(By Mani) The Viking play in southwest Saskatchewan has seen significant
investment since the application of horizontal multi-stage technology over the
last five years. The industry has spent over $1.5 billion in the broader
Dodsland area since late 2007, resulting in over 1,300 horizontal Viking wells with
435 licenses to drill more.
Clearly, the oil & gas industry is interested in the
opportunity, but the Viking has never really captured investor interest due to
the low productivity of its wells.
"We contend that the large Original Oil In Place (OOIP), low
recovery to date, low geological and capital risk, meaningful per section NPVs
and a trend of improving productivity will continue to draw industry attention
to the play and potentially result in a wave of consolidation," CIBC analyst
Arthur Grayfer wrote in a note to clients.
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It is for these reasons that the play (and E&Ps in the play)
needs to be on investors' radar screens.
The lower geological risk, strong netbacks (light oil) and lower
total well costs ($0.85 million to $1.2 million) make the greater Dodsland
Viking play very well suited to junior and intermediate producers.
"We estimate an "average" Dodsland Viking well requires ~
$60/Bbl for a pre-tax cost of capital return and a top-tier well requires
~$40/Bbl. At $80/Bbl, development of a section of Crown Viking land offers
pre-tax NPVs of ~$10 million and IRRs of ~34%," Grayfer said.
At a density of 16 wells per section over a township (36
sections) of Viking land, an E&P can achieve a peak production rate of
almost 7,000 barrels per day (Bbls/d) after eight years living within cash
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In addition, the play can generate meaningful free cash flow,
which could support strong growth and/or a dividend model.
"For investors interested in pure-play exposure to this play,
our top pick is Raging River Exploration Inc. (CVE:RRX)," the analyst said.
The company derives almost all of its production from the
greater Dodsland Saskatchewan Viking and has shown strong year-over-year
improvement in productivity. Raging River has focused its activities on highly
prospective areas such as Dodsland South, Lucky Hills -Whiteside and Plato. The
company controls 133 sections of Viking Rights in the greater Dodsland area and
has 100 locations booked.
Novus Energy, Inc. (CVE:NVS) stand out as another way to gain
pure-play southwest Saskatchewan Viking Exposure. For Novus, about 85 percent
of current production is from the Viking in Saskatchewan, and about 98 percent
of 2012 capital spending has been focused on the company's Saskatchewan Viking
lands. The company controls 124 sections of Viking Rights in the greater
Dodsland area and has about 280 locations booked.
With a current cash yield of 8 percent, Penn West Petroleum Ltd.
(TSE:PWT) represents a good way for investors to get exposure to the play via a
higher yielding entity.
"We note we believe the healthy economics at stable long-term
decline rates characteristic of Viking wells make the Viking, in our
opinion, an ideal asset for mid -sized dividend paying E&Ps," Grayfer said.
The Viking represents one of the four principal tight oil plays
in Penn West's inventory. In west-central Saskatchewan, Penn West controls
about 230 sections of Viking Rights in the greater Dodsland area, which could
potentially support an inventory of ~3,700 un-risked locations at 16 wells per
section spacing. In Alberta, Penn West controls another over 800 net sections
of less proven Viking acreage.
Whitecap Resources, Inc. (TSE:WCP), an oil-weighted producer
that derives about 13 percent of its production from the Dodsland Viking,
has demonstrated very strong productivity at Lucky Hills-Whiteside. Whitecap
controls 114 sections of Viking Rights in the greater Dodsland area and has
about 46 locations booked.
"Given the strong cost improvements experienced by the company
in the play and the strong productivity from the area, we wouldn't be surprised
to see Whitecap look to expand its footprint in the Viking," Grayfer wrote.