D.P: One of the big questions for the Great Divide is that while it has four pods, the assumption by many is that only one might see development. What are the chances that a second or third of the four pods could see development over the coming years?
D.G: There have been discussions about how many Pods we would have at the Great Divide. We feel that we have indicated on our maps up to four Pods, but you have indicated in your question that there is an assumption that only one might see development. We think that there is a large probability of more than one Pod being developed on this property. We just didnt pull that out of the air; we did have discreet and concrete well control on these particular lands; we identified prospects or channels before we designated them as prospective pods.
They do need additional core hole drilling to confirm their size and that they have sufficient reservoir to exploit. This is the process you go through just like you do in the mining business, Dave. As you know, when you get a lead you then drill additional wells surrounding that lead to try and get a clear handle on the size and geometry. Then you can plan your development drilling. All we are doing in the Oil Sands here is we are mining using SAGD technology, because our ore body is deposited at around 450 meters below surface and the only way we can get to it and exploit it effectively is by drilling horizontal well pairs. We are fortunate in that we are at that depth, so that we can use conventional horizontal wells. We dont have to get a special rig, like some of our competitors do, because they are so shallow. Also, when you are using steam, anytime you have some depth, it enhances the performance of your steam in assisting you in terms of more efficient recovery.
So, we are pretty enthused that we are going to have sustainability and repeatability, which are two buzz words that we have and that is implicitly and philosophically, which is our approach on this particular project.
D.P: One of the big questions about the Great Divide is financing. Will it be equity, which will dilute the stock or will it be a joint venture agreement with a major that would give someone else a chunk of the play? The question is how severe the dilution might be?
D.P: How do you see this playing out and considering the huge dilution weve seen in the junior mining business, is there a chance we could see a rights issue to award loyal investors?
D.G: Question four that you put to me, Dave, was a question about financing and we are evaluating our alternatives as we speak. One of the critical data points we await, (or milestones if you will) is updated reserve reports. This will assist us and I expect to have it within the next couple of weeks. At that time, we would issue a press release on it. The early indications in the report (and a report isnt a report until it is finalized), the early indications are that we are getting pretty good recognition by GLJ of the existence of only Pod 1 and a decent reserve base. It also is important that our reserves are going to be upgraded to the probable status from the possible reserve category, and as you know the market place tends not to give much credence to possible reserves and even in our own case, we have historically used 10% of the 10% value in keeping with the NI51-101 definitions.
So, we will have reserve quality or upgrade and then the evaluation can be brought into our underlying asset base, at higher values as compared to what we did when we treated them as possible reserves. So, we are going to have a resource study and a reserve study and probable reserve assigned to Pod 1, possible reserves continuing to be assigned to other portions of our acreage based on the well control and data that we have been able to provide GLJ.
Our objective in financing is to have maximum interest retention at minimum equity dilution. We will have to put additional equity into this exercise, but we are trying to do as much as we can for our existing shareholders at minimum dilution. We also continue to explore some partnering alternatives ?the oil sands are topical these days and everyone is looking for something. It may be a combination of things.
You ask the question about a rights issue? Well, rights issue just arent used very much anymore, but we appreciate the support of our loyal investors. We will look at ways and means of making sure our existing shareholders are as looked after as might be feasible in the circumstances.
I have never been a great proponent of bought deals as compared to a marketed financing and I think there may be some ways we could, (when we do put equity into the company at the appropriate time) incorporate something that is specific to our existing shareholders. I think that we could probably get some project financing for this, something like a middle tier financing. The last money that comes in would be secured debt from Chartered Banks and there is not a whole lot new about that as you well know Dave, but there is a strong indication that we could get about a 1/3 of any project financed with secured bank debt. In other words it comes in after the other money is in place.
One alternative (of course) is to bring in a partner, but that is permanent dilution as well, because you are giving up a stake in the project forever once you bring a partner in that matter. We will just have to evaluate it and see what else they might bring to the equation besides money. We have this all modeled and we will structure it as best as we can. I would point out that we do have a very sophisticated model that we use that enables us to evaluate various alternatives and proposals. We have had numerous conversations with our friends over in China. They approached us over a year ago; whether that is the right way for our company to go remains to be seen.
We know that there are certainly other players and there is a real barrier of entry to the Oil Sands now, so people will be knocking at our door. Our initial preference is to go alone if we can and try to maintain 100%, because the operational flexibility gives you continuing control of the project, but we will just have to evaluate which is the better alternative.
D.P: Down the road, the Great Divide project looks like the perfect investment for an oil and gas income trust. Considering so many oil and gas income trusts have such short life spans of 3 or 4 or 5 years, a project with a 25-year life span ?wouldnt it look awfully appealing to more blue-chip investors?
D.G: The Great Divide has the potential for an Oil Sands trust and I think that you are bang on in recognizing that potential. I think one of the key things that we have done for the Connacher shareholders is by getting into the Oil Sands and developing this project to where it is now we have reduced the risk of the company as the oil sands is an annuity-like project and we are very enthused about it.
We can see a 10,000 barrel a day, 25 year project we hope is repeatable several times and in the early years, depending on what price deck you use these things can generate $75 to $80 million in annual cash flow. Once you got that level of cash flow, you never have to dilute again in developing Pod 2, 3 or 4 if they exist as you have cash generated and huge revolving borrowing power. The other channels/pods do exist; the question is concerning the quality and volume of reserves for future exploitation.
So you can flip your debt. You have got lots of debt capacity with that kind of cash flow and of course this is a lenders dream. You have reduced the risk and made it more of an annuity type company (if you will) by this involvement.
Offsetting this glowing picture is that there are differential issues in the short run in the market place that we have to be mindful of. With more and more heavy oil coming into the market place, even with substantially rising prices, we have seen the differentials jump remarkably high compared to where they were historically reaching as high as $26.00 a barrel. So, we are looking at ways and means of mitigating that differential risk and we are investigating some business opportunities in the integration area that would serve that purpose.
I just cant elaborate any further at this time about that, but we are aware of the circumstances and mindful of the higher commodity risk associated with heavy oil and this is 8 degree APIP oil and yet at the same time our project is not big enough to have an onsite upgrader. So weve had to look at other alternatives and we are doing that and we hope to announce some progress in that area in the near future.