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Novus Energy finds 100% drilling success in Saskatchewan

By G. Joel Chury,
May 10th, 2012
email: joel@vantagewire.com
ResourceClips.com

When former Premier Ed Stelmach raised the royalty rate on Alberta oil and gas production in 2007, Saskatchewan production soared. This was especially true for plays which require companies to employ horizontal drilling and advanced completion techniques. Companies like Novus Energy.

“It’s a fantastic area because the Saskatchewan government has done something very intelligent. They’ve initiated a flat fee on the royalty rate, and so it’s 2.5% on the first 37,000 barrels produced,” says Hugh Ross, Novus President/CEO. “It’s way better than Alberta, because it’s a highly attractive royalty rate.”

Determining the relative advantages of each province now requires some extensive calculation, as Alberta rolled back its rates in 2010 and now offers its own incentives. Rather than peg its rate to barrels produced, Alberta’s horizontal well rate is justified at 5% on each new horizontal oil well in the first year of production. What’s crucial are the operating netbacks to the company after a well is tied in.

Novus is primarily chasing light and medium oil in the Viking formation in the Dodsland region near Kindersley, which is relatively shallow (750 metres) and takes on average only three to four days to drill. The payoff is a low-risk, resource-style sweet oil (35 degree API), with very little water to separate out. When done correctly, costs for shallow Viking wells can be brought down to a highly reasonable rate. Novus has lowered its costs of drilling and completing horizontal wells to $835,000 per well ($930,000 for the complete onstream cost).

After drilling about 90 wells in the region, Novus believes it has fully de-risked the play. By increasing its leveraging of oil to gas production from 26% to 84%, average netbacks have increased from $7.43 per barrel of oil equivalent (boe) in 2009, to $23.52 in 2010, $47.17 in 2011 and $53.04 (forecast) for 2012. Segregating its light oil production, the company completed 4Q 2011 with an industry leading $68/boe in the Viking, averaging $64.74/boe over the entire year and paying a royalty of only $11.37/boe.

“We had to drill all over the play to de-risk it in 2010, and it’s a big area (90 miles by 60 miles), so we were moving our drill rig all over the place,” Ross reports. “Once we had proof of concept, it allowed us to focus on key areas, which is our focus for 2012. We’ve drilled now over 90 wells, and we’ve yet to drill a dry hole.”

The company drilled 52 wells in 2011 alone, thereby increasing production by 77% and proved plus probable reserves by 58%. An additional 73 net wells into the Viking are planned for 2012. The company projects that average production will rise an average of about 3,300 barrels a day this year, with 84% of that leveraged to oil. Exit volumes are projected to be in excess of 4,500 barrels a day, leveraged 85% to oil. With 86% of its identified drilling locations still left to be spudded, there’s still plenty of potential, as the company has amassed a significant undeveloped land base in the region.

A land base that could be made more productive by downspacing. This refers to governmental approval for a reduction in the amount of space required between wells, after proving that the added wells will enhance recoveries. Initially, required spacing allows for up to eight wells per section of land (or two per quarter-section). Once approval is secured, this may be doubled to 16 wells per section. Novus has already seen its regional peers obtain such approvals and believes downspacing could see its total of prospective drilling locations increase from 615 under an eight-well/section spacing to 1,230 under a 16-well/section spacing. This means potentially 55,350 barrels per day in added production, instead of an initially projected 27,675 barrels.

Novus still has eight years of drilling inventory left to play out in the region. “We have been pretty aggressive once we got our land position,” Ross concludes. “We went from zero acres [in 2009], to today where we have 125 net sections of land in the play. So we’re one of the biggest juniors, possibly even the biggest junior in the play.”

At press time, Novus had 191.2 million shares trading at $0.86 for a market cap of $164.4 million.

By G. Joel Chury,
May 10th, 2012
email: joel@vantagewire.com
ResourceClips.com

G. Joel Chury is a veteran investment columnist for Resource World Magazine and the Editor in Chief of VantageWire.com. His knowledge of both the mining and oil and gas sectors along with his ability to sift through TSX.V data and press releases makes him one of the best up-and-coming newsletter writers on the web.

With a diverse background that includes investor relations writing and consulting for publicly-held companies and previous field work as a surface land agent for oil and gas companies, Mr. Chury seamlessly translates technical results geared towards engineers and geologists into a more readable language that’s palatable for investors on the go. As well, Mr. Chury is an avowed silver bug, always willing to join the debate on where the precious metals market is heading.

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