Monday, July 1, 2013

Showdown under way; Buccaneer shareholders to vote July 2 on whether to keep existing board

Eric Lidji
For Petroleum News

In a showdown likely to have implications for Cook Inlet, the shareholders of Buccaneer Energy Ltd. will meet on July 2 to decide whether to keep the existing board of directors, or replace them with officers chosen by two Hong Kong based shareholders.

Earlier this year, Pacific Hill International Ltd. and Harbour Sun Enterprises Ltd. requested the meeting for shareholders to vote on whether to remove the four existing directors: Chairman Alan Broome, CEO and Managing Director Curtis Burton, Finance Director Dean Gallegos and Director Frank Culberson. The shareholders will also vote on whether to add Nicholas Davies, Clinton Adams and Shaun Scott to the board.

Under Australian corporation law, shareholders holding at least a 5 percent interest in a given company may request a meeting for shareholders to vote on proposed resolutions.

Pacific Hill International and Harbour Sun Enterprises became shareholders through a stock placement late last year, and hold a combined 8.6 percent interest in Buccaneer.

Issue is Alaska

The two investors accuse Buccaneer of having “lost its way” in Alaska, citing its ever-growing lease portfolio, its recent cost overruns, its difficulties securing funding and the vagaries surrounding its recent efforts to better market the company for a potential sale.

The existing board is making a push to get shareholders to vote against the resolutions, including letters, video appeals, meetings in Texas and Australia, and conference calls.

They argue that the company has “never been more focused,” and is poised to capitalize on its ambitious portfolio in Cook Inlet basin after three years of preparatory work.

Since arriving in Alaska in early 2010, Buccaneer has acquired a large portfolio in Cook Inlet, including seven prospects across some 50,000 net acres, a stake in the Endeavour jack-up rig for offshore activities and a lease on the Glacier rig for onshore activities. Currently, the company is earning revenue in Alaska from the 3 billion cubic feet produced to date at its Kenai Loop field and from tax credits, but whether the bulk of its investments in the region pay off depend on its activities over the next two years.

A jacked-up debate

The Endeavour jack-up rig seems to be at the heart of the issue.

Pacific Hill International and Harbour Sun Enterprises appear to believe Buccaneer is taking on too many opportunities without adequate funding, according to a statement the companies sent to shareholders, which Buccaneer partially quoted in recent filings.

The two shareholders believe Buccaneer “has lost investor confidence and is struggling to secure the necessary funding required to execute its strategy” and thinks the company “needs to get back to the business of being an upstream oil and gas company,” presumably a reference to the significant investment partnership required to buy the rig.

Buccaneer believes owning the rig has allowed it to pursue known prospects in Cook Inlet, while opening the door to a future revenue stream through leasing opportunities.

Through Kenai Offshore Ventures LLC — a joint venture with Singapore based Ezion Holdings Ltd. and the Alaska Industrial Development and Export Authority — Buccaneer purchased the rig from Transocean Offshore Resources Ltd. in late 2011.

The jack-up rig is currently drilling at the offshore Cosmopolitan prospect, and is scheduled to drill in the coming years at the Buccaneer-operated Southern Cross and Northwest Cook Inlet units, and at the ConocoPhillips-operated North Cook Inlet unit (a legacy natural gas field where Buccaneer recently farmed-in the deep oil rights).

Without any jack-up rig, Buccaneer would be unable to explore these prospects. And if it leased a jack-up rig, such as the one Furie Operating Alaska is using to explore the Kitchen Lights unit, Buccaneer would be unable to drill its portfolio at its desired pace.

But purchasing the rig brought risks.

The rig arrived in Alaska from Malaysia in August 2012, but subsequently spent months docked in Homer. The exact nature of the delay remains in dispute, but Buccaneer and rig operator Archer Drilling LLC eventually parted ways. In legal filings, the companies have accused each other of breaching the contract and failing to pay contractors on time.

Buccaneer is now using the rig, but the delay created a ripple effect, forcing it to request extensions for its state work commitments at Southern Cross and Northwest Cook Inlet.

Even as the company needed more time to handle its existing portfolio, it was closing on a deal to purchase the Cosmopolitan prospect from Pioneer Natural Resources Alaska Inc. and working on a deal to farm-in the deep oil rights at North Cook Inlet. And although the jack-up delays concern only offshore developments, Buccaneer also asked for additional time to pursue West Eagle, an onshore development in the Homer area. The state agreed to the extension, but required Buccaneer to post bonds to guarantee the work.

Pacific Hill International and Harbour Sun Enterprises believe all these events prove Buccaneer is unfocused, but the existing Buccaneer directors believe they are steadfast.

In a recent letter to shareholders, Broome described Buccaneer as being in the “execution phase” for its Alaska portfolio: producing at Kenai Loop while starting its offshore program. “This puts the company in a compelling position and is the result of more than three years of effort by the current board and management team putting together permits, technical data and a skilled team in a niche, but highly attractive market,” Broome wrote.

Is Buccaneer for sale?

The two revolting shareholders also criticized the status of Buccaneer on the market.

While acknowledging that Buccaneer’s stock price is low (and has generally been declining since about March 2011), Broome wrote that the existing board believes “the market is nowhere close to fully or fairly valuing Buccaneer’s assets and their potential.”

Broome said that Buccaneer wanted to have something other than its share price to show any potential buyers interested in the company, and so it hired Canaccord Genuity (Australia) to evaluate its portfolio. To the two shareholders, though, this move made it appear as though Buccaneer is “now pursuing a process which appears that the entire company is up for sale with no clear or preferred transaction outcome being articulated.”

North Cook Inlet reserves

As it negotiates this drama, Buccaneer is announcing progress at three of its prospects.

With a new report estimating that the deep oil deposits at North Cook Inlet unit contain some 9.8 million oil equivalent barrels in proven reserves, Buccaneer is now detailing plans to begin drilling at the offshore field in mid-2014. The report from Netherland, Sewell & Associates Inc. also estimated that the deeper oil-prone formations at the offshore Cook Inlet field contain some 38.5 million oil equivalent barrels of proven and probable, 2P, reserves and some 95.9 million oil equivalent barrels of proven, probable and possible reserves, Buccaneer announced in a statement on June 20.

Generally, “probable” means there is at least a 50 percent chance of actual recovered volumes meeting or exceeding the 2P estimate, and “possible” means there is at least a 10 percent chance of actual recovered volumes meeting or exceeding the 3P estimate.

The reserve estimates are 80 percent oil and include additional “contingent” reserves.

The report estimated the reserves in the Lower Tyonek, Hemlock, Sunfish and West Foreland formations at North Cook Inlet. Since 1962, there have been some 13 wells drilled into those formations at the unit, including seven wells drilled in the 1990s by ARCO and Phillips, separately. At the time, the companies called the prospect Sunfish.

Buccaneer farmed-in the deep oil reserves at the 23,368-acre unit from operator ConocoPhillips in early May. Under the deal, Buccaneer agreed to drill a well by the end of 2014 and a second well in a different section of the acreage by the end of 2015.

Buccaneer said it plans to use its Endeavour rig to drill an offset of the North Forelands No. 1 well that ARCO Alaska drilled in 1992 starting in the second or third quarter of 2014. The original ARCO well flow-tested at 4,340 barrels of oil equivalent per day, but low oil prices at the time kept the company from pursuing development.

For the second well, Buccaneer said it plans to offset the NCI No. 1 well that Shell drilled in 1964. The well had originally flow tested at 2,270 barrels of oil equivalent per day.

Shallow oil at Cosmo

The Endeavour rig is currently drilling at the Cosmopolitan prospect, where it recently encountered oil at a slightly shallower interval than Buccaneer had anticipated.

As of June 24, the Cosmopolitan No. 1 well had encountered oil and condensate at 5,600 feet, in the Lower Tyonek formation, according to Buccaneer. Because of the unexpected discovery, Buccaneer set intermediate casing about 400 feet higher than it had originally planned and is now preparing to run wire line logs, test pressure and take core samples.

Buccaneer previously set casing at 2,055 feet.

Buccaneer has previously said it expected the Tyonek to hold “multiple prospective gas zones” to a depth of 6,000 feet. The drilling to date has penetrated “three primary gas zones totaling 175 feet” and early logging indicates “good resistivity, permeability and porosity characteristics,” the company said, adding that it may flow test, “if warranted.”

Buccaneer said it remains interested in four “secondary” zones in the Tyonek.

Under its initial well plan, Buccaneer said it would case the well at the bottom of the Tyonek before continuing to drill into the oil-bearing Starichkof and Hemlock formations, where it would take core samples. Buccaneer is not planning a flow test.

Upon reaching a total depth of 8,000 feet, Buccaneer plans to plug the well back to the bottom of the Tyonek formation to perforate and flow test the prospective gas zones.

The Cosmopolitan prospect is located off the coast of Anchor Point.

Buccaneer is the operator of the Cosmopolitan program and owns a 25 percent interest in the leases, with Fort Worth-based BlueCrest Energy II LP owning 75 percent.

Kenai Loop developments

Finally, Buccaneer is permitting additional wells at its Kenai Loop field.

The company recently applied for an Alaska Oil and Gas Conservation Commission permit for the Kenai Loop No. 1-4 at the onshore field near the city of Kenai.

The directional well would be drilled from the existing pad to a bottom hole location some 1,368 feet to the southeast at a total depth of around 10,900 feet, according to the company. Buccaneer plans to drill the well using its contracted Glacier rig.

Buccaneer said it is permitting two other wells at the field. All three wells would test targets identified in an earlier well brought online in February, according to the company.

In addition to permitting additional wells, Buccaneer is asking the AOGCC to rename its existing wells at the field “to reflect their pad number.” Under the proposed scheme, Kenai Loop No. 1 would become Kenai Loop No. 1-1, Kenai Loop No. 3 would become Kenai Loop No. 1-2 and Kenai Loop No. 4 would become Kenai Loop No. 1-3.

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