Size isnÔÇÖt everything
Max Petroleum, a five-year-old start-up launched with $37 million from an IPO, is poised to harvest rich rewards from one of the biggest hydrocarbon deposits in the world, Pam Derringer reports.
Blessed with great timing, investment funds and industry smarts, London-based Max Petroleum LLC jumped on a rare opportunity to buy a stake in the oil-rich Pre-Caspian Basin in 2005 and snapped up lucrative oil and gas leases to 5,212 square miles of landÔÇöabout the size of ConnecticutÔÇöin Kazakhstan, a former Soviet republic bordering the Caspian Sea.
Dwarfed by the megabillion oil giants in the region, Max Petroleum ironically gains some advantage from its smaller size because it can afford to tap wells that would be uneconomical for its larger neighbours to develop. More significantly, Max Petroleum is the only prospector in the region to use state-of-the-art three-dimensional seismic imaging, which CEO Michael Young says is a major competitive differentiator and the key to the companyÔÇÖs future success.
Young says, ÔÇ£3D seismic is not new, but itÔÇÖs never been applied on-shore.ÔÇØ Without 3D data, Max Petroleum would have had little chance of finding any promising sites that the Soviets had not already discovered and drilled based on two-dimensional images in the 1980s, he says.
But exploratory (ie, widely spaced) 3D seismic images detect faults, traps and outcroppings that donÔÇÖt show up on 2D surface maps and, in turn, pinpoint with high accuracy hydrocarbon deposits that the Soviets missed, which is key to the companyÔÇÖs business strategy, he adds.
Nonetheless, Max PetroleumÔÇÖs commitment to go 3D wasnÔÇÖt for the faint of heart. Just two years old at the time, Max PetroleumÔÇÖs 2007 decision to follow that route required a huge investment of money and time. Outsourcing the task of mapping 1.3 million acres cost $35 million and took two and a half years, Young says.
This commitment, in turn, required the hiring of geologists and geophysicists to interpret the data; consequently, Max Petroleum coaxed Richard Hook, a veteran of international oil exploration, out of retirement in 2008 to recruit a Houston research team experienced in analyzing similar terrain in the Gulf of Mexico.
The geologic analysis still continues, but by the end of 2009 the team of four had created a portfolio of 16 leads, of which 12 are potential drill sites. Each of the shallow, post-salt sites (less than 11,483 feet below ground) could yield potentially 254 million barrels of oil and cost a relatively inexpensive $2 million apiece to drill.
Undergirding Max PetroleumÔÇÖs success has been its deep roots in the oil exploration business, with James Jeffs, executive co-chairman, using his industry ties to recruit other top US oil industry veterans to manage and advise the fledgling venture. The teamÔÇÖs seasoned expertise has been key, giving it the perspective to make the right decisions and the courage to take big risks, such as funding the costly 3D seismic images. The team also has strong political ties in the US as well as Kazakhstan, which is critical to successful operation in a foreign country, Young says.
In addition, management is savvy enough to know the companyÔÇÖs limits and has wisely confined its direct activities to the shallow post-salt sites that are relatively affordable to drill. The greater hydrocarbon potentialÔÇöbillions of dollarsÔÇöis buried in the deeper, pre-salt deposits, but they can cost up to $25 million apiece to drill, Young says. Instead of overreaching its capabilities, Max Petroleum plans instead to reach agreement with a larger corporation or corporations for deep well exploration. ÔÇ£WeÔÇÖre looking for partners to share the cost for testing deep prospects,ÔÇØ he says, adding that the company hopes to have a pact in place by next fall.
However, Max Petroleum intends to manage and oversee the drilling of the shallow, post-salt deposits itself according to an ambitious timetable, Young adds. ÔÇ£Our goal is to drill and test all 12 prospects by mid-year 2011,ÔÇØ he explains.
To date, two of the first 12 post-salt drill sites (all of which were initially identified with the earlier 2D images and subsequently confirmed with 3D) are producing 2,400 barrels of oil a day, generating about $4 million a month in revenue, Young says. One of the two is an extension of an existing field, but the other is in a new location.
ÔÇ£ThatÔÇÖs whatÔÇÖs exciting,ÔÇØ he says. ÔÇ£Ours was the first post-salt shallow discovery in the Basin since 1993. ItÔÇÖs very small, producing only 18 million barrels, but the surface was flat, and we couldnÔÇÖt have seen it with 2D images. The find was due to the 3D data, the technical team and a lot of hard work.ÔÇØ
Finally, Max Petroleum had the fiscal expertise to achieve smart growth, investing more than $300 million in acquiring, exploring and developing its leases in Kazakhstan and increasing equity to $175 million and loans to $139 million. Annual revenues are expected to hit about $39 million for the fiscal year ending March 30, 2010, and the company is cash positive, excluding debt repayment, Young says.
But one of Max PetroleumÔÇÖs proudest achievements is that it accomplished all this, including completion of the 3D imaging project, during and following the 2008 international fiscal meltdown, which dropped the price of oil from $103 to $33 a barrel and decimated company earnings and valuation, he says. Many smaller firms in the business did not survive because they couldnÔÇÖt raise capital, and many thought that Max Petroleum wouldnÔÇÖt either, he says. ÔÇ£Everyone assumed our primary financial backer, Macquarie Bank Ltd., would push us into insolvency, which would have led to the cancellation of our drilling licence,ÔÇØ Young says.
Instead, Max Petroleum developed a creative strategy to restructure outstanding debt and exchange a large portion of loans for equity in the company. Most significant, Max Petroleum won MacquarieÔÇÖs confidence with a white paper guaranteeing specific timelines for future discoveries of post-salt sites, with deadlines for data availability and the compilation of an inventory and portfolio valuation.
ÔÇ£ThatÔÇÖs the excitement of our story: where we are now, where we were at that moment and the key decision points,ÔÇØ because Macquarie had to continue to fund the 3D processing to recoup its investment, he explains. ÔÇ£But we met every deadline, oil prices started to recover, and Macquarie now has the potential to earn much more.
ÔÇ£It was touch and go. But theyÔÇÖve been a strategic partner,ÔÇØ Young continues. ÔÇ£We did this together. Now weÔÇÖre sitting on a great opportunity in the next 17 to 24 months with the post-salt sites, and we have huge potential on the deep. I donÔÇÖt know if we will ever see an opportunity like this again.ÔÇØ
