Canadian Oil: Growth in the Duverney and Montney, and the Race for MEG

Welcome back to another episode of the Oil Ground Up Podcast. I'm your host, Rory Johnson. A reminder to hit subscribe and leave us a review. Oil Ground Up is distributed in partnership with the ClearCommodity Network at clearcommodity.net and also the Oil and Gas Global Network, the leading podcast network for oil and gas. Our guest today is Mike Spiker, principal analyst at HGM Energy Partners and one of my absolute favorite people with whom to discuss what's happening in the Western Canadian Oil Patch. Our conversation today focuses on two key areas. First, what's happening in the non-oil sand sector of Western Canada with a specific vote net focus on the Motnie and Doverney plays and second, digging into the recently high-volume flomping news of Strathcona's bid for Meg. What makes Meg such an attractive asset? Who else might jump into the ring and what to look out for next? Mike Spiker, welcome to the podcast. Mr. Rory Johnson is good to be here this morning. I am very excited to talk about everything Western Canadian sedimentary basin. The floor is yours. So yeah, just going to sit at the stage here. One of the things I've always loved about your research is you really kind of effortlessly shift between almost like obsessively deep kind of asset level research and I think you have a good skill at kind of being able to kind of zoom higher level and kind of like talk about why it matters. And I actually think that's actually a rare skill to jump between those levels of focus and concentration. So I wanted to just have a conversation with you in the light of everything that's happening in the Western Canadian oil sector or oil and gas sector and most people when they think about Western Canada and I even myself am quite guilty of this quite often, you know, it's mostly an oil sand story. That's obviously the by far the largest flow. You've got, you know, upgrading, you know, I'm working right now a lot on on diluent fuels, which is a fun side story we can get you later. But a side of the oil sands, there is this whole traditional or kind of more conventional depending on how you know how you classify it. Oil and gas sector, you know, wells, shale, tight, tight formations, horizontal drilling, the whole, everything you think about the state side is happening in Canada too. So I just wanted to have you on to talk about two things. First of all, what that kind of conventional or as you will probably correct me later conventional and unconventional non oil sands production sector look like, where it's heading, what the kind of major stories and kind of major trends within that segment are. And on the second half of the podcast, you've had a lot of spicy commentary and I think really interesting research about the proposed acquisitions of mega energy. So you know, what is mega, who is bidding on it, what the future is, why it's an attractive asset and why it's attractive company. So with that in mind, I just kind of want to ask you, explain to me like if I was completely new to this space, explain to me what the non oil sands western Canadian sedimentary base and industry looks like. What is oil, gas, what are the major plays, what are the major kind of issues, hurdles and advantages in the sector? Absolutely. Well, I would say the number one issue that we face is that there's not more do or any production. So you call it unconventional, are you sorry, you'd call it conventional. Most people would consider the emerging western Canadian sedimentary basin, the WCSB plays to be unconventional. So these are shales and tight sandstones, mostly in the Monteney and Duvernay that produce oil, liquids rich gas and lean gas through horizontal drilling and with multi stage fracture treatments. So that the two major unconventional plays are obviously the Monteney and the Duvernay. So the Monteney has been growing conventionally since, well, the late 90s and unconventionally since the early 2010s and really obviously like every other play in the US and Canada, what's driven huge growth is horizontal drilling and fracturing. And so more recently, the Duvernay has really had its time as people have taken learnings from the US, shale plays, the eagle ferd and ported them up to Canada. And the unconventional plays in Canada, Monteney and Duvernay are just as good if not better than what we see in the US. And there are a number of factors that contribute to that. So it's not just the raw quality. We have a better mineral tenure system, we have a more favorable royalty regime. And some people would say that it's unideal to operate in Canada and there are some drawbacks as to how quickly you can grow in terms of egress infrastructure and whatnot. But really the meat of what we have in Canada are the unconventional Monteney and Duvernay. That would be what the largest companies, Tormelene, White Cap, ARC all found their business on and then we have the more conventional kind of smaller scale resource in the eastern part of Alberta. And these would be chasing more conventional sands and smaller, more localized pools and plays. So there's a lot of really good resource throughout the entire province. But the more blanket style resource play, definitely the Monteney and Duvernay to the West. And that's where a lot of the capital has been moving. So kind of 80% of upstream capital that's spent outside of the oil sands would land in the Monteney, would land in the Duvernay. We're going through our own kind of export expansion phase with with energy Canada. And there's a lot of optimism just around plays get better every every single year. And we're not seeing that same momentum in the States. So there's a ton of inventory. It's super competitive. And we get into as much or as little detail as you'd like. But where most of the capital pools is going to be in the Monteney and the Duvernay and then to some extent the deep basin and Charlie Lake and Cardium are all still relevant. And there's still high return drilling to be had in those areas. But on the horizontal kind of unconventional fracked plays be the Monteney and Duvernay. And then obviously the clear water is another huge source of growth that would be similar to the oil sands. It's not treated with a with a frack, but it has benefited from better drilling. I mean, it's not completions, but better drilling knowledge through through these multilateral wells that just kind of expose more reservoir contact. And we've had multilateral drilling really since the since 2003, but being able to space legs really tightly and get a multilateral well done for a few million dollars. And then of course early exploration by spur and those folks in kind of the late 2010s kickstarted that that play. So in terms of outside the oil sands, it'd be the Monteney and the Duvernay, which kind of reigns a premium in that space. Well, let's let's drill down into and forgive the pun into the kind of differences and distinctions between them because I think that they're both gassy plays in the scheme of things. You know, it's it's either pure gas or liquids rich gas. So talk to me a little bit about let's start with the Duvernay. So I think I think all of this is going to be affected for instance by natural gas market dynamics in the start of a village in Canada and everything there. I typically think of the Duvernay as the more even more liquids rich aspect of this is that correct? That's right. So in the Monteney, you have local geological dynamics that impact where you're going to find oil and where you're going to find gas. And that's because the Monteney is a traditionally self-sourced play but there's also hydrocarbon migration and and sourcing from other shales and source rock that aren't within the Monteney pay column. So I get into that in a minute, but the Duvernay is a traditional shale as in it sources itself and the hydrocarbon phase. So whether that's oil, volatile oil, liquids rich gas or condensate or lean gas is a function of of the carogen transformation into how deep it was buried, the burial temperature and and how long it's had to transform from organic matter to producible hydrocarbons. So essentially the longer and the hotter this organic matter has been cooked for in situ in place, the leaner it becomes. So if you have a cooler slightly shallower burial, you can expect oil and the deepest parts of the Duvernay produce wet or lean gas. So it's a shale in the traditional sense where it follows the traditional phase windows as it dips downwards, it becomes leaner. There are sweet spots where you have over pressured condensate, over pressured over pressured rich gas and it's really what people would be familiar with if they know about the Eagle Ferd and if they know about the real shale plays in the US. So the Duvernay is more of an oil and rich gas play and what you would kind of compare to say certain parts of the Permian. So you have a really big oil window, a really big condensate window. There are some unique factors in the Duvernay that it's really rich itself. The gas is physically very rich in propane and butane and other lighter NGLs. So 50 or 60% condensate would be kind of what you would expect from a typical Duvernay well in a real sweet spot but you can go up to 70 or 80% oil. So you have different phases, there are some parts of the Duvernay where you'd get 80% gas but for the most part there are some basement heat interactions and some other very localized phenomenon that at K-Bob which is the most familiar and most developed part of the play, you do have a really wide condensate window and condensate for all intents and purposes. I know for you this is going to be sacrilegious to say but condensate is pretty much oil. Right. When you're running economics. I think you might get a lot of people on my Twitter feed very angry by saying that but given the fact that I think it's important for a lot of people to understand liquids accounting I think is contextual and I think that a barrel of say condensate stateside might be treated differently in what it's used for than say in Canada because virtually every barrel of condensate or lighter hydrocarbon in Canada ends up in the bitumen diluent pool. So it basically all becomes ultra light, you know liquids but it becomes blend into heavy WCS barrels at the end of the day for the most part. So I completely agree that it is oil in the kind of truest flowing sense. Where is, so like, talk to me about like where production has, like how fast is the Duvernay bin brewing? Is it a more recent kind of explosion? Is it a spin kind of a steady thing? Talk a little bit about what the costs are like on a liquid basis. How much is it costing to produce a barrel of that condenser? Okay. All great questions. All right. So this is going to be small peanuts for any U.S. listeners. The Duvernay really today is only 250,000 BUEs a day and that's sales volumes. So of that 250,000 BUEs a day and this is going to be rough math. About 125,000 barrels a day would be oil and condensates. So that's well-head oil, plant pentanes and condensate that's treated in field facilities. You'd get a pretty good weighting of NGL so propane and butane's. Ethane is not an NGL in our view but that's for another day. And then the rest, the balance would be sales gas. So there's a lot of gas shrink in the Duvernay and that kind of is getting a little technical but about a quarter million BUEs a day, half of that is high value oil and condensate hydrocarbons. So really nothing in terms of a U.S. production. The entire Duvernay would be comparable to what an average or low-sized smid cap would produce in the U.S. and this is what I would say is kind of our crown play but there's tons of inventory. So you would place well over 5,000 locations in the Duvernay with a good number of those being very comparable to what core or tier one inventory would be in the U.S. So these are well as a cost around 10 million Canadian dollars, give it up to 12 or 13 million dollars in the deepest parts of the Duvernay but they're recovering three to four, 500,000 barrels of oil and two or three B.C.F. of sales gas and around 80,000 barrels of NGLs through a shallow cut facility. So the F&D costs on these wells are extremely low. It's about $10 per BUE. And the Duvernay also benefits from the Canadian or, I should say, the Alberta royalty framework, the modern royalty framework where the crown shares in the capital and operating costs of these wells. So while in the U.S. you might have a quarter royalty or an eighth where you would give a no deduction 25% revenue payment to the mineral owner, in Alberta it's a bit different. You give 5% to the mineral owner, the crown, the citizens of Alberta and once that well has paid back and the pay back numbers are generous, you then pay a royalty that slides based on pricing. So the royalty over the lifetime of the average Duvernay well is about half that of the royalty that Eagle Ferd or Permian well would pay. So we benefit from a better royalty structure and a better mineral tenure structure and then these incredible F&D costs which put up kind of three, even four times recycle ratio on a well level. So kind of think of it as a million BUE's, half of that around liquids in the core of the play and 10 to $11 million per well. So that's really workable and really comparable to what people and EMPs in the Midland base and what expect where companies would put up kind of 400,000 BUE's estimated ultimate recoveries and they do that for around $7 to $8 million per well. But obviously we have the royalty advantage and a better mineral tenure system. So very similar to the US and very similar both in terms of geology and in terms of economics. And also in terms of Permian gas dynamics, both ACO and WAHHA are zero forever. So really very, very comparable place, the Duvernay and your Texas shales, your kind of Keystone plays down there, the Eagle Ferd and the Permian. So really these are phenomenal wells and there's a ton of Duvernay. There's a ton of inventory. We have seen new companies enter kind of new plays in East Shale Basin which have been previously explored and they've been able to accumulate massive resource positions for talking inventory, positions that are larger than some individual US smid caps are close to some of the large caps in terms of core liquids inventory. The Duvernay has been explored and been active since 2014, even a little bit earlier, but really when US Shale took off, the Duvernay Shale took off with talisman and cana, repsoll, shell, chevron, XTO through imperial and really having big flagship positions in the play. Obviously US Shale stole the spotlight from kind of 2014 onwards and it was kind of tough to justify capital in Canada, especially when the Duvernay was still in exploration mode and the US plays were in manufacturing mode. But now it's really coming into its own where you're putting up really strong F&D costs, getting well costs down to kind of what you would consider to be manufacturing specs in the US and it's a great play. And it's not huge in terms of US resource. It's material for a birch. So just for listeners kind of context, if the oil sands are producing roughly ballpark 4 million barrels a day of synthetic and raw bitumen and then in total the non oil sands production of birdas give or take a million barrels a day roughly half of that's what we're all called conventional or non oil sands fruit and the other 500,000s about kind of natural gas liquids, pentanes, butane, etc, etc. So of that million roughly a quarter is being derived from the Duvernay you'd say. So what about the Monteney? How does that come in? Are we talking much larger? How does it differ in contribution to the kind of liquid balance in Alberta and Western Canada? The Monteney would be about 400 and change thousand barrels of condensate and oil and pentanes, but a far lesser pentanes and condensate weighting than the Duvernay. So the Monteney in total would produce around 2.2 million B.O.E.s a day and around half a million barrels a day of liquids. So around a 20 to 25% liquid weighting compared to the Duvernay at 40 to 50% kind of thing. But the sweet spots of the Monteney, the condensate rich Monteney produce similar kind of 50 to 60 and even 70% oil U.Rs with absolute figures being 3, 4, even 500,000 barrels of oil and condensate. Though the catch is the oil and condensate fairway of the Monteney is far smaller in relative terms than it is in the Duvernay. You have condensate fairway in Alberta and an up-dip oil fairway throughout Alberta and you know. Can I pause you for one second? Can you define what you mean by fairway? Absolutely. Okay, if we rewind, we think about the Duvernay in terms of a self-sourced shale in the Monteney and you get both hydrocarbons that are generated in the Monteney and then migration from source rock outside of the Monteney. And so when we're talking about fairway, we're generally talking about phase windows where we can expect similar repeatable results. So in the Monteney, these fairways are, they are defined by burial depth and temperature and all of the other factors that you would typically associate with defining phase windows in an unconventional play. But because it's also a tight siltstone rather than a totally impermeable shale, you get hydrocarbon migration throughout from down-dip to up-dip that kind of messes with things. So you get gas that moves through areas of permeability from the deepest parts of the play to the shallowest parts of the play, right? Through essentially these kind of permeability conduits and that can greatly change the fairways or the phase windows. So when we say fairway, we kind of mean it synonymously with phase window, but in the Monteney, the phase window, you can get kind of really great and phenomenal condensate wells in a gassy phase window. And so we prefer the term fairway as to where we can expect kind of a tight range of recycle ratios, e-wars, and similar repeatable results mainly when it comes to oil and liquids production. So in terms of fairways in the Monteney, the oil window and the oil kind of play is much smaller and it's mostly kind of on the north side where the heavy hydrocarbons have migrated upwards to the shallower parts of the play. And these are these areas are kind of largely controlled by one company, WhiteCap, and then a number of smaller E&Ps and exploration companies, some are private, some are public, but it's much smaller than are about a thousand kind of core up-dip oil locations in the Monteney compared to multiple thousands for oil locations in the dupernet. And then in a relative context, right, the Monteney produces far more oil than the dupernet. So it's a smaller play relatively, but the Monteney is much larger just in terms of its absolute size, ignoring phase windows. And the Monteney also extends from northwestern Alberta into British Columbia as well. Are there any material distinctions between operating on others at the border? Or is it generally treated as one kind of contiguous region? Yes, there are lots of things we can, we talk about this for five hours and we would only be a 10% grit. How about you do two minutes on it? Oh my God, that's tough. That's even harder than five hours actually. Okay, the Monteney is about 500 kilometers from the southern tip to the northern tip. There are some big boy. Yeah, it's pretty much the same size as the Permian in terms of total acreage and exploitable inventory. And there are some minor differences in terms of royalty structure and in terms of land tenure and where you send your gas and which transmission system you tie into if you operate in BC or if you operate in Alberta, but it's the same petroleum system. So as a general rule of thumb, the Alberta Monteney is more liquid weighted is more is oilier than the BC Monteney. The BC Monteney generally kind of all operates under the deep basin over pressure system and the Alberta Monteney. There's some conventional parts that introduces that kind of up to oil fairway that has seen some pretty material successful well results recently, but keeping it to keep it into 120 seconds. There is not a ton of difference other than the BC Monteney is generally gas here. It's far more consistent just given its deposition and kind of its local geology and the Alberta Monteney was more or less kind of the first part of the play to be developed at Kaqua and the BC followed. And actually the BC was a little bit earlier at tower by in Canna, but there is not a whole lot of difference between operating on the BC and Canadian side other than BC gas prices are even worse than in Alberta, which is a tough thing to imagine that it could get worse than Alberta. So on that talking about I think I as you will know I typically try and steer clear of gas, but I think in this setting it's difficult to avoid and finally particularly given the only start up of of LNG Canada. So talk to me a little bit about so obviously LNG Canada is being fed from the Monteney and coastal gas link and everything else there. So you're getting some of the gas off take there. Is much more of the gas come down into the BC side from the gas year side of the Monteney or is most of that gas and processing of structure heading into Alberta? Alright, so the major Alberta transmission system which is NGTL, it's run by Trans Canada. There is a lateral that extends the North Monteney main line that extends into BC. So as a general rule of thumb BC can ship gas into Alberta, Alberta can't really ship gas into BC. It is some very minor exceptions to that rule, but broadly you have some BC takeaway that goes on to NGTL. There is some BC takeaway that's fed onto alliance which then goes down into Chicago to be processed. But for the most part BC gas goes south down west coast and is sold into the US or it exits via coastal gas link which is now just starting and it's shipped out via LNG. There is not a ton of of BC egress which is why you hear about kind of zero dollar prices so often and so frequently. It is a kind of a rule we say that Monteney could produce 25 BCF a day tomorrow if we wanted to, if we had that sort of egress. So why prices are consistently so depressed is we just haven't churned through, we haven't even churned through low cost or zero cost liquid rich inventory, let alone our one, two and three dollar break even inventory. So most of the BC Monteney is owned by integrated producers so that's Petronas, Mitsubishi, through the CutBankRidge partnership which is a Vintav and Shell and these companies have integrated export capacity via LNG Canada. So the big dream is that these producers which also sell their gas currently onto the Alberta Spot Market or the BC Spot Market will free up volumes on those main gathering and transmission systems so that other producers can backfill that and hopefully there's some tightness and storage reacts etc etc. But for the most part BC production is by the integrated LNG producers or want to be integrated it's soon to be integrated LNG producers in the case of Pacific Cambrian and is largely earmarked I should say for LNG export. So it's a phenomenal gas resource and there's obviously a lot of validity for these producers wanting to export it but as it stands right now, Canada just we don't have the export infrastructure whether that's pipelines to the US or LNG exports or local demand technically not export infrastructure we just don't have the egress to take away for such high quality resource. I think that's an interesting point. I think one thing that I've heard a lot and again I like to dabble in the policy space to my own detriment many many times but I think one of the criticisms that's often been raised in the context of the same LNG Canada or broader more Canadian LNG build out has been for instance the Australian example where you had a large scale build out of LNG a lot of committed gas those facilities and it kind of distorted and raised domestic Australian natural gas prices at least as critics argue to the detriment of the Australian economy and kind of their own kind of gas and power dependent industries. But kind of what I'm hearing from you is essentially this is like if you put another LNG facility of equivalent size right next to LNG Canada your what your comments to me are implying is that we could basically fill it for almost zero dollar feed stock in many cases equivalent that you there's so much supply pent up in the mottany that we could basically continue to tap it with as many kind of LNG straws that we want without really having any material effect on broader Canadian let alone even kind of Western Canadian gas pricing that it says it correct me if I'm wrong no you're you're bang on and now we should define material because in a relative in a relative sense it will be material I'm going to look right now this morning station two trades at three cents per gj so that's the first year and that's actually infinitely more than zero it's up infinite percent day over day so station two might go to three dollars which would be which would be a material increase on a relative basis it would still be some of the lowest cost gas on a global basis so the mottany has has well over half a QCF which is 500 TCF a recoverable natural gas that's similar to the Marcellus right which produces well well over 20 BCF a day and Canada as a whole produces 20 BCF a day kind of give or take right so the mottany if if we apply that same American exceptionalism to our own resource could easily easily produce at 20 BCF a day head eyes closed kind of we could do that and ramp it overnight what producers lack right now is you know there's some egress issues and processing issues all can be solved by building more infrastructure it's all solved by money essentially but in terms of the geology the resource absolutely if I look at our North American cost curve and specifically our candidate cost curve there's four four dollar mmbt you gas we've got 50 years of supply below four bucks and it's it's not infinite natural gas but it is a ton of natural gas there's there's more gas in place in the mottany than than the entire country of Australia and that's including all their unconventional sales it's including the beetle and and all their kind of emerging plays the mottany can produce more gas in the country of Australia and currently produces less than half right so if if we gave export capacity even if we gave the the surety of three dollars to these producers we could ramp volumes material materially from the mottany and there's no doubt about that and then the mottany benefits from from a liquid stream in their gas which the the Haynesville and the Marcellus don't so and in the U.S. you get really dry gas you get no propane no butane and typically no condensates the mottany there is a thin oil window but there's also a thin true dry gas window where there's zero liquids at all so the mottany also benefits from having kind of 30 or 40 thousand barrels of oil and condensate that come with 10 BCF gas so it's a very well-rounded gas play as well so you know so ten bucks any three go ahead so I think so I as you know I have a chat with you about this I've been doing a lot of work right now on the Alberta diluent pool and kind of again sticking coming back from the gas side to the liquid side one of the main things I'm thinking out here is that Alberta is chronically short diluent and condensate so as we begin to produce more gas and unlock kind of some of the economics in these basins what is the trajectory of kind of that you see kind of or Canadian pentanes condensate other kind of you know classic diluent streams how does production outlook look for those and and you know is there an opportunity within the next say five to ten years to reduce the need there's reduced the call on U.S condensate imports so again for anyone that's that's not aware Alberta imports via both the southern lights and coach and pipelines and smattering other kind of sources roughly 300,000 barrels a day of condensate condensate and pentanes from the U.S. in order to you know fulfill the call on oil sends diluent is there an opportunity to source more of that domestically and then you know if that does in fact happen could we one day for instance reverse those pipelines you know to to free up more egress out of western Canada the answer I would say is no now I think I think it's tough to underwrite Canada ever reversing southern lights or stopping imports of U.S. condensate and mainly for two reasons if we're going to underwrite massive gas growth we're also likely underwriting to some extent more oil sands growth because there's been some exogenous factor like a revitalization of of infrastructure permitting and etc etc so if there is massive mountaine gas growth we'd also expect some quantum of oil sands growth but in just in general in terms of how the mountaine has been produced today a lot of the yearly development was targeting the really condensate rich parts of the play a inventive and incant slashing can at tower arca Dawson and now conaco at Inga and fireweed and so a lot of the the really low hanging condensate fruit in the mountaine and the doverna have been mostly exploited right there's not a lot of kind of pure condensate growth left I would say in the mountaine there's a ton of liquids rich gas growth left in the mountaine but with that you may be get an incremental one or two hundred thousand barrels a day of condensate for a context formerly produces around 80,000 barrels a day of condensate along with three BCF of natural gas so we kind of underwrite a ratio similar to that where for every three BCF you get kind of if you do a hundred thousand barrels and if we were to grow 10 BCF maybe at that point we could ween off US exports but at that point I would also hope we're producing two or three million barrels a day more of our of our beautiful oil sands resource and we would still need we'd still need that that cheap US condensate so a lot of a lot of the really low hanging condensate development in in the mountaine has been tapped that's kind of the arc cacua formerly paramount, wapiti and car, a ventive at pipe stone a lot of that kind of 43 to 50 degree API light diluent pentane stream is kind of producing what we'd expected to produce run rate over the next 10 years so could we accelerate it yes but but more or less we'd say you might get to a point over the next decade where with no oil sands growth you can reverse sudden lights or reservoirs imports by unfortunately don't think we'll ever get off of US condensate imports we'll be right back after a short break everyone Trevor Hall here host of the mining stock daily podcast and CEO of Clear commodity network if you're looking for timely interviews sharp market commentary and straight shooting insight into the mining and metal sector mining stock daily is the show for you we cover the latest mineral discoveries company moves and the macro forces shaping global metals markets every trading day and now we're part of the clear commodity network bringing you trusted voices across the entire resource and commodity landscape you can find mining stock daily on your podcast network of choice and at clear commodity dot net clear commodity network digital news on the physical markets hi this is Chris Barry host of the power current podcast throughout my investing life I've been obsessed with a single question what happens when commodities geopolitics and technology collide about 15 years ago I founded an advisory firm to help answer this question for both companies and investors alike and the power current podcast is an extension of this effort each episode we dive deep into the current state of the most important markets companies and technologies that will power the revolution in energy today and into the future find the power current podcast wherever you get your podcasts and now back to my conversation with Michael spiker at the end there you mentioned the prospect of you know if if there is no growth in the oil sands which is obviously my personal nightmare no growth in the oil sands but I think well I think I started an initial genesis for this conversation was the non oil sands players the dover name in particular and your love of that particular play obviously over the times I first asked you about your interest in coming on the podcast the story in western canadian oil and gas has become a little bit more oil sandsy in in this case in the proposed takeover of of Meg so Meg is for those that are unaware of the major oil sands player it is you know it isn't a major oil sands player but it's the smallest of the kind of the major crew so before we even get to the you know the stress cone of bid and the potential for alternative bids from other from other players just tell me a little bit about about Meg so we're we're leaving the non oil sands plays for a second gonna dig right down in the oil sands so tell me a little bit about Meg why it's a company that I think a lot of investors find a trap attractive and I think in this case why stress cone to find it so attractive for sure well the oil sands see some of the greatest resource on earth you know that it's it's unconventional in the sense that you know you can't stick a a strong to the ground and produce it it's it's not a kind of a trap and seal but it's not conventional in the way that it declines in the way that it demands maintenance capital over the life of the asset so Meg is such an attractive asset because it's such it's just such a high quality resource and so kind of generally the oil sands you'd have in situ or and mining and upgrading but in situ and and sagd has come a long way over the past decade we've gotten very very efficient at at producing in situ bitchman and so can you can you underwrite kind of 50 years of a resource for the oil sands players absolutely and you can't it'd be really tough I would say to do that for a lot of the companies in the US that are also producing at oil at a very high kind of liquids waiting you could maybe get to 50 years for for a very select few of kind of rich gas or gas producers but for the oil weight of producers in the US it's very hard to get to the same resource duration that the oil sands offer at the same free cash flow margins so obviously oil sands is is a lot more capital intense up front but when that capital is sunk you get really just a phenomenal asset very very low demand for maintenance capital and you get kind of a free cash flow stream and a resource stream that lasts decades and decades and so you get you there's huge differentiation in terms of of oil sands resource quality at the very at the very peak you have the thickest rock the highest oil saturation the fewest number of impermeable shale baffles that allow that kind of block the steam chamber from accessing the full pay column you have essentially the lowest number of variables or factors that would impede steam from accessing the full resource and producing it in the most efficient manner as you move down the oil sands food chain you add in lower quality factors whether that's thinner pay lower oil saturation thief zones or or permeability baffles that that makes it essentially more capital intense to both produce and maintain the assets but also up front it requires a lot more money to build the steam and emulsion facilities because you have to inject more steam you have to handle more barrels it's it's a more intense operation to produce lower quality oil sands resource so may is such is such a gem because it has really high quality oil oil sands resource and you can produce it so efficiently you can expand it so efficiently and there's not a lot of of that really tier one resource especially that's producing that's permitted that has expansion projects underway and having that is a huge asset so it's not hard to see why straffcona wants that in their portfolio because traditionally they would have lower quality oil sands resource and and Meg is is a is a crown asset it it's capital efficient to expand it's incredibly incredibly easy I shouldn't say easy is this is no shade or or or no disrespect to anybody that operates the assets but it's it's it's extremely acid extremely easy asset to run very efficiently because it's such a simple and high quality business at its core so then if it is such a gem such a kind of a crown jewel amongst kind of various tier one if you want to say oil sands assets why is it in a position why is it in this position the first place why is in a position that you people are coming in with offers or bids for this for this this company then are lower than I think many investors are attracted by yeah no that's a that's a good question so over the life of of Meg as it has existed over the past you know well over a decade it went through a large capital cycle right coming out of the 2014 oil price cycle and at that point there wasn't really anybody to acquire it because everybody was struggling then coming out of that slump 2019 I obviously husky tried to acquire it and you know Meg told them to pound sand and then you had we had this oil price spike another cycle into the kind of 2022 2023 time frame Meg began to grow and then in 2024 Meg sent sanctioned a large official expansion project where they were going to add and officially expand their full facilities add more brown field type expansion and before they were just kind of doing these small expansion projects could be maybe debodal necking nothing nothing that needed a full kind of fledged program and then in 2024 they came out and said well we're going to officially expand our our resource we're going to add 25,000 barrels a day of capacity and you know at that point the market didn't like it for for whatever reason right and and there's a there's a lot of of very short-sighted participants in the Canadian upstreet market they're focused too too much on free cash flow and you know fiscal year one and fiscal year two rather than long term to asset value and and the stock the stock struggled for sure and the stock actually got down to a point where the people that were mad about Meg growing and canceling their buybacks let's talk about down to a point where that Meg could fully fund their 10% buyback and their growth and it was kind of ridiculous but what kind of over the last year or two years Meg has been I don't want to say punished but more or less kind of ignored or or scolded for going through a capital cycle and then over the first decade or kind of the intermediate decade of its existence there wasn't a ton of of industry M&A and and what M&A did happen was more or less distressed and so Meg isn't distressed today but their share price was was widely attractive we like to do these kind of probabilistic simulations and and we had before Strathcona acquired Meg at the at the price that they were trading at kind of 21 bucks we had Meg would generate a risk 20% IRR for the equity holders over the next eight years which which is incredible right that's to own a very liquid asset and company of that size and to be able to generate returns like that is you know it's a great opportunity if you can kind of look past people that are discarding it because they're growing a little bit right so Meg was kind of in a soft spot in the capital markets nothing to do with the underlying quality of their business right there's these disconnects in the capital markets all the time we see that in the in the upstream sector and and that's what Strathcona took advantage of right they sold their Monteney they put out those assets in play decided they were going to attack when it came to Meg and it was it was incredibly opportunistic it was not this is not because Meg is distressed this is not because Meg needs somebody to save them for the for the first decade of their existence they were kind of more or less I don't want to say irrelevant but but growing and and not ready to be marketed and then the market has presented this this disconnect between their intrinsic value and what they trade on the on the open market and it's Strathcona struck it kind of it's it's as simple as that and then now they've triggered another of their own Meg's own process right and and you'll probably see a number of of competing bids but there it was nothing more than than opportunistic in terms of of Meg's share price and the watchers isn't and Strathcona decided to strike it while taught while while it was available so tell me a little bit again for listeners that aren't aware tell me a little bit about Adam Watchrose and and the and and Strathcona's strategy like what Strathcona's actually doing in the West today in O patch and I think also tell me a little bit about some of the other potential competing bidders like again with to your point it kind of like you know Meg wasn't known was paying attention to or known was was you know looking to acquire Meg during this period but now that Strathcona's made this bid you know you've kicked off this cycle where everyone's gonna try and throw their hat into some degree so tell me you know tell me a little bit all the all the big players that are going to be in this this competition for this for this company and is there any chance of the end of this that everyone walks away and that Meg kind of goes forward continuing on an independent basis like it is oh I'm gonna give myself in trouble this is a this is a good question but it's it's uh it's one that I and for all listeners this is not this is not advice this is not you know these these are not it you know we're not advising you along any of these lines but again I think it's just again from in the in the spirit of context for what's happening in in the western Canadian oil patch right now I think this is you know this is the biggest story in this particular moment and I think a lot of taller helps because I think I myself included I don't follow these companies super closely and all you'll see headlines come across and quite frequently I'll just ask you what is this mean so now I'm gonna ask you for our listeners as well okay I'm not gonna get myself in trouble with the regulators I'm gonna get myself in trouble with all the all the companies we're about to talk about all right so going back uh Adam Watchress the Watcher's Energy Fund this is a private equity fund that was that was seeded in in the mid 2000 and 10th saw 2017 they began with the acquisition of mosaic which was a condensate rich money producer and their original view was they were going to acquire this really good competitive resource in Canada right as we discussed in the earlier part they were going to acquire locations drilling sticks that could compete head to head with the Permian and they did that they acquired mosaic out of bankruptcy they acquired some assets from Paramount and they put together a really really good Montenay asset at Kakwa this was really probably some of the best rock in the Montenay and they recently sold that in a bid to focus on the oil sands so they kind of consolidated the Montenay and I shouldn't say consolidated the Montenay but they built a good position for themselves through to 2019 and then when everything began puking and the oil sands producers that were carrying too much down their balance sheet began tapping out pen growth osam etc that's when they started acquiring these oil sands assets and these were assets that had existing infrastructure but the negative factor was more or less they had a capital stack that wasn't able to bear $50 WTI so the the watchers is they they'd raise the private equity fund they deployed that capital into acquiring some of these oil sands resources and assets and they did it incredibly well buying pen growth buying osam buying these assets essentially at the lowest oil prices will probably ever be kind of thing right and then they started yes knock on wood that's right and then but then they started acquiring other oil sands assets to complement their portfolio they acquired assets from snow vise and then they acquired saraphina in 2022 and these acquisitions were much richer right these acquisitions were arguably not good they definitively paid too much for saraphina right and and so they have made some really good acquisitions and very good dispositions throughout kind of 2017 to 2021 and now they've capitalized in selling the mottney they did an incredible job with that right twerling paid too much for the mottney and that was you know earlier earlier this year that they saw virtually all of their mottney assets for what with a 2.8 billion give or tick that's right about three billion dollars they sold all of their mottney twerling paid too much for ground birch arc paid a maybe a little bit too much for cacqua and cinder oil got a good deal on pipe stone so they acquired pipe stone they went public via pipe stone in 2022 or maybe 2023 by timeline on that as a little bit rough but they went public through pipe stone that was their goal with pipe stone was to become a public vehicle and and then they sold it for essentially a small gain and they sold all their assets earlier this year in 2025 and now they're focused back on the oil sands and it's easy to see why you want to be focused on the oil sands the oil sands players have effectively no leverage they have huge free cash for margins so if you're a private equity player it's it's very easy to add a large amounts of leverage to companies that have no leverage and trade exceedingly cheap right so if you can buy the was an unlevered oil sands producer at four times cash flow and you're okay adding four times cash flow leverage to it which is high but not exceedingly unreasonable right if you're a oil sands player you can get these assets for free right now not free but you can add a ton of leverage and you can employ very little equity and it's very easy to see why you would want to add if you're a private equity company on the other hand the money is more capital intense and there's huge disconnect in kind of what the oil sands assets should be priced at long term and what they're priced at right now so the watchers is they disposed of their money assets this year that was after taking Strathcona public the watchers energy fund owns 80% of Strathcona they've got multiple funds they've done multiple raises but kind of as a one entity they own 80% of Strathcona and now Strathcona is strictly focused on the oil sands and the heavy oil fairway so the watchers have done a phenomenal job right there's no doubt they're very very very talented and very good at at what they do which is moving assets around which is M8 right the background Adams watchers background was he ran the watchers and co which was you know the best A&D boutique in the city for a very long time it was acquired by Scotra Bank and you know he was the best at doing that they were they were number one in A&D they've seen it all and generally kind of we don't expect them to lose when it comes to A&D they are not very talented heavy oil developers right so the oil sands that asset the Meg has put together extremely talented heavy oil developer watchers energy fund in Strathcona extremely talented at moving money around and making a ton of cash timing transactions right which by the way there's there is a place for that in the WCSB the A&D market is markedly slower in Canada than it is in the US so if you have a willingness to move around as we saw they did in the Monteney you could make a ton of money and there's a total market for that and so now they're very reasonably looking to add leverage and looking to acquire oil sands assets because that's where the long term opportunity is so there are private equity fund Strathcona I would say as a side car if you're a public equity shareholder in Strathcona you are second you are lower in the capital stack than watchers energy fund their LPs are number one that's something that people need to know and consider when thinking through this deal right the very fact that watchers energy fund is subscribing into the Meg deal via subscription receipts tells you that they're okay squirreling away a little bit of that accretion and that there's enough accretion in that deal that they can dilute through you know incremental equity subscription so it's a very it's a very uh I want to say messy but it's a very complex and very A&D focused very transaction focused business that they run the other hand Meg and the other oil sands assets the best of the best are not focused on A&D they don't have M&A mandate right yeah so when people compare Strathcona to Meg you know they say oh Adam Watchers is a better financier or a better at A&D he's he's got a better tune of the of the WCSB acquisition market well Meg doesn't have an acquisition mandate their mandate is to capital E efficiently expand Christina Lake something they're doing and something they're incredibly good at and a kind of important note is that if the watchers is want to go expand their assets they're going to have to pay more money to do it to get one barrel a day out of the ground kind of to build a one barrel a day or a thousand or a hundred thousand barrels a day of bitch human production at Lindbergh at Tyga at whatever the watchers is asset whatever Strathcona assets it's going to cost more money up front for compared to Meg so while they operating margins may be similar the long-term capital efficiency of what Meg has at Christina Lake is markedly better and so that's not reflected in kind of the day-to-day earnings and metrics that they highlight but that's essentially the Meg's better quality geology driving a long-term more desirable asset so we've kind of gone a little bit off base but broad strokes the watchers have run a private equity fund for close to a decade Strathcona is an amalgamation of all of the assets they've acquired throughout the basin and all the assets they have right now they've focused primarily on the oil sands for a very good reason because you can add material leverage to these business and get 40 years of reserves for free in terms of what the equity owns and they focused on Meg because it's an extremely high quality asset and it's been kind of mispriced so they're not there's not they're not exceptionally talented oil sands operators right nobody was will disagree with that I don't think Strathcona would disagree with that they are exceptionally talented and moving money around the basin and you look back and if you have two billion dollars to play around with in the WCSB you can make a ton of cash there's nobody else kind of doing what they're doing so good on them for moving but we don't think that the asset will go to Strathcona at the current price of their offering we think that so if let's talk a little bit just before time here talk to me a little bit about so you've talked a lot about Strathcona versus Meg I think skill sets culture to you know talk to me a little bit about some of the other potential bidders I mean obvious the obvious kind of options are the other oil sands majors that are also companies that kind of live and breathe this space so what makes them more or less kind of attractive in just a few minutes on heroism closing thoughts oh we don't have we don't have another three hours I'm disappointed um okay have you on again Mike oh I could we could talk about this for a long time okay rapid fire really you have a handful of true bidders C&L Suncor and Sonovus you could get Imperial in there and we think it's unlikely that Conaco gets in there because they ultimately sold Christina Lake to Sonovus in 20 2017 2018 when they disposed of all of their Canadian assets besides the money so we think it makes a ton of sense for Sonovus to sell their deep basin whether that be to Tormelene or even Payto paido is done an incredible job improving costs on their previous acquisition so we think they could get it done but there's a funding mechanism in the deep basin for Sonovus to then go and use cash to acquire Meg the huge accretive deal for Sonovus right they share a lease line they would be able to not only drive GNA synergies but one of the few companies that would drive true operating synergies we all just for those that are familiar these they're two kind of crown jewel oil sands instead of us are literally a pro like much global they share they share they share they share like a shared fire crew kind of thing they already share resources so it would be a hugely sensible deal for Sonovus to want to acquire this we also think there's a mechanism where they sell sunrise to Soncor obviously Soncor needs to expand their base mine upgrade or life and it doesn't have to be with mine bitumen it can be with in situ bitchman production sunrise is a Sonovus asset that sits directly adjacent to to what Soncor has there's also another expansion asset at telephone lake that they can package in and that solves a problem for Soncor which is base mine so it the ultimate most sensible outcome is that Sonovus packages out sunrise and the deep basin and uses cash to buy Meg their kind of net oil production would be plus 30 40 thousand barrels a day but they'd drive be able to drive huge gene and operating synergies their net cash flow would be would be fairly material and that's the most logical outcome now see an RL could buy it they would have a kind of a tough time taking it on the balance sheet as they just finish the acquisition of Chevron's Canadian assets but they could get it done and same with Imperial but Imperial has just been on such a run buying back stock they're expanding their own Aspen project in the next few years we're not 100% sure that Imperial is is ready to to acquire Meg like this so really there's one outcome in our mind which is Sonovus buys it and we think Sonovus will come in at at about 20 bucks 29 bucks and we think that they can easily do that they can fund that if they wanted to they could fund that on the balance sheet without any asset dispositions but it makes a ton of sense to to pair that and marry that with dispositions that would not only solve problems for other companies and and be able to fund this for them but streamline their own business we don't think Sonovus needs to own the deep basin like they just don't and and in terms of just a couple a couple final final thoughts here so in terms of what we're looking for next so we're we're recording this all around noon on Tuesday July 29th as of yet we don't have any we have no other announced bids for Meg what what are the kind of you know it's frail markers which we should you know we and other kind of market participants and investors should be looking for on what's coming down the line are we all just waiting for a snowman's bid or is there anything else we're kind of waiting for to kind of see how this all sorts of stuff out yeah we're just waiting for Sonovus but it's it's that simple so Strathcona is not in the official Meg sale process because they're not going to sign a stanstil agreement right they still want to complain and moan about things so they're not good to essentially remove their ability to do that and the bid deadline was yesterday right it was Monday July 28th and so we assume that Sonovus will have made a bid and the Meg the Meg board of directors will accept that bid and and that will be that then Strathcona will pull whatever lever they have to put the outcome to a shareholder vote and ultimately we think that Strathcona will try to come in higher than Sonovus if that doesn't happen we would assume Sonovus Sonovus is successful in acquiring Meg and all we're waiting for is that to be released so really the ball is in Meg's court we assume pretty much know that Sonovus is bidding they've socialized that over stampede all of the brokers are are discussing it right it's no secret that Sonovus is going to make a bid now it's will Meg accept that and how will Strathcona react right Strathcona has recently said oh we're gonna pay a special dividend we don't think that'll happen think they'll increase their bid for Meg and we put to the shareholders and at that point really the option is Sonovus or Strathcona there's a low likelihood that Meg remains independent right if it was to shareholders independent or Strathcona we'd say there's a very high likelihood Meg remains independent but if it's Sonovus or Strathcona you think it's mostly a done deal and so right whether it's cash or stock or whatever really at the end of the day the dollar value matters Strathcona is far lower than then Meg their initial implied bid was kind of something like 23 bucks and Strath sorry Sonovus we expect would come in around 28 or higher so really we're waiting for Meg to just say we've received X number of bids at X dollars and this is what the board has decided to move forward or not move forward with but because Strathcona is not in that process after that happens we assume it'll become super messy I don't know what will happen but it'll become gross and and very entangled but our base case is that Sonovus comes in higher in around 28 29 bucks awesome well my that was really really fascinating I learned a huge amount and just before we before we let you go you tell our listeners where to find you and where to find some of HTM's research please don't know I'm kidding you can find us at htmog.com we are not accepting new clients we're fairly tight with our research but there are some examples and some past insights there that you'd be able to read and interact with us so keep a tight client base and a tight business and we're really exceedingly happy with really made the WCSB a playground where can we go create value and position clients to win so if you visit our website there's some examples of our work and and you can kind of chat with us but that's where that's where you can find us awesome thank you so much for joining us Mike awesome I was it was a pleasure to be with you this morning worry the information presented should not be considered investment advice clear commodity network and its affiliates are not responsible for any loss arising from any investment decision in connection with the material presented herein please do your own research or speak with a licensed financial representative before making any investment decisions