My Thoughts on Equal Energy Activism

The pot was certainly being stirred up around Equal Energy last week. One shareholder, Nawar Alsaardi, singlehandedly engaged the investor base of the company, gathering together a group of shareholders to push for a major change in direction fo the company. According to a recent post on Yahoo! message board, Nawar has signed up a significant number of shares:

In total, we have the support of 29 private shareholders, plus two institutional shareholders, those parties collectively present just under 3 million shares, or 8.5% of the outstanding shares.

I’m pretty sure that is enough to petition for a board member to represent the group.

The proposal

Nawar has posted his proposal for the steps he would like to see Equal take as a slide show on slideshare:

The proposal is basically to sell the Canadian assets (Lochend and the Viking) and reduce debt, turning the company into a US based trust that focuses on the Hunton, pays out a dividend, and has the Mississippian as a kicker for growth.

I think its a plausible strategy and I support the move in principle; to pressure management to better promote the company and look for ways to reduce debt. To raise my own personal grievance: if Equal did lose 4,000 acres of prospective Mississippian land to lease expiries (as it seems like they have), that is just not acceptable. 4,000 acres is $10M lost, or around 30 cents a share.

However I am having trouble supporting the specific actions being advocated.   I don’t want Equal to sell all their Canadian oil assets. It seems counterproductive to me to sell what amounts to be many acres of undeveloped land with only about 1,100boe/d of mostly oil production when Nawar (and I believe management) feel these assets would only fetch around $80M in their current state.

The problem is that they would be selling mostly undeveloped land. The company is in the business of buying land and de-risking it; that is the basic value-added premise of an oil and gas company. Under Nawar’s proposal Equal would be selling land that is for the most part not de-risked.

If I were management

I approached my decision to support or not support the proposal as if I were management. And if I were management I would put my focus on the oily areas right now.  I would attempt to “add value” by proving up locations and increasing production. In particular, the Viking has low drilling and completion costs and you could likely gain a couple PUD locations for every well you pop into the ground. Grow that production and then (maybe) look at selling it once you have reached 2,000+boe/d. At that point you would be able to fetch a much higher price for the land and production, perhaps enough to bring down the debt entirely.

Worried about NGLs and natural gas

My other concern is that the proposal would essentially turn Equal into a natural gas and NGL company. I work on the natural gas side of the business and I am not optimistic about the short and medium term future of natural gas prices.

One consideration that rarely gets mentioned when discussing the relative merits of oil versus natural gas is that natural gas and the slightly heaver NGL’s are quite a bit easier to get out of the ground than oil is. They exist, for the most part, as a gas in the reservoir.  There is plenty of energy within the fluid that does the work to lift them out. Its just an inherently easier process then trying to get the heavier hydrocarbons out.

This is why its always going to be easier to drill and find natural gas than it is to drill and find oil.  It is also why I am far less skeptical about the long term performance of gas shales and tight gas reservoirs where horizontal multifracs have been used to produce the formation, than I am of the oil shales.

The second point, which is more immediate, is that everybody and their dog is drilling the snot out of any play that is liquids rich right now. One has to wonder whether there will be a propane glut or a butane glut coming down the pipe (sorry, bad pun).

The third point is that rising NGL production is as much about separation techniques as it is about finding the resource. There are plenty of NGL’s that are being passed through the pipeline with the methane simply because it hasn’t been economic to knock them out. With methane at $2.50 and some of the heavier hydrocarbons significantly higher, its getting economic to do a more thorough job of separation.

There was an excellent First Energy piece on Deep Cut Gas Plants a couple of weeks ago. FE said the following:

Deep cut gas plants are field gas processing plants that have a special processing capacity to extract more liquids. On average, deep cut plants in Alberta extract 3.7x more liquids for a given volume of gas than ‘shallow cut’ plants. This is because of their special processing units and because these plants are located in the areas in the basin where gas is more liquids-rich

First Energy listed the following deep cut plants either under construction or under consideration in Alberta:

Now to be fair, all this is Alberta centric information. I don’t have information on the supply/demand dynamics of NGL’s in Oklahoma. Nevertheless, its a North American market and I suspect the price differentials of a given hydrocarbon can only be stretched so far from market to market.

The bottomline

My basic point is more qualitative than it is quantitative. I don’t like the direction the NGL market is going, and if I were managing a company like Equal that had oil assets and ng/NGL assets, I would be reluctant to part with the oil assets. Getting back to the “if I were management” theme, if I were in charge of Equal the first thing I would do is commission a study of the NGL market in Oklahoma, make sure I understood the dynamics of that market, and from there decide if I should be selling off some or all of the Hunton assets before NGL prices begin to slide.

But the oily assets. I just find that a tough proposition to support. I wish the others the best and if it works out I will eat my crow pie. But I have to stick with what I see that lies ahead here and I just wouldn’t want to create a natural gas, NGL company right now.