Permex Petroleum (CNSX:OIL) Low Expenses and High Operating Netbacks

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Mehran Ehsan, CEO of Permex Petroleum Corporation (CSE:OIL)(OTCQB: OILCF) sits down with James in studio for an introduction into the company. Permex Petroleum is a uniquely positioned junior oil and gas company with assets and operations across the Permian Basin of West Texas, and the Delaware sub-basin of southeast New Mexico. In an economy with failing oil prices Permex operates in an environment with some of the lowest operating expenses and some of the highest operating netbacks. Ehsan anticipates an increase in production to be over 1,000 barrels a day for the first half of 2020.

Transcript

James West: I’m joined now by Mehran Ehsan. He is the President and CEO of Permex Petroleum Corporation, trading on the CSE under the symbol OIL. Mehran, welcome.

Mehran Ehsan: Thank you, thank you for having me.

James West: Yeah, Mehran, let’s start with an overview: What exactly is – I mean, it’s kind of self-evident in the name, but what exactly is the business of Permex Petroleum?

Mehran Ehsan: Sure. Permex Petroleum is a uniquely positioned junior oil and gas company with assets and operations across the Permian Basin of West Texas, and the Delaware sub-basin of southeast New Mexico. We essentially own and operate oil and gas wells on federal, state and private land.

James West: Okay, well, the Permian Basin is certainly a famous producing body of hydrocarbon. It’s interesting that you are actively developing this in an environment of falling oil prices, especially, you know, we just heard that OPEC decided to pledge to continue their diminishing output in an effort to keep prices from falling too much further. How sensitive is your company to that oil price?

Mehran Ehsan: You know, I think there is no E&P company out there that would say we’re not sensitive to oil prices. With regards to OPEC, you’re absolutely right: 1.2 million barrels in cuts continues for the next nine months, and as you’ll notice, environment’s changed a bit where historically, when OPEC comes out and says this, WTIN Brant go up. But this time, it did not faze it as much, and that’s because of the shale resiliency into the US, and that’s the market we’re in.

So price sensitivity, we are price sensitive; however, we operate in an environment with some of the lowest operating expenses and some of the highest operating netbacks.

James West: Sure. Okay, so let’s go in depth on that: tell me about the netbacks and the types of exactly what kind of pay zones you’re working in.

Mehran Ehsan: Sure. So when you look at the Texas plays, specifically West Texas, majority of the hype was created around the Wolf Camp formation, which is deep, requires much fracking, thus the cost is quite high. With us, it’s more conventional San Andres wells; they’re shallower, but they don’t require the same amount of fracking or operating expenses.

So when you look at our operating netbacks, we run it at 45 oil WTI, and netback is around $29, which is quite healthy.

James West: Wow, that is, that is. Okay, so I mean, a lot of companies have really come from nowhere to become major sort of integrated producers; Continental Resources comes to mind. Is that sort of the ambition of Permex Petroleum Oil, is to sort of grow incrementally on increasing production?

Mehran Ehsan: Absolutely right. And it’s funny you bring up Contro; Contro is personally my favourite company out there. I have followed them quite well, we know them quite well, their personnel. One of the best operators in that region.

The model we’ve looked at has been to be silent on the sidelines as a small junior player, don’t take on debt, but take on a hawkish position. Where other operators are leveraging and struggling now in this environment, we would go on and start taking up some of their acreages in preparation for drilling and development as oil prices recover.

James West: I see. So is your business model, then, typically to farm in as a financial partner more so than an operator?

Mehran Ehsan: Not necessarily. We are an operator.

James West: Oh, okay.

Mehran Ehsan: That doesn’t mean we won’t farm in and do JVs; in fact, if you look at one of our properties, we’re a working interest partner with Occidental Petroleum. When we proceed to do our drilling of horizontal wells, we will actually embark on utilizing their expertise as a large cap to drill them for us, as our joint venture partner on that deal.

James West: Continental sort of became famous being among the most willing to spend rather prodigiously on large horizontal multi-stage fracks at depth that were, you know, some wells running upwards of $20 million. That’s not the case, because you guys are more conventional, more shallow, as you say. So does that mean that you’re not doing any multi-stage horizontal fracking?

Mehran Ehsan: No, that does not mean that. So the way you’re looking at it is, it’s like comparing a well that you’re injecting 20 million doing a 50-stage frack on a 12,000 foot vertical hole and another two miles out lateral. Nothing like that is what we’re touching. We do have basement rights on our leases which allows us to do that, but Permex is not of a size to do that at this juncture, nor would we want to risk putting 20 million into one hole even if we could, at this juncture.

What we’re targeting is a San Andres conventional play at about 5,000 feet deep, one mile out, with a 20-stage frack program. This would cost the company approximately $2.5 million to $3 million USD to drill and development, but when you look at the payouts on some of these wells – 400 barrels a day in production – the pay is less than a year at 50 oil. Rule of thumb: if the payout of the well is under 12 months, drill it. If it’s over 12 months, walk away.

James West: Sure. And what does the decline timeline look like on most of these wells?

Mehran Ehsan: That’s another good question. So when you look at Continental going after Wolf Camps have some of the steepest decline curves. That’s why we always discuss shale. Although the shale revolution has been strong, one thing people don’t understand is the significant declines that these have. With the San Andres, you’re looking at about 30 percent year-on-year decline in the first year, which the second year goes to around 15 and then 7.5 percent (unintelligible) [0:05:37] at that level.

James West: Okay, well, that’s certainly better than some of those deeper fracks. How is the competition for acquiring those types of shallower projects? I would think you would have to pay more for something that’s so much closer to surface and less risky.

Mehran Ehsan: Yeah, historically that would be the case. But when you look at the hype and some of the production out of the deeper zones, it’s like, think about this: would the competition be more right now for demand for horizontal rigs or vertical rigs? Because the hype is around horizontal, demand for horizontal rigs is much higher than vertical, so one would actually be able to get the vertical rigs at a much discount to market.

When you look at our shallower stuff, the production isn’t nowhere close to what the large caps are doing at 2,000-plus highs; I’ve seen 11,000 barrels a day from a well. You have an area that you can go into. That is why, when you look at the San Andres, one of the main companies that focuses on it is Ring Energy. One of the other companies that does it is Pacesetter Energy. So you don’t have that much of a hype around it yet, and that allows us to embark on it without that much competition, still.

James West: Sure. Okay, and tell me, how is Permex capitalized at this point?

Mehran Ehsan: So up to this point, we have utilized our cash flow for small, incremental growth for the company. Moving forward, we’re going to need to be able to raise either capital, or do a convertible notes. One of the things our company has never done is, again, debt. That’s one weakness that we don’t want to have. However, given where we are, given the environment and the marketplace and where our share price is, we have to consider certain notes, a possibility for us to raise capital in order to drill a horizontal.

As I indicated, each well will require 2.5 million to 3 million. You would take two shots at net, and anticipate to start doing this in fall, sometime. So between now and fall, it’s a matter of correcting our market, creating awareness, and getting us to a position to capitalize ourselves for that drilling.

James West: Sure. And from your planning perspective, where do you see the price of oil going in the near term?

Mehran Ehsan: I am not going to be speculating about that. You know, anyone that speculates now is going to be wrong, because you look at the corrections that we’ve had over the past 60 years – we’ve had quite a few of them – they’ve been predictable, to a degree. This round has not been. We’ve been downward correcting for five years now, and every time we have an upswing, there’s another sentiment or fundamental or speculative or technical that drives it down.

Personally, I don’t think we’re going to see 70, 80 WGI anytime soon.

James West: Okay. And finally, tell me about the – what’s your production profile look like going out 12, 24, 36 months on a forward-looking basis?

Mehran Ehsan: Sure. So when we look at fall, if we were to bring on one of the wells, it adds 400 barrels to where we are. So our anticipation is two of those wells. If we do D&C, drill and complete, two wells and put them on pump, and they’re progressing nicely at 400 barrels a day each, we’re going to be over 1,000 barrels a day for the first half of 2020.

This is where we’re headed, and that’s where we want to be, is to knock out two; but we have room for 12 of these wells. Once we have had two under our belts, it becomes such an easy strategy for us to pursue the balance of the 10 wells on.

James West: Wow. So you envision being over 10,000 barrels per day within two or three years, then?

Mehran Ehsan: If we are able to succeed. Again, this is oil and gas; it is risky. But we aren’t doing any wildcatting, we’re not doing any exploration. This is all infill drilling; as a matter of fact, we’re producing from that formation already, we’re just tagging into it on a lateral scale.

So if we have the funding to do it, we will do it, and continue drilling them. If we do not, and we do succeed on the first two wells, we will use organic cash flow growth to drill the rest of the wells.

James West: I see. Fantastic. And tell me about your technical team, quickly: who’s overseeing the design of the programs and everything?

Mehran Ehsan: So on the US side we have engineers and geologists. Our team is three engineers, three geologists spread across both sides. A nice pedigree that have done San Andres. In fact, when you look at our US side, the main focus of our team has been this formation. In fact, they’ve done over 100 wells in the San Andres for other companies. So, from an engineering side, we have experts that have done this over and over, geological standpoint, as well. Some of the team have worked with Gulf Oil, some of them have worked with Exxon in the past. But the main thing is boots on the ground and the experience within this formation. Those are the important things, and those we do carry at Permex.

James West: Fantastic. All right, Mehran, let’s leave it there for now. That’s a great introduction to the company. We’ll come back and follow your progress with interest. Thanks for joining me today.

Mehran Ehsan: Absolutely. My pleasure. Have a wonderful day.

James West: Thank you, you too.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.