A bet on the Bakken pays off for Crescent Point Energy
'You should be comfortably nervous about your risk,' engineering boss says
In the mid-1990s, Neil Smith was working for NCE Resources Group Inc. – a firm that invested in oil and gas plays. His job was to suss out drilling opportunities worth investing in. NCE sunk $70,000 into the first well Smith recommended. But the results didn’t come in as expected. Essentially, Smith had made a $70,000 mistake. “I was devastated,” he says.
Jump ahead almost two decades and Smith – now Crescent Point Energy Corp.’s vice-president of engineering and business development – is working for a company that spent roughly $570 million drilling 239.7 net wells during the first three quarters of 2011. That works out to about $2.4 million per well, which shows Smith didn’t let one bad experience scare him away from taking chances. “That’s what happens during your career: gaining comfort with risk,” he says. “Investors are looking to you for a return on their money. You’re under pressure. You just learn to live with it.”
That attitude has no doubt helped the winner of Alberta Oil’s 2011 C-Suite award for top senior risk management executive play a key role in a firm on the rise. Since the Vancouver native joined Calgary-based Crescent Point in 2003, it has gone from a 5,000 barrels of oil equivalent (boe) per day operation to one on track to produce 80,000 boe per day in 2011.
It’s gotten there by being at the forefront of a rush to extract oil from old haunts like the Saskatchewan Bakken, the Shaunavon and the Viking – reservoirs that are experiencing a rebirth thanks to advances in horizontal drilling and hydraulic fracturing. This development is a key reason the Canadian Association of Petroleum Producers forecasts Canadian conventional oil production will average one million barrels a day in 2011 after years of declining returns.
But what seems obvious now – that a prime place to extract oil is where it’s already been found – was less obvious when Smith first signed on with Crescent Point. “I thought Saskatchewan was not really being looked at,” he says. “But there was a tremendous amount of opportunity. And when you go into areas where there’s not as much competition, there’s going to be more opportunity and it’s going to be cheaper.”
The gambit has certainly worked out for Smith and Crescent Point, not only in the Bakken, but in other plays as well, such as the Swan Hills region in northwestern Alberta. The company has now booked 380 million barrels of reserves and has a 20-year drilling inventory at 6,500 locations. In 2010 revenues were over $1.5 billion. Yet the growth has been measured. In a business where so much is out of the company’s control – commodity prices, geology, weather – Crescent Point has pursued a business strategy aimed at taking as much risk out of the oil and gas game as it can. “Are we no-risk? No, this is the oil and gas business,” Smith says. “It’s about calculated risk, not a Hail Mary pass.”
Making decisions based on data is a cornerstone principle for Smith and company. So is maintaining a conservative balance sheet that protects the company from the industry’s brutal boom-and-bust cycles. In any business, cash flow is king and hedging is an important instrument in Smith’s tool kit to manage risk. Crescent Point uses this method of limiting or offsetting the possibility of loss from wild fluctuations in oil prices by pre-selling up to 60 per cent of its production. That strategy served it well in 2011 when the price of West Texas intermediate crude yo-yoed from a high of US$113 to below US$80 a barrel.
What’s also paid off is its habit of gaining a toehold in smaller companies with land in interesting plays, allowing those firms to drill on them, and then buying them out if the results are promising. This is how Crescent Point became a dominant player in the Bakken and Shaunavon. And it’s how it acquired over one million acres of land in the prospective Alberta Bakken, a tight oil basin along the Alberta and Montana border that energy consultant Wood Mackenzie says could hold 2.6 billion barrels of recoverable oil.
“We’ve typically been a first mover or a fast-follower into these plays,” says the 50-year-old Smith, who notes Crescent Point has completed $6.5 billion in acquisitions in the past nine years. “And while everybody was chasing the Alberta Bakken, we were quietly building our position in the Swan Hills. Some of the results coming out of those wells are demonstrating that was a really good thing to do.”
The company’s strong balance sheet and land position has also gone hand-in-hand with another risk management strategy: diversification. For example, if bad weather shuts down operations in one area – as it did in the Bakken this spring – Crescent Point is able to shift its spending and focus to other core areas, which keeps production and profits flowing and shareholders happy.
It’s all added up to a successful formula thus far for Smith and Crescent Point. And it’s one he is keen to keep following, steering the company away from the risks that can scupper growth. “I once worked for a guy who always said when you do your reserve assignments you should be comfortably nervous,” Smith says. “You’re not being wild, but you’re not being so conservative that you’re setting your hurdles too low. So it’s about being comfortably nervous about your risk.”
More posts by Darren Campbell
- Worst Case Scenario
- Amid a struggle to ship crude oil to the West Coast, three crazy ideas emerge
- Field upgrading is making it possible to pipe bitumen without thinning agents
- It’s Bleak Out Here: What juniors must do to earn investor trust
- Is Imperial Oil’s corporate structure outdated?