Rising oil prices have fuelled a rebirth of Canada's junior oil and gas companies, which are once again snapping up new land and exploring new frontiers as a remarkable comeback takes hold.
After years of watching their ranks shrivel amid an economic recession and oil and gas fields that were nearly spent, the junior sector is remaking itself as it taps back into reservoirs it once thought dry.
Companies are taking the success of a core group of new plays and spreading it across western Canada and beyond, betting that technological advances will unlock the great bodies of crude that remain in dozens of old plays, some of which have seen less than 10 per cent of their oil recovered.
Canada's juniors remain heavily dependent on natural gas, a fact that has muted the impact of new oil plays for some. But for others with exposure to oil, the new prospects are so bright that, little more than a year after tight credit choked off much of the sector's lifeblood, money is again pouring in.
"So far this year we've raised $23.5-million, and I've got about five bought deals being offered to me right now. If I wanted to do $25-million tomorrow, all I have to do is make the call," said James Evaskevich, chief executive officer of Yangarra Resources Ltd., which produces 1,200 barrels of oil equivalent per day.
The company, formed in a corporate recapitalization in late 2009, started out this year at 10 cents a share. It's now at around 80 cents.
"So we're up eightfold and there's probably another three- or four- or five-bagger in this thing if we continue to execute," Mr. Evaskevich said. "It's really big bucks. This is a game-changer."
The reason lies in the immense gains made possible by a technology that has spread like wildfire across the industry in the past few years. Rather than drill vertical wells into oil pools, companies are now snaking horizontal wells through the pools, then using so-called "multistage fracturing" to break apart tight rock so the oil can flow more easily.
Over the past several years, companies have used the technology to revitalize one of Alberta's most prolific oil fields, the Pembina, in a play called the Cardium that promises to at least double the quantity of crude that can be recovered. The concept has been repeated in several other plays such as Viking and Shaunavon.
Now, however, junior companies are roaming the province testing whether the technology works in a other plays - Swan Hills, Second White Specs, Rock Creek, Notikewin, Spearfish, Glauconite, Alberta Bakken - and racing to buy up surrounding land when they discover that it does.
"It feels to me like we get to work in the '50s again, because we're discovering new big pools in a different way," said Neil Roszell, chief executive officer of Wild Stream Exploration Inc.
Finding more lucrative plays is "is more than possible. It's 100-per-cent likely. We're only in the second or third inning of this part of the game."
It's a remarkable change from last year when Canada's junior oil and gas companies were still experiencing a painful contraction. In 2009 alone, the number of publicly traded companies that produce between 500 and 10,000 barrels of oil equivalent per day fell by 15 per cent to 54. Between 2005 and 2009, the tally tumbled 40 per cent.
Last Christmas was a dark one for the sector. One observer called junior companies a "dying breed." Executives lamented their inability to impress shareholders. Companies faced such dire prospects that even consolidation was difficult.
But in 2010, the industry not only halted its slide, it actually added two companies, in a year that saw Alberta achieve record land sales and a resurgence in drilling activity.
"New companies are being formed to focus on the sexy oil plays," said Peter Knapp, the president of Bryan Mills Iradesso, whose quarterly iQ report is one of the most authoritative sources of information on the sector.
"It's actually a relatively healthy sector."
Much of the reason lies in the substantial new reserves that can be tapped by the new drilling techniques - an amount that, according to CIBC World Markets Inc. could total 5- to 15-billion new barrels. For junior companies, the new techniques are also providing strong returns with lower risk. In the past, finding a new pool of oil meant contending with a 90-per-cent chance of failure. Now, once a company establishes that the techniques work on an old pool - a process that remains risky - its subsequent wells have a "90-per-cent chance of success," said Phil Collins, the chief executive officer of Calston Exploration Inc.
Calston is a private company that is buying up land in Texas, where it believes it can achieve results similar to some of the Canadian plays.
"I'm an entrepreneur here taking Alberta-based technology and exporting it," he said.
The new plays have, however, brought their own share of problems. Horizontal wells with multistage fracturing cost upwards of $3-million, far more than traditional wells that ran $500,000 apiece. They're worth it because they produce far more oil. But the high costs have raised the risks on wells that don't work - a single dry hole could put a company under. As a result, junior companies are engaging in greater numbers of partnerships to share risk. The barrier to entry has also risen dramatically: Executives say that a company that used to require $10-million to launch may now require as much as $50-million.
Still, as industry finds new frontiers to drill, it's also perfecting the technology.
In the past 18 months, "we've managed to bring down the costs by $500,000 to $600,000 per well, and we've almost doubled the initial productivity," said Ray Smith, chief executive officer of Bellatrix Exploration Ltd.
"That is a huge change," he added. "The basin is really running quite nicely."