Regardless if an analyst or investor has a bull or bear thesis on the foreseeable future of oil prices, there’s no debating this: oil touches about everything in our lives and isn’t going anywhere anytime soon. It’s the oxygen of the world’s economy. To that point, there are opportunities to capitalize on the oil patch, no matter if oil remains stubbornly low, if it has reset to a new norm in the range of $40-$60 per barrel, or if fundamentals catalyze crude much higher.
The panic from the nosedive in oil prices that started back in July 2014 has subsided. A close look at the industry shows companies not scrambling now, instead positioning for the future. For example, some U.S. companies have pulled out of Canadian oil sands projects to focus on U.S. shale properties. Viking Energy Group, Inc. (VKIN), an independent exploration and production company, has been active in the first six months of 2017, looking to tap into what CEO James Doris calls, “tremendous near and long-term opportunities across North America.”
Viking doesn’t employ the typical strategy of most small oil and gas companies that requires millions of dollars for exploratory drilling schemes to define resources. Rather, Viking focuses on acquiring long-life, low-cost producing oil properties. Simply, the conservative, methodical approach helps de-risk the growth model. By knowing all the optics of a property, Viking understands right off at what price points it can generate profits, well life spans and where cash flow can be allocated to increase production with minimal risk and cap ex.
“Our focus is on acquiring interest in long-life, low-cost producing oil properties, generating positive cash flow at today’s oil prices for development potential,” Doris told Equities.com in May. “We have aligned ourselves with industry experts that have been involved in the oil and gas space for decades, and that have followed a very conservative approach and philosophy on how we invest in the oil and gas space. We’re not into wildcatting or highly speculative drilling ventures. Our strategy is about buying assets that are making money at today’s prices, and that have development potential for the future where the results are essentially predictable.
On the topic of de-risking, Viking uses hedging tactics to combat any possible slide in oil prices, including a two-year hedge at $47 per barrel in effect right now for a portion of its production.
While Viking has assets in Alberta, Canada, its production and development efforts are directed immediately in Eastern Kansas and Western Missouri, investments that have been distinguished this year by the State of Kansas. Through its wholly-owned subsidiary, Mid-Con Petroleum, Viking owns a majority working interest in over 6,000 acres in the prolific region. In line with its overall acquisition strategy, Viking’s portfolio has established wells that are similar to others in the area that demonstrated the ability to produce for 20-30 years.
This is exemplified by Mid-Con’s ABC lease in Miami County, Kansas, which is still pumping and has produced nearly one million barrels of oil, including some 900,000+ before Mid-Con’s acquisition of a 95% working interest in October 2016.
The company has a premier partner in Kansas Resource Development Company, with a KRDC subsidiary serving as the operator of the Kansas leases, adding their regional expertise to enhance production and provide insight on expansion. KRDC and affiliates have more than 1,000 wells under management.
Time for Accelerated Growth
Generally speaking, it’s often more time consuming to properly build the foundation of a company, especially in a market with negative sentiment abound. Against those headwinds, Viking has assembled the building blocks.
Doris says that Viking has a goal to reach a minimum production goal of 1,000 barrels per day by the end of 2017. In order to meet this milestone, the company will build upon the cornerstones meticulously put in place over the past year or so.
Forgetting about the $47 hedge, even at $40 oil, that’s about $14.6 million in oil production annually from a company with a market capitalization under $10 million.
“We spent the last 12 to 18 months putting important building blocks in place for the company to ensure long-term success,” Doris said. “Now this year, we’re excited that we’re actually going to be able to execute on the plan that we’ve formulated. It has taken a long time to put together, and our focus now is going to be more about the execution of that plan.”
Growth will come from not only potentially increasing working interests in properties and enhancing production on running wells, but mainly from drilling at existing properties. At the end of May, Mid-Con’s operator on the ABC lease, S&B Operating, completed drilling of six new producing wells – and under budget at that. Investors should be looking ahead to next month, when an analysis on current production will provide for guidance for near and mid-term production.
Moreover, an enhanced recovery well was completed on June 5 at the ABC lease. This type of well is used as an access point to inject fluid into the isolated formation to increase oil recovery.
The aggregate of the six new wells along with other producing wells at the 400-acre ABC lease are just scratching the surface of potential at the property. Management estimates only about 30% of the lease has been developed to date. The operating cash flow, about $300,000 in cash on hand at the end of Q1 and a revolving line of credit with CrossFirst Bank established earlier this year, give Viking the resources to advance the ABC project and its other assets in a way that they shouldn’t get over-levered as oil continues to stabilize and investors rotate back into the sector.
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