AN INTERVIEW WITH DAVID ANDERSON,PRESIDENT AND CEO OF LONE PINE RESOURCES
Don Stowers, Editor, OGFJ
OIL & GAS FINANCIAL JOURNAL: In May 2011, your company announced its spin-out IPO from Forest Oil. Talk to us about the rationale behind taking your company public. What factors led to this decision?
DAVID ANDERSON: Over the past three years we undertook a significant restructuring of our Canadian asset base that saw us divest high operating cost, low-growth assets and reinvest into concentrated resource style plays, including a significant light oil play. As a result of this restructuring we found ourselves with a dynamic asset base that was capable of growing at a faster rate than was achievable within the Forest business model of spending within cash flow. Spinning the Canadian assets into a stand-alone public company allows us to invest a larger amount of capital into these assets without having to compete internally for capital with the other business units at Forest. Another consideration was that Forest felt the growth potential of the Canadian business unit wasn't being captured in its share price, even though the Canadian assets had already been growing at a 20% annualized organic growth rate (pro forma for divestitures) over the past three years. Forest made the decision to unlock that shareholder value by splitting the Canadian business unit into an independent company.
OGFJ: I know it's early but how has as your dual listing on the New York Stock Exchange and the Toronto Stock Exchange helped create visibility for your company?
ANDERSON: It's still very early and so far nearly all of our liquidity has been on the NYSE. Over time, however, we expect there to be a natural migration of our shares towards Canada as those investors will know the assets the best, given their exposure to our ultimate peer group of Canadian E&P companies. We remain committed to both markets though, and our origins in Forest, combined with the extensive capital markets coverage we receive in the US, will make that a very important market for Lone Pine. In fact, we are actively participating in a lot of sell-side events in the US that Canadian peers of our size would never be exposed to. We feel this incremental exposure can only help the company as we grow. Also, having access to both sides of the border will provide flexibility in future financings and ensure we are able to find the best sources of capital available. We will be familiar in both markets and can access the one that makes the most sense for Lone Pine at that time.
OGFJ: Your assets in Canada offer both liquids and natural gas exposure with a significant drilling inventory. What is your strategy in the near-term to continue to grow production for the company?
ANDERSON: We are fortunate to have two very high quality assets – our light oil play at Evi in the Peace River Arch and our Nikanassin resource play in the Deep Basin. Our production has historically been heavily weighted to natural gas, but we have begun a significant shift towards light oil through the allocation of a greater amount of capital to Evi, a play we believe to have industry-leading economics. For the near term, you will see us continue to allocate the majority of our capital towards Evi, which will drive an increase in our overall liquids weighting while at the same time growing total corporate production and cash flow. Based on current drilling rates we have a drilling inventory of more than 10 years at Evi and more than double that in the Nikanassin. This deep inventory of low-risk, scalable projects provides us with significant upside potential in 2012 and beyond.
OGFJ: Operators flaunt the advent of horizontal drilling techniques and how it has opened vast oil and gas fields in the US. How has new drilling and completion technology played a role in the development in the Canadian fields where you operate? And what role do you expect it will play in the future?
ANDERSON: The advent of horizontal drilling and hydraulic fracture stimulation has opened up opportunities to Lone Pine that were not available in the past. A perfect example of this is at Evi where the Slave Point formation that we produce from had historically been bypassed for deeper zones as it was too tight to produce vertically at commercial rates. The fact that the field has been extensively produced from deeper zones provides for great well control and a very low risk geological model. Without horizontal drilling, this play would not be as economically attractive. On the completion side, we have been early adopters of new technology that has allowed us to complete wells faster, cheaper, and with better productivity. We are a very technically driven company and are constantly trying new technology in our core plays to enhance the margins.
OGFJ: Let's dig in to your Evi light oil asset in northern Alberta. What is the ultimate potential of this play? What, if any, growth metrics have you established?
ANDERSON: Evi represents a significant undeveloped resource base for Lone Pine that is in the early stages of development. Through an active land acquisition program over the past three years, we have amassed a land base with more than 500 net drilling locations for highly economic light sweet 39° API oil. Evi wells are currently generating 100% returns with a one-year payout and tremendous consistency. We continue to evolve our completion techniques in the area and have seen remarkable response to increased frac density. We are still establishing the optimal density and well spacing that will drive the best well productivity and are very excited about the long-term potential of this play. We are also piloting a waterflood project to determine if there is secondary recovery potential that could further extend the life of the field.
OGFJ: Lone Pine also has natural gas fields in the Deep Basin and Nikanassin plays. How are you allocating capital to your gas projects in the near term while evaluating current natural gas prices?
ANDERSON: We are still generating solid returns in the current gas price environment. However, those returns pale in comparison to our economics at Evi, so our investment in natural gas has been somewhat limited in 2011. We will remain active in natural gas in the near term though as the only way to improve the economics on these plays is through continued cost reductions and operational efficiencies. By maintaining an active presence in this play throughout the depressed gas price cycle, we set ourselves up for even better returns when gas prices recover. Our goal in the near term on natural gas is to keep production flat while improving the economics of the play through our operational efforts.
OGFJ: Oil and natural gas prices continue to remain volatile. Can you tell us about your hedging strategy? What percentage of your 2011 and 2012 production is hedged and at what prices?
ANDERSON: We use hedging as a defensive mechanism to protect cash flows and ensure we are able to adequately fund our capital program over the next year. We have been fortunate with the hedges we layered on shortly after the IPO as those hedges are now deeply in the money and have provided us with the security to not have to cut capital in the face of the recent commodity price downturns. We are currently hedged on 40% of our production for 2011 but are less hedged for the next calendar year. We will investigate additional hedges in 2012 but recognize it's a fine line between securing cash flow and maintaining commodity price exposure for our shareholders. Another advantage we have in the current commodity price environment is the fact that we sell our oil in Canadian dollars at the Edmonton Light benchmark that is currently trading at a premium to WTI. This has resulted in additional insulation against the recent drop in WTI, as our realized prices have fallen by much less than the US benchmark.
OGFJ: Recent economic developments, both domestically and internationally, are forcing investors to examine a company's financial outlook more closely. Talk to us about your guidance and your outlook on prices.
ANDERSON: The natural gas price environment has made it challenging for gas producers in North America, particularly considering the continued success from shale gas plays that are bringing additional volumes to market and further suppressing natural gas prices. We are long-term believers in natural gas prices due to what we expect to be significant demand side shifts in the next three to five years as well as future West Coast LNG export solutions [Kitimat, BC LNG export terminal]. However, we recognize that natural gas is not the place to be chasing above average returns right now. Thanks to the size and scale of our Evi asset, we have been able to shift the bulk of our capital to that project this year and are planning to do so again next year to further develop that light oil asset. We have the short-term goal to increase our liquids weighting up to 40% in the next two to three years and are well on our way to achieving this result. In 2011 we will double our liquids weighting from 14% in Q1 2011 to almost 30% by year end. At that point we will be much more commodity diverse and have a balanced platform capable of shifting capital in the future to whatever commodity is generating the best returns at the time. We know right now that the best return is oil but we have been through enough cycles to know that it can quickly change. One of our key drivers is rate of return, and we will be pragmatic about where the above-average returns reside.
OGFJ: Lone Pine is a new company but it doesn't feel like a new company. What are your plans for the growth of Lone Pine in its new publicly-traded platform?
ANDERSON: That is right. Lone Pine is a new entrant to the public markets, but from an operating perspective we have had a lengthy history in each of our core areas. When we spun out from Forest, the only thing we had to add was a financial team, which was quickly put in place, and we really hit the ground running. The Canadian assets had historically been run as an autonomous business unit and the operating philosophies we had have not changed. We want to be early movers on resource plays where we have deep technical expertise, secure a high working interest and operated position, and then work diligently to control costs and drive economics.
The next year will be very exciting within Lone Pine as we continue to target growth in production, but a much higher increase in cash flow and EBITDA as that growth is amplified through high margin light oil. We were somewhat orphaned in the public markets between the IPO and the Forest distribution on
September 30th, but now that the spin-off is behind us we think our valuation will look a lot different a year from now than it does right now.
OGFJ: Thanks very much for taking time to talk with us today.
