MegaWest Energy Corp.,
a publicly held oil and gas company (OTC BB: MGWSF), plans to become a
leader in non-conventional oil and gas operations with an initial focus on
North American heavy oil. MegaWest Energy has acquired and continues to
acquire large blocks of acreage known to contain substantial deposits of
heavy oil. MegaWest’s strategy for growth is underpinned by three converging
market factors; the need for security of energy supply in North America, the
current world oil price, and new technical developments in commercial
thermal recovery of heavy oil.
MegaWest plans to create shareholder value through the exploitation of North
American heavy oil using various methods of thermal and enhanced recovery.
MegaWest's operational and head office is in Calgary, the heart of the
Canadian oil patch and home to vast array of technical experts in the
recovery of heavy oil. The company has a team with expertise in various
methods of primary and thermal heavy oil recovery, including Cyclic Steam
Stimulation (CSS), Steam Assisted Gravity Drainage (SAGD), steam drive, in
situ combustion, electrical heating and solvent processes.
VP Finance and CFO
Mr. Kerr has held senior
executive positions in junior public oil and gas companies since 1992 with
Deep Basin Energy Inc., TriQuest Energy Corp., Innova Exploration Ltd. and
Action Energy Inc. In addition, Mr. Kerr spent four years as Corporate
Finance Associate at Rogers & Partners Securities, providing him with a
broader perspective of the finance and investment industry. He received his
B. Comm. Degree from the University of Calgary and progressed into his first
role as Corporate Controller after working at KPMG.
Mr. Kerr brings strong public market experience and a solid background in
corporate accounting, internal controls and corporate finance to MegaWest,
having previously been involved in various corporate restructurings and
public equity and debt financings. Mr. Kerr has oversight of finance,
accounting and treasury functions and will focus on investor relations and
corporate governance for MegaWest.
Oil & Gas
MegaWest Energy Corp.
926 5th Avenue SW #800
Calgary, ALB T2P 0N7 Canada
Interview conducted by: Lynn
Fosse, Senior Editor, CEOCFOinterviews.com, Published – January 8, 2010
CEOCFO: Mr. Kerr, you have been the CFO
of MegaWest Energy for a short period of time; what attracted you to the
Mr. Kerr: There are a number of things
that attracted me to MegaWest Energy. The first being the fact that MegaWest
was a heavy oil enhanced recovery company. I believe that oil prices will
rise over the long term and heavy oil differentials will remain narrow. The
second reason being that the gentlemen on the management team were very
experienced, having managed a number of other companies including Murphy
Oil, CS Resources, Petrovera Resources and others, where they had made
successes. Another reason that I joined MegaWest was because of a very
difficult decision that was made by the management team in December of 2008,
when they shut in all of the production and laid off about 80% of their
staff when the oil price crashed. They decided to wait for better times. For
a public company with the market expecting constant growth, a decision like
that is a very challenging thing to do and they made that tough decision and
I admire them for that. I thought, these guys know how to make the tough
decisions. Those were some of the main reasons why I joined.
CEOCFO: Reclaiming North America’s
untapped energy potential is a focus for MegaWest; what is happening there
and what is the plan?
Mr. Kerr: What these fellows did when
they started the company was to undertake a relatively large widespread
survey of North American heavy oil resources. They looked for places with
known heavy oil accumulations that were relatively underexplored and or
underexploited. Based on that search, they found some underexplored land in
Montana, Missouri, Kansas, Kentucky and Texas that had known oil resources.
MegaWest then raised about $50 million and went out and acquired a bunch of
these lands with a portion of these funds. After that, the Company used some
of the money to drill lands in certain of the areas; as an example, the
first area that MegaWest drilled was in Texas, which unfortunately was not
as successful as we expected. MegaWest then purchased an already drilled
project at Chetopa, Kansas, which it put into production. This facility was
shut in after producing over 10,000 barrels of oil due to equipment issues
with the steam generation plant. Because of the better reservoir properties
across the state line in Missouri, we then drilled on two properties in
Missouri and we were very successful there. MegaWest built two facilities
and drilled over 150 wells, started steam injection and oil production and
then shut everything in because of low oil prices in December 2008. At that
point, the Company was tapped out of money. In July and August of 2009, oil
prices were showing strong signs of recovery and management decided to
re-start steaming operations in Missouri. In order to do so, management
needed to raise more money. MegaWest was successful in raising $4.2 million
dollars with a very innovative financing structure when other junior
companies were having significant challenges in raising new funding.
MegaWest’s strategy is to exploit
these large underexploited reservoirs and we are talking about lots of oil
here. There are potentially many billions of barrels of original oil in
place; we are talking about billions with a ‘B’ that can be recovered. These
are the kinds of resources that MegaWest is looking for. These reservoirs
are also shallow, as an example, in the Missouri area, the depth of most of
the wells are about 250 feet and MegaWest drills them with a water well rig.
Therefore, it is a wonderful, inexpensive way to find large quantities of
oil at a very low cost.
CEOCFO: Given that there are billions of
barrels of oil there, how do you decide where you want to look?
Mr. Kerr: The first part of what
MegaWest did was to look through the national geological surveys to find
places where oil wells have been drilled, even up to 100 years ago and have
not been able to be produced for whatever reason. As an example, in the
Missouri Kansas area, the oil reservoir is contained in sandstone between
two shale layers. The oil is heavy (18 gravity) and does not flow very well
through the rock. In order to produce the oil, some technology other than
just pumping has to be applied, such as what MegaWest does, which is Steam
Stimulation. We inject steam into the reservoir, which heats the rock,
reduces the viscosity of the oil, and helps the oil to flow to the pumping
wells. The steam also pushes the oil through the rock toward the production
wells. Therefore, MegaWest looks for areas where oil has been found that
other companies have had difficulty producing in the past and we apply this
technology to produce the oil.
CEOCFO: Is this a technology that has
been developed by you or is it commonly being used: what does MegaWest know
that others don’t?
Mr. Kerr: This is a pre-existing
technology that has been in use for about 30 years. The difference is that
our team has decades of experience in steam technology, so we are very
familiar with it. More so than perhaps other companies that might be
interested in developing resources that are in place in the areas we are
working. For example, other companies in Missouri might not have the same
experience that MegaWest does, so we are using our experience to leverage
CEOCFO: Your projects seem to be in the
United States; is that just opportunistic or by design?
Mr. Kerr: I think that it goes back
again to the survey of underexploited heavy oil resources that MegaWest did.
For example, let’s look at what is going on in Canada, where the majority of
the heavy oil resources are in the tar sands area or in deeper geological
horizons and they are all very expensive. These oil horizons are usually
quite a bit deeper than where we are operating and/or they are mining
operations, where companies strip the tar sand right off the surface. Heavy
oil resources in Canada are deeper, more expensive and more difficult to get
at and process. Canadian heavy oil resources are also largely exploited. In
Canada, it is very expensive to buy the land and very expensive to get into
the play, so one of the reasons why MegaWest focused on the United States
resources was because the lands were available at a relatively low cost. In
addition, it seemed like there was less competition with very few other
companies that were involved in developing shallow heavy oil resources in
CEOCFO: What is the status of MegaWest
today and what is the financial picture?
Mr. Kerr: Right now MegaWest is
injecting steam and producing oil from both of its major projects in the
Deerfield area of Missouri. There is one project in an area called Marmaton
River and it takes up about 20 acres of land in a 300-acre parcel. There are
two phases of drilling that have been completed there and we are currently
producing anywhere from 130 to 160 barrels a day, depending on the day and
depending on how well the steam is going into the reservoir. Then we have
our second newer project approximately 3 miles away in the Grassy Creek area
of Deerfield. The Grassy Creek project has 20 acres developed on a 400-acre
parcel. MegaWest has a 90% working interest in the entire Deerfield area
with only 40 acres developed out of our total 15,000 acres in the area.
MegaWest’s entire land holding in Missouri alone is approximately 38,000
acres. We have approximately 130,000 acres of land tied up in our Company,
so MegaWest has a lot of land to be explored and developed.
Where we are at financially is that we have over $2.5 million in the bank
and no debt. At the moment, our total company production is ranging anywhere
from 140 to 180 barrels a day. The expectation is that sometime in the
summer of 2010, with no additional drilling, we should be producing about
1,000 barrels a day from the two projects that are currently under steam
injection. On top of that, we have identified up to 23 additional projects
on lands that MegaWest currently owns where expect that we can ramp up to
400-600 barrels a day each. Each project costs approximately $4.0 to $4.5
million to build the steam facility, to build the production facility, to
drill 45 producing wells, to drill 15 steam injection wells and to drill 3-4
service wells on a 10 – 20 acre parcel. If we decide to take the slow route
to growth, we can grow organically with these projects using existing cash
and net cash flow generated from oil sales or we could finance at some point
in the future when it makes sense and accelerate that growth.
CEOCFO: What is your two-minute take on
the energy/oil situation?
Mr. Kerr: We are one of the few
petroleum companies out there right now that really likes to have low gas
prices and high oil prices. So, right now we are in a situation that is very
favorable to us, because gas prices are low as a result of oversupply in
North America because of the shale plays that have come on, particularly in
Texas and that area. There is lots of excess production coming on stream, so
gas prices seem to be depressed, which we are very happy about, because we
use gas to fire our boilers, which generate the steam. Each of MegaWest’s
projects burns about 1 million cubic feet of gas a day, so the cost of
purchasing natural gas is our largest operating cost and when gas prices are
low, we like that a lot. Then you add on to that the oil price scenario
right now, which seems to be in a state of recovering from where it was at
the end of 2008. The West Texas price has virtually doubled since then,
trading above $70 a barrel. We are a heavy oil company and we sell our oil
for 80% of the West Texas price on the spot market. High oil prices and low
gas prices are currently very favorable economic conditions for MegaWest.
Our main challenge is to get to the point where we can actually start
producing more oil than we are burning gas and that will be coming forth
very soon. As far as what we see in the medium term, we expect that gas
prices will be relatively depressed, mainly because of the full gas storage
situation and we don’t expect that situation to change much over the next
couple of years. On the oil side, we expect that demand is going to
increase. The world uses oil to create gasoline and other fuels for
transportation and countries like India and China, have very large growing
affluent middle classes. The people in those economies want more cars and
trucks. This will generate increased demand for fuel. Therefore, we see the
demand for oil in the medium term growing, which means higher prices.
CEOCFO: Lay out the case for potential
investors; why should they pay attention to MegaWest Energy?
Mr. Kerr: There are a number of reasons
why investors should pay attention to MegaWest Energy. Number one, we are a
growth story that has the potential for organic growth and/or accelerated
growth through financing when it makes sense. Our independent reserve
evaluators have given us a value for the assets in the company of about $195
million and our enterprise value with no debt is currently $20 to $25
million depending on our stock’s trading price on the day. Therefore, we
think that there is a lot of unrecognized value for our share price in the
stock market. MegaWest has the properties and the ability to grow
significantly with relatively low geologic risk by adding multiple
individual projects each with potential production of 500 barrels of oil per
day. We have an aggressive growth strategy planned and we think that any
investors that are here with us now are going to reap the rewards of
MegaWest’s growth plans and increasing valuations in the market.
CEOCFO: Final thoughts, what should
people remember most about MegaWest Energy?
Mr. Kerr: There are a few things that we
would like to point out. One of them is that we have a very large land base
for a company of our size. When you capture the land, you capture the value.
MegaWest has the ability to add projects and production at a very low cost
and the reserve cost in the ground, on a long term basis, is going to be
somewhere in the $10 a barrel range, which is much lower than most other
conventional plays. We have the ability to have long-term steady production
growth, and we have an excellent management team all of whom are very
experienced in running companies and finding oil and gas. Therefore, we
believe that all of these factors will result in higher share prices, which
are always beneficial to shareholders.
Any reproduction or further distribution of this
article without the express written consent of CEOCFOinterviews.com is prohibited.