Milestone Exploration

A well oiled team┬áFred Baker tells Gay Sutton about the changes taking place in the Canadian oil and gas exploration sector and how Milestone Exploration is reshaping its strategy for new circumstances. YouÔÇÖd think that with oil prices rising so dramatically over the last couple of years and governments focusing on security of supply, being in the oil and gas exploration business would be highly attractive. And you would be right.   Milestone Exploration, a Calgary-based junior oil and gas exploration company operating in Alberta, was set up in 2004 at a time when there was huge excitement in the market and juniors were proliferating. Their role was to identify and drill for oil and gas, and once their wells reached a certain level of productivity they were likely to be snapped up by the well heeled trust companies. It was a great business model, with a ready-made exit strategy, according to president and CEO Fred Baker, and the risks were not particularly high. ÔÇ£We wanted to take advantage of that. We saw a model that was working and wanted to pursue that model,ÔÇØ he explained. A couple of big investors were prepared to put up the lionÔÇÖs share of the capital, while Baker brought together a team of like-minded experts to join him. The company strategy was to have a finite life cycle of three to five years during which time it would identify and exploit new oil and gas reserves, and bring production to a level that would make the company an attractive prospect for the trusts.Very early on, the company made a decision to diversify geographically rather than place all its investment into one area. Starting with land in South West Alberta, Milestone then picked up land and began the assessments in the Peace River Arch and West Central Alberta.The plan was to drill shallow wells in these areas, which would keep the capital risks low and would generate cash flow to fund the ongoing exploration and development. ÔÇ£It also enabled us to gel as a team and to learn about the three areas before beginning work on the deeper and more costly wells,ÔÇØ Baker explained. ÔÇ£We now have income from all those areas, and a couple of years ago we moved focus to concentrate on the deeper wells.ÔÇØThis stable and assured business structure and exit strategy was not, however, destined to last. ÔÇ£Things then changed and became a lot tougher for juniors,ÔÇØ Baker continued. Changes in the law meant that trust companies would no longer be able to benefit from a significant advantage in the tax legislation, but would be taxed at a corporate rate, and over the next few years would also have to make the decision as to whether to revert to a regular corporation. ÔÇ£The impact on us is that the trust companies are no longer production driven and are less keen to buy juniors. They are much more selective on how they are doing business. However, even with these changes there continued to be a very robust acquisition and merger market.ÔÇ£Four years ago, you could reach a level of 1,500 barrels a day, and if it was focused production then the trusts would buy. Now, the formation of trusts is not happening anymore and exit strategies are less certain.ÔÇØThe company will soon be entering its fifth year, the year by which it had originally planned to sell. But because of the changes in the marketplace it is pursuing an ambitious and challenging new strategy. Although other opportunities may well present themselves, the company is focusing all its activity on its three key sites, and aims to increase production a great deal further towards its original target of 3,500 barrels a day. ÔÇ£If we can get our production up to around 3,500 barrels a day we will become a more viable target for medium sized companies that want to grow through acquisition, and possibly for the trust companies for that matter. That is our challenge over the next year.ÔÇØ And itÔÇÖs no small challenge. The company is currently achieving something in the range of 2,300 barrels per day. This is not the only challenge the company has been facing. Although it is part of the Canadian oil boom, the huge increase in activity in the Oil Sands region of Northern Alberta has driven up the cost of raw materials and labor, and Milestone has had to fight for its share of resources with which to operate. ÔÇ£In terms of rising steel prices, we have built some inventory in casing and tubulars for our wells, buying it in advance before prices go up. And we wanted to make sure we had sufficient inventory in view of the world shortage of steel.ÔÇØAs a small company employing just 14 highly trained professionals and administrators, Milestone has to rely on contractors for work on the ground. ItÔÇÖs a common factor of small junior companies. ÔÇ£The Oil Sands employ a huge number of skilled labor and they pay big dollars for it. So the contractors who work in our areas are struggling to get sufficient experienced staff to bring on all the rigs theyÔÇÖd like.ÔÇØ This again has been driving costs up.Baker has, however, developed a very effective approach in dealing with contractors. He believes that contractors are a part of his team. ÔÇ£If you donÔÇÖt have integrity with them,ÔÇØ he explained, ÔÇ£itÔÇÖs really hard to move forward. You have to work together.ÔÇØ This requires being upfront with them and involving them in what youÔÇÖre trying to achieve, being flexible and understanding their needs and issues, he explained. ÔÇ£But it all boils down to open, honest communication. That is what has been successful for us.ÔÇØSuccess, in the end, will come when Milestone is bought out by one of the bigger boys in the industry. But itÔÇÖs worth noting that when Baker set up the company in 2004, it was initially capitalized with $35 million followed by another $20 million. ÔÇ£Nowadays the juniors are being capitalized by $100 to $200 million because the sites require a higher level of technology and a more sophisticated level of drilling. And that is a lot more expensive.ÔÇØ ┬á