Forget the oil sands: Arguably the hottest chunk of oil real estate this year sits in the pasture and wheat fields of southern Saskatchewan.
Far from Alberta's Fort McMurray, Saskatchewan's Bakken oil field was, until five years ago, thought of as a dud. Wells drilled into its dense rock produced five, maybe 10 barrels a day.
But, in a mirror of the revolution that has overtaken North American natural gas production, technological change has brought great new volumes of crude surging to the surface, and a flurry of deals to match.
In the course of this year alone, Crescent Point Energy Corp. CPG-T , which converted from a trust this year, has bought nearly $2-billion in assets and companies, many of them focused in the Bakken.
Its chief competitor, PetroBakken Energy Ltd., was formed in a $2.24-billion merger of TriStar Oil & Gas Ltd. with the Canadian business unit of Petrobank Energy and Resources Ltd.
A third competitor in the area, Glamis Resources Ltd., has spent $535-million in five transactions this year.
Crescent Point Energy posted the latest in the transaction blizzard Monday with its purchase of TriAxon Resources Ltd., an all-share deal worth about $250-million.
The consolidation has dramatically reshaped the Bakken, where 1,000 wells drilled in the past five years have expanded by tenfold the estimates of oil in place – to between four and five billion barrels – and new technology has created economics far more compelling than the oil sands.
Crescent Point now owns about two-thirds of the land in the Bakken, and a similar amount in the Lower Shaunavon, another Saskatchewan play that contains heavier crude.
The TriAxon deal also gives Crescent Point exposure to the Viking play, a less-understood field it hopes to tap with similar technology.
That technology involves the use of horizontal wells and multistage fracturing, a method that pumps high-pressure fluid and sand into the rock to crack it apart so oil can flow out.
The first well of its kind was drilled in the Bakken in 2004, nearly 60 years after oil was discovered in the area. It worked. The Bakken now produces about 65,000 barrels per day. New wells in the field produce as much as 250 barrels a day (a yield that drops to 25 barrels by the fifth year of production) and economics so solid that even during the oil crash last year, Bakken producers were still making money.
“The Bakken is economic at any price level,” said Crescent Point chief executive officer Scott Saxberg. “And the Lower Shaunavon is probably similar.”
Analysts have calculated that Bakken plays will break even with oil at about $30 (U.S.) a barrel. That calculation is part of the reason why valuations in the area have been high. Crescent Point, for example, paid $142,643 (Canadian) per producing barrel of oil equivalent for TriAxon – double the average for Canadian energy transactions this year.
That's high enough to stir worry among shareholders.
“Paying rich multiples always gives us reason for concern,” said Dean Orrico, chief investment officer at Middlefield Capital Corp. “It really does come down to management drilling these properties to ensure the price is justified. That's a bit of a ‘show-me' story.”
And it may be time to call a halt to the buying spree, he said.
“We'd now like to see [Crescent Point] focus on what they've got and really prove that up,” he said.
For all of the excitement about the Bakken and similar fields, companies have yet to find a way to wring more than about 20 per cent of the oil from the ground. New techniques are promising – underground water injections, for example, could boost recovery rates to over 30 per cent – but the Saskatchewan plays retain technological risk.
And much of the 1,600-square-kilometre Bakken remains unexplored; other plays have seen even less drilling.
That means there is both plenty of opportunity – Crescent Point, for example, has told investors it has the potential to more than double its reserves – and risk that new ground won't be as productive.
Investors, however, are nearly as optimistic as the companies working in the region.
“We still have great belief in the upside,” said Glamis chief executive officer Trent Yanko. Technology has transformed the new Saskatchewan oil fields, he said, “from something that was never even thought of to a major world-class play.”
