Duvernay Oil Corp

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Duvernay Oil Corp.

1500, 202-6th Avenue, SW
Calgary, Alberta T2P 2R9
Canada
Telephone: (403) 571-3600
Fax: (403) 269-6510
Web site: http://www.duvernayoil.com

Public Company
Incorporated: 2001
Employees: 54
Sales: CAD 208.6 million (2005)
Stock Exchanges: Toronto
Ticker Symbol: DDV
NAIC: 211112 Natural Gas Liquid Extraction

Duvernay Oil Corp. is a Canadian oil and natural gas company listed on the Toronto Stock Exchange, involved in the exploration, development, and production of crude oil and natural gas in four primary areas in northwest Alberta and northeastern British Columbia. The bulk of the company's proved and probable reserves of 36.1 million barrels of oil, about 60 percent, are found in the Fir, Wildhay, Wroe, and Bigstone areas of Alberta. About 30 percent are located in British Columbia's Sunset area, and another 10 percent in Alberta's Peace River High area. Using the latest in 3-D seismic, horizontal, and well-stimulation technology, Duvernay has enjoyed excellent success in fields considered "mature" and not worth pursuing. The company is based in Calgary, Alberta.

FOUNDERS PART OF 1993
BERKLEY PETROLEUM LAUNCH

Duvernay is in essence a continuation of Berkley Petroleum, whose former officers, led by CEO Michael L. Rose, established Duvernay. A trained geologist with a degree from Queens University, Rose once worked for Shell Canada. In 1993 he and a group of colleagues struck out on their own, forming Berkley Petroleum with CAD 11 million in private equity and bank debt. The company's war chest was soon supplemented by an initial public offering (IPO) of stock in that same year. With Rose serving as CEO, Berkley enjoyed success in Canada's Western Sedimentary Basin, finding oil in Saskatchewan and gas in Alberta and the Northwest Territories. Later in the 1990s Berkley became involved in a deep natural gas field in western Kern County, California, near Bakersfield. Berkley was doing nicely when in late December 2000 it found itself the recipient of an unwelcome tender offer from Dallas-based Hunt Oil Co., which publicly announced to Berkley shareholders that it was willing to pay CAD 10 ($6.70) a share for Berkley stock, a 15 percent premium over the $5.75 it was fetching on the Toronto Stock Exchange at the time. Hunt already owned a 9.6 percent stake in Berkley. It had been involved in Canada to some extent since 1948 but had more lately begun beefing up its assets in the country. Earlier in 2000 Hunt failed in a bid to acquire Calgary-based Ulster Petroleums Ltd. but succeeded in June 2000 to acquire Newport Petroleum Corp. for $500 million. Subsequently Hunt Oil Co. of Canada was formed to house the assets.

Surprised by the takeover bid, Rose immediately categorized the Hunt offer as opportunistic and inadequate, maintaining that it "failed to recognize the underlying value of Berkley's assets." Indeed, one independent analyst contacted by the Dallas Morning News calculated CAD 12 to CAD 12.50 to be a fairer price. Berkley rejected the offers, as it did a slightly higher second bid from Hunt. Then in February 2001, another company, Anadarko Petroleum, stepped in as a white knight and offered $7.52 per share or $777 million. It was accepted, Berkley was sold, and Rose's management team found itself unemployed, albeit flush with cash. They were not, however, tired of the work they did, and put some of that money to use in forming a new company. "If you're a petroleum geologist, there's nothing more exciting than finding new oil and gas pools and having the satisfaction of being right and creating value," Rose told Oil and Gas Investor in a 2004 profile. "Besides, the team we brought over from Berkley … is still relatively young and really doesn't know how to do anything else."

FORMATION OF DUVERNAY OIL:
2001

Ten ex-Berkley employees, led by Rose, worked with the Calgary-based energy investment firm of Peters & Co. Limited to conduct a highly successful private placement of stock. Altogether they raised CAD 81 million, including CAD 28 million of their own cash, and in September 2001 established Duvernay Oil Corp. It represented the largest amount a Canadian exploration start-up company had ever raised. Because the company planned to pursue opportunities in western Canada, it chose the Duvernay name as an allusion to the Devonian Age in the history of Earth, when the oil and gas deposits in the area had been formed.

From the outset Duvernay pursued a business plan to grow through an aggressive drilling program, taking advantage of the strength of the former Berkley employees. The company also sought to take advantage of low commodity prices at the time, which made a number of desirable properties available for purchase. Duvernay wasted little time in putting its war chest to use. In September 2001 it used 4.5 million shares of stock to acquire oil and natural gas properties in British Columbia's Saturn and Groundbirch regions. By the end of the partial first year of its existence, Duvernay was operating a single well, but it quickly ramped up exploration activities in 2002 and by the second half of the year it was making significant discoveries of oil and natural gas at Groundbirch and Wild River in Alberta. In January 2003 Duvernay acquired oil and natural gas properties, plus related facilities and undeveloped lands, in Alberta's Wild River-Sundance-Fir area. In the first half of 2003 Duvernay was able to make discoveries in Alberta at Dawson, Pushwaskau, Smoke Heights, Sundance, and Wild River.

Duvernay replenished its cash with a private placement of stock in June 2003, selling 3.2 million shares and grossing CAD 20 million. The company used another five million shares in August 2003 to acquire one of its partners, Alberta-based Segue Energy Corporation. Segue had been the operator at the oil and gas discovery at Wild River the year before. It also held working interests in the Sundance gas discovery operated by Duvernay. By combining the interests of the companies, Duvernay hoped to speed up development of some of its properties and improve shareholder value. With the addition of Seque, Duvernay served as the operator for 90 percent of its properties. Also in October 2003 Duvernay opened a wholly owned and operated natural gas plant to control the production of the natural gas it produced at its Groundbirch discovery.

COMPANY PERSPECTIVES

Duvernay is an Alberta-based oil and natural gas company with an aggressive activity plan for future growth.

Duvernay was well stocked with properties in its four core operating areas, enjoying considerable success in a basin that the oil and gas industry had long since considered tapped out. Much of that success was, of course, attributable to Rose and his seasoned team, but it was also a reflection of new technologies that could be brought to bear in locating and squeezing out the remaining pools of oil and gas in the rock formations of Canada's Western Basin. Three-dimensional seismic studies provided a map of underground structures, revealing the most likely places where pockets of oil and gas might accumulate. Advances in well stimulation, in particular fracturing technology, also proved useful in the tight-sand gas wells Duvernay drilled. Frac technology caused large cracks in reservoir rock around a well, allowing the gas or oil to flow more freely through the rocks and into the well. "In many cases," Rose told Oil and Gas Investor, "it has meant the difference between not producing anything and having commercial wells." Duvernay also took advantage of horizontal drilling to cut through a reservoir at an angle to increase the exposed length of the reservoir and increase the yields of oil and gas.

PUBLIC OFFERING: 2004

Duvernay posted oil and gas sales of CAD 18.6 million in 2002, and more than doubled that amount in 2003 to CAD 46.6 million. Moreover, the company's proved reserves had experienced a dramatic increase, from 7.23 million barrels equivalent at the end of 2002 to 18.72 million barrels at the end of 2003. By this time Duvernay had become large enough and possessed growth potential to warrant taking the company private. In an IPO of stock conducted in February 2004 by a syndicate that included Peters & Co., First Energy Capital Corp., Scotia Capital Inc., UBS Securities Canada Inc., and Sprott Securities Inc., Duvernay sold five million shares of common stock, netting nearly $49.5 million. The money was earmarked for the support of further exploration and development activities and for general corporate purposes. Duvernay shares then began trading on the Toronto Stock Exchange.

Soon after completing the IPO, Duvernay announced a drilling plan in 2004 that called for CAD 80 million to be invested and about 50 wells to be drilled over the course of the year. About one-fifth of those wells were to be drilled in the Sunset-Groundbirch-Saturn operating area in northeast British Columbia. Three months later, in May 2004, Duvernay had some good news to report to its new shareholders, the discovery of a major new gas field there. After 18 months of drilling in the area, resulting in 20 new gas wells, the company was able with the help of seismic mapping to delineate the Triassic Doig trend, estimated to be a 50-mile-long, two-mile-wide band. It was a tight gas sand formation that could be exploited at commercial levels through the use of fracture stimulation. There were 13 gas wells operating along the trend, most of which were 100 percent owned by Duvernay. In addition, the company estimated that it controlled another 115 potential drilling locations, possibly holding 250 billion cubic feet (bcf) of natural gas.

Riding high, Duvernay was able to raise another $25.2 million in a secondary stock offering in June 2004. At the same time, management announced that the capital program for the year would be increased from CAD 80 to CAD 110 million. Further funds to support the program were engineered later in the year with another stock offering that grossed CAD 42.5 million. When the year came to a close, Duvernay recorded revenues of CAD 95 million in 2002, more than double 2003's totals. Net earnings per share also increased from CAD 0.26 to CAD 0.50. A major reason for the strong numbers could be attributed to record oil and gas prices that produced exceptional results for the entire energy sector. Nevertheless, Duvernay continued to take a conservative approach to maintaining reasonable levels of debt, careful not to get too far ahead of prices.

With the war in Iraq and other unsettling developments in the Middle East having the potential to disrupt oil production, prices remained at extremely high levels in 2005 and 2006, leading to further prosperity for Duvernay, which continued its aggressive drilling program and experienced little difficulty in promoting further stock issues to pay for it. The company set a $140 million capital program for 2005, and then in April 2005 completed a private placement of stock that generated gross proceeds of nearly CAD 41 million in order to bump the program to the CAD 180 million level. Just two months later the amount increased to CAD 230 million, supported by another stock offering that fetched about CAD 50 million in gross proceeds. The company was not done, though. Yet another offering in October 2005 raised another CAD 41.6 million to increase the capital program to CAD 310 million. In 2005 Duvernay operated 99 wells and was involved in another 27. The impact on the balance sheet at the end of the year was dramatic. Revenues again more than doubled to CAD 208.6 million, as did net earnings per share, which improved to CAD 1.07. The company's reserves also increased at a comparable pace.

Duvernay set a capital program budget of CAD 350 million for 2006, but as had been the case the year before, the company wasted little time in boosting that number. A stock offering in February grossed CAD 55.6 million, allowing the budget to be increased to $400 million. Record quarterly results continued in 2006. The company's success story was well known in the industry. One analyst told the Calgary Herald, "Duvernay is a poster child for the fact that there is still a lot of exploration to be done in supposedly 'mature' areas."

Ed Dinger