Word to the Wise: Best Growth Strategies: Drilling vs Acquisition

November 23, 2021

Each week, XI Technologies scans its unique combination of enhanced industry data to provide trends and insights that have value for professionals doing business in the WCSB. If you’d like to receive our Wednesday Word to the Wise in your inbox, subscribe here

In order to capitalize on the recent trend of rising commodity prices in the Western Canadian Sedimentary Basin, producers need to consider their best course of action. While there are any number of strategies one could deploy, the most significant tend to fall into two categories: increasing production via drilling or increasing production via acquisition.

Two weeks ago, the Petroleum Services Association of Canada (PSAC) released its 2022 Canadian Oilfield Services Activity Forecast, expecting 5400 wells drilled in Canada in 2022 — an increase from their latest 2021 forecast of 4650. Anecdotally, this predicted increase in drilling aligns with what we’re noticing at XI Technologies with an increase in orders of our pre-drilling regulatory reports for H2S release rate potential and surface casing.

But while drilling should increase, factors such as labour and supply chain shortages will still hinder drilling efforts from becoming the dominant strategy for capitalizing on high commodity prices. As PSAC’s President and Chief Executive Officer, Gurpreet Lail explains, “for 2022 we expect drilling activity to be higher than 2019. But, although we’ll be back to pre-COVID levels, we’re not going to be near where we were pre-downturn”.

As proposed by an article in the Financial Post from November 12, “buying production trumps a drilling bonanza in Canada’s oilpatch”. The article quotes an analyst from Raymond James as saying “companies that have the capital to go and backfill (production), that have the size to make acquisitions, are doing so… the mentality is it’s probably better to acquire, as opposed to go out and drill”. As ARC Energy Research Institute executive director Jackie Forrest suggests in the article, “shareholders are not rewarding [companies] for increasing production.”

This leaves acquisition and mergers as an attractive alternative to drilling for those looking to exploit the current pricing situation. The issue is that a lot of M&A opportunities may never become publicly available. By way of example, the recently announced purchase of Storm Resources by Canadian Natural Resources Limited was never a listed opportunity. As mentioned in the Financial Post article, there wasn’t an outside force compelling Storm to sell. CNRL found an opportunity and made an attractive offer.

Examples such as this suggest that those looking to acquire in this environment need to be proactive in their A&D scoping and search for opportunities using public data outside of a data room. Companies with capital, or with solid financials, are preparing to fill in the blanks. Where are target acquisitions focused? Who are the working interest partners, and do they also meet buyers’ criteria? What analogous plays would make sense to pursue? What are the reserves and associated liabilities? How do potential acquisitions affect your emissions?

Since the number of publicly traded companies has decreased over the past 5 years, the only option is typically government-collected data that can be time-consuming to correlate and evaluate to find the best opportunities available. Companies that are successfully able to acquire at a time when spending is not being dramatically increased will be the ones that find efficiencies in their A&D targets and processes.

Whether a producer decides to capitalize on the current commodities market through A&D or drilling, data is key to making quick and informed decisions. AssetBook is the leading provider of public data in the WCSB, with tools built and perfected for strategic acquisition identification and evaluation. OffsetAnalyst eliminates inefficiencies and minimizes the cost associated with tour research in drill planning. RegulatorySuite helps operators mitigate drilling risks and adhere to industry guidelines when applying to drill.

If you’d like to get a more detailed look on how XI Technologies can meet your A&D scoping needs or prepare to drill, contact us today.