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Grand Petroleum Inc.’s future growth is based on building,
exploiting and adding to its production base through prudent acquisitions, asset
management and financial control
Energy
Oil and Gas Exploration
(GPP-TSXV)
Grand Petroleum Inc.
1450, 407-2nd Street SW
Calgary, AB T29 243
Phone: 403-231-8400
Andrew Hogg
President and CEO
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
December 30, 2004
BIO:
Andrew Hogg, P.Geol., MBA, President and Director. Mr. Hogg began his career
in the oil and gas industry in 1985 as an exploration, development and operations
geologist with Norcen Energy, a large independent Canadian producer. Coincidental
with the completion of his MBA, Mr. Hogg gained experience in the investment industry
first with a small Calgary-based consulting firm and later helping open the Calgary
corporate finance office for BBN James Capel (now HSBC Securities). In 1995 Mr. Hogg
co-founded a successful private oil and gas company as the Vice-President and Director of
Artemis Energy Limited which was sold in 2002 to Vermilion Resources for about $31
million. For the last 5 years Mr. Hogg has been a well-respected Oil and Gas Analyst
initially with First Marathon Securities before heading up Yorkton Securities oil and gas
research team. Mr. Hogg has extensive contacts within the oil and gas business in
Calgary and is intimately familiar with Canadian markets and the investment community.
He will handle primary responsibility for finance, evaluations, strategy and
investment relations. Mr. Hogg received his BSc. (Honours, Geological Sciences) from
Queen's University in 1984 and his MBA from the University of Calgary in 1992.
Company Profile:
Grand Petroleum Inc. is an emerging Calgary based oil and gas producer that evolved from
the reverse takeover of RightsMarket Inc. effective December31, 2003. Grand explores for
and develops oil and natural gas in selected focus areas located in East Central Alberta
where management has significant geological expertise and knowledge, thereby reducing risk
through experience. In 2004 Grand will begin to drill in West Central Alberta with the
goal of developing a new base of longer life, high netback natural gas production. Grand
will continue to position itself for sustained future growth and per share value gains by
building, exploiting and adding to its production base through prudent acquisitions, asset
management and financial control. The common shares of Grand Petroleum trade on the TSX
Venture Exchange under the symbol GPP.
CEOCFOinterviews: Mr.
Hogg, what is your vision for Grand Petroleum?
Mr. Hogg: “What we simply want to do is build an
aggressive growth, oil and gas company. We started with nearly nothing about two and a
half years ago and our goal is to build a company that is somewhere between five and ten
thousand equivalent production a day. We then will look for finding a Canadian Royalty
Trust or larger producer that will be interested in purchasing us and giving our
shareholders liquidity that will allow them to join us in starting up another company.”
CEOCFOinterviews: Will
you tell us why east central Alberta is important and what you know about it that gives
you a unique perspective?
Mr. Hogg: “The larger companies and trusts are in east
central Alberta and there are assets available at a relatively cheap cost. For example, to
date we purchased about half of our production at around eight dollars a barrel proven in
the ground. That is under ten thousand dollars on a producing barrel basis. These numbers
are about a third of what the industry is doing these days so it has been an extremely
cheap entry point for us. We also have had the ability to take that production base and
with a modest investment, increase it. We have doubled the production base that we bought.
The disadvantage of east central Alberta is that to
properly exploit those assets, you want to shorten the reserve life index so that the
ratio between current production and ultimate recovery is about four years. That is a low
number compared to some of the older fields in Alberta. Our goal is to exploit those
assets and at the same time, redeploy the bulk of the cash flow from east central of
Alberta into west central Alberta where we can get long life reserves.”
CEOCFOinterviews: Why
are larger companies leaving the area?
Mr. Hogg: “One reason is that the assets left to
discover now are smaller and it takes a more focused group to properly exploit them. The
other reason is the short reserve life. The big companies find themselves on a treadmill
if they get too large building in east central Alberta. That harkens back to why we think
five to ten thousand barrels a day is a good exit point. We think we can build this base
in east central Alberta to about 1,500 barrels a day and then offset declines on this
asset base using only about 25% of our cash flow. If we were to be ten thousand barrels a
day in east central Alberta, that is an awful lot of work just to maintain your production
profile. That is because of the short reserve properties. The goal is to use it as a
launching pad but not as the ultimate core asset of the company.”
CEOCFOinterviews: Will
you tell us about the expertise of the management, and what knowledge the company holds
that allows it to be successful?
Mr. Hogg: “I do not know that we know any more or less
than many other people in town here, but we have a team that works very well together. My
background is technical; I started as a geologist back in the mid eighties working in
Canada. My background is also financial; I spent about half of my career working in the
investment business on the other side of the street in corporate finance and research. I
have a good understanding of what public markets are looking for and what we need to do to
work with the investment community. But the market is only part of it. You have to have
strong technical understanding of this basin and how to find oil and gas profitably. Kevin
Wright is our VP of Engineering and he also started in the mid eighties. He has worked for
large companies down to small companies. He has worked in the field as a field operator
and has worked his way up through larger companies doing reservoir engineering and
acquisitions. He understands the business extremely well right from the ground up. Steve
Lamb and I started together in the oil industry in the nineteen eighties. He is a very
experienced explorationist and he has worked most of the basin. He has been involved in
large plays, but in the last three years he has been focused on east central Alberta so he
is very familiar with the area. He was well prepared to hit the ground running with us.
You have an oil finder, a businessman entrepreneur, and someone who understands the
capital markets.”
CEOCFOinterviews: What
is the current ration breakdown between oil and gas and how do you sell what you produce?
Mr. Hogg: “Normally we would probably like to have more
gas than oil but right now we are happy that we are eighty percent oil and twenty percent
gas. We sell the oil on a month to month spot contract, so we are not hedged at all.”
CEOCFOinterviews: You
had a recent financing; will you tell us what it will be used for?
Mr. Hogg: “We have raised 10.99 million dollars. Our
average cost was two dollars and fifteen cents per share, which was a good price
considering where we were trading at the time. The issue was a combination of about four
and three quarter million dollars on a dollar $1.90 per share, as a common share offering,
the remainder of six and one quarter million dollars at $2.40 a share on a flow through
share basis. The goal was to make sure we have cash in the bank for our upcoming west
central Alberta drilling program. We started in east central Alberta but that is not where
we thought we would build the long life reserve assets. Our goal has been to put together
exploration plays west of the fifth meridian in Alberta, and chase deeper natural gas. We
have tied up a number of sections of land in the St. Anne area just west of Edmonton and
we drilled our first well there, which will be completed hopefully before years end. We
have an intense seismic and drilling program planned for the winter.”
CEOCFOinterviews: Are
there newer technologies and techniques that you are able to use to help you be
successful?
Mr. Hogg: “We use a lot of 3-D seismic; it is not new or
cutting edge but in the areas we have in 3-D has not been shot previously so we have a
technical advantage over the guys who have gone before. We are able to learn from whatever
mistakes anyone else has made and the use of 3-D will give us a leg up and a better chance
at success. As far as the rest of it, there is nothing cutting edge, but a lot of day to
day grinding away through the data and making sure we are putting a lot of care into what
we are doing. Many of the oil fields we bought in central Alberta, we bought from the
larger companies. These properties tended to fall through the cracks at the larger
companies; they have not been given the attention we give them mainly because they are
small things for them and it is not worth the effort for the bigger companies. They are
very important to us, and we give them attention.”
CEOCFOinterviews: Will
you give us an example of what you have done to increase production that was not being
done before?
Mr. Hogg: “We purchased two oil fields near Galahad
Alberta a year ago. They were doing 165 barrels a day, and these properties are now
producing over 400 barrels a day. We have also increased our land condition in the area
and have done additional drilling so we are doing over 700 barrels a day in that area.
We bought them at the operating cost of about eighteen dollars a barrel and dropped
it down to about twelve dollars a barrel. We think we can keep them lower than that. We
have taken a facility that was handling about twelve and a half thousand barrels a day of
fluid and brought it up to twenty five thousand barrels a day. We have increased the
efficiency of the operation and we have done this with less staff than originally. It has
been very profitable.”
CEOCFOinterviews: You
talk about a “disciplined execution of proven strategies”. Will you elaborate on
that?
Mr. Hogg: “Many companies, in my experience, talk about
following a number of tenets, which successful companies follow. They say they will
control costs, they say they will stay focused. Focus is a good example. There are many
companies that say they will stay focused and then they go to southern Alberta, western
Alberta, southeastern Saskatchewan, and they are all over and not focused. We have stayed
focused and we will remain that way. We also say we will try to maintain a 100% interest
in our properties and if we are not, we will try to buy out our other partners. Anything
we do not own 100% gnaws at us until we find a way to sell the property or pick up the
other partner’s interests. We try to keep control of our costs, operation and flow of
capital. We watch where we are going and how we are achieving our results on a weekly
basis. Every week the management team sits down and goes through every single operation
and every single well we are drilling. We look at what the results have been and whether
that should impact what we do next. We review every deal, every week. That keeps us
focused on making money every week.”
CEOCFOinterviews: How
does the fluctuating energy situation affect you as CEO?
Mr. Hogg: “It has meant that we have been able to make
acquisitions that were as good at the time we made them and have proven to be very
fruitful over the last year. For example, Galahad that we bought a year ago, the price
forecast that was in the original engineering when we bought the property was predicting
2005 average oil price of $23.00 a barrel and for 2004, our average oil price today is
$45.00 a barrel. We bought our oil price forecast of $25.00 a barrel and we are actually
going to average over $40.00 this year. We made what we thought was an intelligent deal
based on that price forecast, and it has been gravy. One would like to think that we were
led to know prices would go that high; I do not think we knew they would go that high. We
did think they would be higher than twenty five dollars but not forty. Looking forward, I
think there is still a potential for further upside in the oil price. There is a lot of
pressure that could result in higher oil prices. Many things could go wrong in the world
and that could jack the price up. Regardless, you build your cost structure on a much
lower price of twenty five or thirty dollars a barrel, anything you get above that is
going to be gravy and that is how we run our business.”
CEOCFOinterviews: Where
does that excess money go?
Mr. Hogg: “We have invested in the ground, so we have
accelerated our program quite a bit more than we originally thought we would. We started
the year saying that we would spend about six to eight million dollars; we are probably
going to end this year with around twenty million dollars in spending. We have made use of
the excess income for sure.”
CEOCFOinterviews: In
closing, why should potential investors be interested and what should they know that
perhaps they do not realize when they first look at the company?
Mr. Hogg: “I think what investors should always look at
is the track record of the team that is out there. What we have shown over the last year
is that we have been able to find acquisitions less expensively. We have been able to
drill and effectively find additional production. We have shown we are able to handle
growth and build the next leg of growth as well as put together the next area that we are
going to be chasing. We have shown we are able to watch our costs and grow production.
That is what you look for in an oil and gas company. I think it is also helpful when you
see that there is a strong and independent board of directors. We have a board of
directors that we are proud of. They are very independent, actively involved and very well
respected here in town. They have been a key asset for us.”
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