantage of the period in bankruptcy to continue our field studies and that led to, not only a deeper understanding of our asset base, but also to increases in our reserves. Prior to seeking protection under Chapter 11, we had about three months of relatively normal, and unhindered, operations during which time we increased production, drilling development wells, doing recompletions, plugbacks and workovers, even during a management transition.
OGFJ: You alluded to the advantages that come with your recent listing (this past July) on the NYSE Amex exchange. What impact has this had on the company financially and in terms of how Saratoga is perceived by the investment community, analysts, and potential lenders?
TOM COOKE: Our move to the NYSE Amex has had a tangible positive effect on our company. We have been looking forward to this move for a number of years. In fact, we had applied to Amex prior to the bankruptcy. We have now increased our investor base through equity offerings on the West Coast and in Europe and welcome the involvement of quality, institutional investors like GSO/Blackstone, among others. We are now talking with well-established firms who can give us research coverage that will help increase our profile. This move has opened up our universe to many, new potential investors for whom a listing on a national exchange is a pre-requisite. The move from the OTC Bulletin Board has moved us up the food chain.
OGFJ: Where does Saratoga operate? Please elaborate a little on each of the main areas of operation.
ANDY CLIFFORD: Saratoga's assets are all located in transitional coastline and protected in-bay environment on parish and state leases of Louisiana. We have interests in about 12 fields, most of which are located in Plaquemines Parish in water depths of 0 to 20 feet. We find it a very cooperative regulatory environment with no permit delays. It is a pleasure working with Governor Bobby Jindal and DNR Secretary, Scott Angelle. Louisiana is open for business. Our Grand Bay Field has over 70 years of productive life with production of over a quarter of a billion barrels of oil since 1938 yet it still offers tremendous potential, both shallow and deep. We have 18 MMBOE of proved reserves and 58 MMBOE of total reserves with approximately $1 billion worth of value.
Axxis rig with wellhead in Grand Bay.
Photo courtesy of Saratoga Resources.OGFJ: Do you operate most or all of your wells, or are you a non-operating partner in some of them?
ANDY CLIFFORD: We operate almost all of our wells with 100% working interest.
OGFJ: Since Saratoga's holdings are mostly in coastal Louisiana, how have hurricanes affected the company's operations in recent years?
ANDY CLIFFORD: Saratoga's assets have experienced three major named storms within the past six years (Katrina, Ike, and Gustav) with minimal impact on operations. Minimal damage was experienced with a direct hit from the Category 5 Katrina in 2005 (which devastated New Orleans) with only a 30-day interruption to our production and only 18 days downtime after the twin storms of Gustav and Ike in 2008. We have demonstrated our ability to withstand severe storms with minimal downtime as well as the robustness of our assets. Most of our facilities have withstood the impact of many severe storms without detrimental effect. Production has not been adversely impacted, and, as a result, our insurance premiums have been decreasing annually.
OGFJ: How much of your production is weighted towards oil and liquids in comparison with natural gas?
TOM COOKE: We like to maintain a balanced approach to oil and gas. Currently, more than 60% of our production is weighted towards oil versus gas. We like to say that we are oilier than many of our peers. We expect this to continue for the next two to three years. In addition, we currently receive a $15 to $30/barrel premium to WTI on our LLS and HLS crude.
OGFJ: Are you mostly doing development drilling, exploration, or both?
ANDY CLIFFORD: We are currently focused on development drilling and converting our PUD reserves. Some of our development wells have an exploratory tail where we are looking for a little more upside and our deep prospects have shallower, low-risk bailouts, but we are essentially a low-risk development company at this stage of our growth with a serious eye on managed-risk exploration in the future. Our finding and development costs over the course of the past five years have been around $12 per BOE. We expect to drill about five or six PUD wells per year and have over 27 undrilled PUD wells in our portfolio, not to mention our shallow gas and deep exploratory wells. In addition to development drilling, we have our lower risk "block-and-tackling," which involves recompletions, thru tubing plugbacks, and workovers using a lower-cost workover rig. We are also investing in improvements to our infrastructure. We call it our "Hub-and-Spoke" strategy. We have six production platforms and more than 100 miles of pipelines in the Main Pass, Breton Sound, and Vermilion 16 area. We currently handle production for a few companies and receive revenues for doing so.
OGFJ: How is Saratoga financing its drilling program and other operations? From cash flow, loans and credit facilities, private placements, or a combination of all of this?
TOM COOKE: We are currently funding our development program out of cash flow and cash on the balance sheet. We expect to have additional liquidity through a revolver in the near future. We believe our stock is seriously undervalued today and will keep an eye on the equity markets as our stock value improves.
OGFJ: Can you tell our readers about your short-term and long-term strategy going forward?
ANDY CLIFFORD: Our short-term goal is to achieve an exit rate for 2011 of over 4,000 BOEPD, which is a vast improvement over our year-end 2010 exit rate of 2,300 BOEPD. We think we can achieve these goals through infrastructure improvements and de-bottlenecking, coupled with recompletions and development drilling. We will continue to see substantial quarterly increases for the foreseeable future. Longer term, we strive to become a $1 billion company through largely organic growth, supplemented by strategic, accretive acquisitions and joint venture partnerships for our deep exploration targets.
OGFJ: Do you have any plans to expand out of your current areas of operation?
ANDY CLIFFORD: The company has multiple opportunities to organically grow from our existing asset base but has also identified a number of opportunities for accretive acquisitions close to our existing infrastructure. We are a growth company and we are always looking for accretive acquisitions. But we love the operating environment in Southern Louisiana.
OGFJ: Any interest in shale plays?
TOM COOKE: We are not looking at the unconventional plays. Shale plays are typically characterized by long-life reserves and a high probability of success. That sounds like our Grand Bay Field, with no dry holes and over 64 stacked pay sands. We also have low decline rates in our wells, not the sharp declines typical of the resource plays. We have several wells that have been commercially producing since the 1940s and one particular well with over 50 years of production from the same sand and it is still producing at over 20 BOPD today. We are skeptical about the commerciality of most of the shale plays, given the current gas prices. This is due to (1) the sharp decline in IP rates, (2) outrageous leasing costs, (3) the high costs to frac, and (4) the likely need to re-frac specific wells to sustain production. We like to say we are pursuing "good, old-fashioned oil and gas," and we are happy to be receiving close to Brent pricing in crude while we can still make good money below $3/MCF gas in our conventional gas assets. In addition, we do not have lease expiration issues in most of our assets because most of our leases are multiple HBP leases.
OGFJ: Talk a little about the people you have on board and how important they are to the company's success.
TOM COOKE: Our field-base personnel have worked our assets since Chevron, Hess, and Pioneer owned these assets. This means that, not only do they know these assets intimately, but they also have great relationships with all the service providers, which pays dividends in the event of a major storm. We also have excellent people who have previously worked for major oil companies such as Chevron and Exxon, who can benefit from the ability of a small independent such as Saratoga to not only utilize state-of-the-art technologies through strategic relationships with service providers and/or academic institutions, but also to be able to move quickly to seize on available opportunities. We are actively hiring key people to help us achieve our exciting growth objectives.
OGFJ: Could you briefly summarize your financial results for the past quarter and the last fiscal year? Did they meet your expectations?
TOM COOKE: We began the year with net production averaging around 2,300 BOEPD. We are currently around 3,300 BOEPD, with expectations that we will exit at over 4,000 BOEPD. The second quarter of 2011 and the ensuing months have been an exciting time for Saratoga. We have gained momentum on numerous fronts, achieving several long standing objectives, and believe we are now positioned to realize what we believe is the great untapped value of our resource portfolio. We experienced a marked turnaround in bottom line results with net income of $2.1 million, or $0.11 per basic share, for the second quarter of 2011, compared to a net loss of $8.4 million in the corresponding second quarter of 2010.
Our growing net income has been driven by strong top-line growth, topping 40% for both the quarter and six-month period with EBITDA of $12.5 million for the second quarter of 2011 compared to $6.7 million in the second quarter of 2010. Our revenues of $18.8 million for second quarter 2011 compared to $12.9 million in the second quarter 2010.
We are currently completing the Roux development well in Main Pass 46 Field where we have encountered 111 feet of net pay in 13 sands. The most exciting aspect of this well is that six of the pay sands did not have previously booked reserves and we are completing the well with a single gravel pack completion in the lowermost 21 sand where we had probable reserves. This well follows on the heels of our Catina well that had an IP rate of over 1,200 BOEPD and which is now producing back to Main Pass 46.
In addition to our improving operations, Saratoga has made great strides in strengthening our balance sheet. In April 2011 and July 2011, we completed two private equity raises bringing in more than $35 million of new equity and we have completed a debt offering of $127.5 million. As a result, we have reduced our total debt by $18 million, extended out the maturity of our debt facilities to 2016 and substantially strengthened our cash position and shareholders' equity. Our market capitalization went up by 400% to over $140 million today.
With the addition of liquidity from our improving operating cash flows and equity infusions, we have substantially increased our development budget and moved from operating in a cash-constrained environment to a position of deploying capital in a manner deemed optimal by management to support the timely development of our inventory of proved developed non-producing opportunities, development drilling opportunities and deferred maintenance and other infrastructure projects, all with the objective of growing our production.
From left: Andy Clifford, Louisiana Gov. Bobby Jindal, Tom Cooke.
Photo courtesy of Saratoga Resources.OGFJ: Looking ahead, what are your projections for the next several quarters and why should Saratoga Resources' investors be optimistic?
ANDY CLIFFORD: Moving forward, we fully expect our program of recompletions and workovers, together with our infrastructure projects and development drilling program, to increasingly contribute to meaningful production growth as production levels from shut-in and curtailed wells are brought to capacity and new wells are brought on line. We look at Swift Energy as an analog for development of our Southern Louisiana assets. In 2001, Swift acquired the Lake Washington Field, not too far from our Grand Bay and took production from 1,000 BOEPD to 18,000 BOEPD in just six years, becoming the largest producer in Louisiana at that time. They did this through applying 3D seismic technology and by converting PUDs to PDP and PDNP. This is exactly the type of success we hope to emulate in our existing asset base.
Saratoga offers investors an opportunity to invest in a growth story with a large inventory of behind-pipe recompletion opportunities and a large slate of low-risk PUD opportunities. Saratoga is weighted towards oil, and we are commanding a high premium to WTI with LLS and HLS pricing. In addition, we are sitting on huge upside in Grand Bay and Vermilion 16 assets with multiple TCF potential with existing infrastructure that will allow early production and a strong HBP position, which means we do not have lease expiration concerns and can develop these deep resources in our own timeframe.
OGFJ: Is there anything you would like to add that we haven't covered?
TOM COOKE: We are in immediate proximity to the best energy markets in the US, in Southeast Louisiana. We are receiving a high premium to WTI for our oil and expect to receive healthy premiums for the next two to three years. In addition, our assets are located in the transitional, in-bay environment with most of our wells, and even our multi-TCF prospects, in water depths of less than six feet – not 5,000 feet. We do not need a train to transport our oil as the best markets in the US are in our back yard, and we do not need a submarine to drill and service our prospects as they are in less than 20 feet of water! Andy Clifford and I are major Saratoga stockholders, so our interests are aligned with those of the shareholders.
OGFJ: Thanks very much for your time and for sharing your story with our readers.
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Pretty cool, SARA made the cover of the OGFJ for November, never thought I'd see the day. Gotta luv it, they don't need no stinkin' trains or submarines to produce their oil!!
