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Following the Jockeys in the Oilpatch

You’re only as good as your last deal.

Buy the jockey, not the horse.

That’s what came to mind today when I read that Eagle Rock Explorations (ERX-TSXv) was bringing in a new management and re-capitalizing this 550 boe producer operating in Alberta and Saskatchewan.

Half the new group is from Crescent Point Energy (CPG-TSX) the most highly valued intermediate oil producer on the TSX.  That’s a great calling card.  The other half comes from Wild River and Prairie Schooner, two junior producers that were build and sold earlier this decade.

And the Eagle Rock stock showed the worth of this team, quadrupling to 32 cents on huge volume of 12 million shares – 22% of the stock outstanding.

Many investors follow this strategy – find successful management teams who have built and sold companies before, and follow them on every deal.

So in my next issue for subscribers, due out in the first couple weeks of October, I will profile three new young companies that are the new ventures for three highly successful management teams in the Canadian oilpatch. 

Often these companies trade at a stretched valuation for their current asset base.  In other words, they trade at a (sometimes significant) premium to their peer group.  But these shareholders know it’s only a matter of time until they acquire or build an asset base that warrants an even higher valuation.

Eagle Rock came across my screen because I have been looking for a junior/intermediate producer whose focus was the Viking and Shaunavon formation of southwestern Saskatchewan where Reece Energy had been active.  Reece was bought out by Crescent Point earlier this year.   Eagle Rock will be focusing in these areas.  Eagle Rock is already 85% oil.

The new team has a lot of success behind them. New CEO Neil Roszell built and sold two companies as President – Wild River Resources and Prairie Schooner Energy.  The key members of his team at those two companies have joined him – Bruce Robertson, Jerry Sapieha and Paul Mitchell.  Crescent Point directors Scott Saxberg and Paul Colborne will sit on the board of the new Eagle Rock.

The new team is giving themselves $0.045 stock.   At the end of this recapitalization, there will be 393 million shares out and 230 million warrants, so a rollback – up to 50:1 – is in the works.  So at a hypothetical 10:1 rollback, management has 40 cent stock and the public bought it up to $3.20 (32 cents today) in the open market.  Investors are clearly willing to pay a premium.

The company’s Beverly property in Saskatchewan does have those Viking and Shaunavon formations, but wasn’t producing from them.  That property was actually in the process of being sold to a company controlled by one of the new team, but if this deal gets shareholder approval that sale will not happen.  I guess they liked the property so much they decided to buy the company.  Eagle Rock will change its name to Wild Stream.

But Beverley is not a huge property so other acquisitions will likely be happening very quickly.  

I was keen to follow a new Viking/Shaunavon producer as Reece Energy showed that these formations are just like the Bakken – steady 50-80 bopd producers (after the first big decline in production), and very repeatable over large areas.  But land costs would be much lower because these formations hadn’t really been discovered by the market yet.  So my thinking was that valuations on producers here would be much lower than Bakken players, but have very similar economics – if not better, because of the lower land costs.

However, with this team at the helm, any thoughts of a lower valuation just flew out the window.

This is isn’t the only team in the Canadian oilpatch with a great reputation that analysts and institutional investors follow.  In my October issue, I will give a brief outline of three other groups that have made shareholders rich in the past, and a description of the new public companies they are building now.  (One is an international-based group.)

Because after all…you’re only as good as your last deal.  And you buy the jockey, not the horse.

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