Razor Energy: Light Oil Value

Meet the newest member of my portfolio: Razor Energy.

Source: TMX Money

Razor produces light oil and NGLs through the Swan Hills Platform and additional liquids from the Kaybob South area. The company acquired the Swan Hills assets from Penn West Petroleum in 2016. The Kaybob South assets were purchased in 2017.

Assets

The Swan Hills reservoir has been producing oil since 1962. Here is what the ownership of Swan Hills looked like in 2011.

Source: A&D Drill Bits, BMO Capital Markets, 2011

Since then, operators have changed: There has been a lot of activity surrounding the company’s core assets in the recent past.

Source: Razor Energy, November 2017 Corporate Presentation

Cardinal Energy bought assets in September 2015 and then again in September 2017. Pengrowth Energy acquired those assets in April and September 2017. Crescent Point Energy was active in consolidating the whole area in June 2015. All those lands are adjacent to those of Razor, and part of both the Swan Hills Platform (located East of Swan Hills) and the Virginia Hills Units.

Already, back in 2015, Crescent Point noted there was a lot of upside in oil exploration using newer technologies in the area.

The Coral Hill Assets are large oil-in-place pools with low recovery factors to date and are in the early stages of horizontal development.

Scott Saxberg, CEO of Crescent Point Energy, July 2, 2015

Razor also plans to drill horizontal wells between the two Virginia Hills Units. The newer wells are shown in the red square below.

Source: Razor Energy, November 2017 Corporate Presentation

In detail:

Source: Razor Energy, November 2017 Corporate Presentation

Horizontal wells are shown as red lines in the image above. Wells are expensive (C$4M per well). One well was drilled in October 10 and two other wells are licensed as of now.

The Kaybob South assets are another area of focus for the company.

Source: Razor Energy, November 2017 Corporate Presentation

Returns are higher in this area particularly because of lower drilling costs. Razor acquired those assets in May 2017. Drilling is planned for 2018.

Production

(C$/boe)Q2 2017Q3 2017
Revenue46.8842.68
Other revenue4.323.29
Royalties10.868.24
Operating costs29.1130.86
G&A4.713.44
Financing4.572.01
DD&A7.026.47

Source: Razor Energy, 2017 Financial Statements, 2017 MD&A

Price realization is very good because of the type of oil sold. Depletion and depreciation is low. Give credit to the attractive price paid and the low production decline of those assets.

The only drawback is the very high operating costs, at almost C$30 per barrel. Even though management has made this a priority, operating costs can’t be reduced substantially. Management is targeting operating costs of C$27.50 per barrel.

Razor owns midstream assets which provided extra cash. This is identified as “Other revenue”.

Funds flow from operations were of C$0.09 and C$0.04 per share in Q2 and Q3, respectively (C$0.13 and C$0.10 per share excluding decommissioning obligations).

Funds flow from operations were lower in Q3 because of lower Canadian oil prices, mainly because of a strong Canadian dollar. This affected revenues to the amount of C$1.1M in Q3. Total funds flow from operations in Q3 would have totaled C$2.7M (C$0.18 per share) in Q3, 60% higher than in Q2. Funds flow from operations should rebound strongly in Q4, considering the lower Canadian dollar and stronger WTI oil prices.

In addition:

Included in the capital budget is $2.0 million to address the Alberta Energy Regulator’s requirements under the Inactive Well Compliance Program, and other end of life well and facility spending. The company spent $918 thousand in the third quarter of 2017 on asset abandonment activities for a total of $1.7 million year to date.

Razor Energy Press Release, November 23, 2017

As such, only C$0.3M in decommissioning obligations will be spent in Q4. Total capital expenditures should be similar than in Q3, at C$4.8M.

The higher cash flows from operations explain the aggressive NCIB by management. Razor already started to buy back shares of the company (more than 165,000 shares as of today). There are 15.8 million shares outstanding.

Conclusion

Negative: The company is in debt. The company has a C$30M term loan from AIMCo, bearing interests of 10% per year. Net debt stands at C$17M. The debt load is high considering funds flow from operations of C$1.3M and C$0.7M in Q2 and Q3. At the very least, funds flow from operations are already positive, even with low WTI oil prices ($48 in Q2 and Q3).

  • Insider ownership is good: Management and directors collectively own 22% of the company.
  • The light oil and NGLs production mix help mitigate Razor’s high costs.
  • The NCIB should give some volume to the stock and provide a floor for investors.

Insider buying has been very intense lately.

Source: Canadian Insider

I bought two weeks ago.

On another note: Purple is the new trendy color in oil and gas (see Obsidian Energy).

Disclosure: I am long RZE. Not for republication on Seeking Alpha.