Oil E&P, Canada and the Hunt for Capital

Chris has been an active participant of venture capital projects for the last ten years. Prior to starting Stonechair Capital Corp, he was the Head of Capital Markets and Senior Investment Banker at a resource focused boutique bank and the VP of International Opportunities at a national firm. His experience with public and private companies has seen him finance projects throughout Africa, Europe, South and North America and Australia. Stonechair Capital is a corporate finance advising firm specializing in the development of energy and resource companies. Our operations are based in Calgary, Alberta and we represent public and private companies throughout Canada, the United States and Europe. For more information and how to contact Chris directly, please visit: www.stonechaircapital.com

Ross Stewart Campbell (RSC) from The Oil Council: Chris, many thanks for joining us to share your thoughts on today’s markets. Some of our readers might not be familiar with Stonechair Capital Corp. Can you quickly introduce your company?

Chris    McLean    (CM)    from Stonechair    Capital    Corp: Stonechair Capital is an advisory firm that tries to align its interests with that of its clients. After 10 years in capital markets we saw a need for a company to bridge the gap
between investment banks and private equity. Lately deal volume has outpaced the need for deal quality in our equity markets, something has been lost.

RSC: Let’s start with the wider Canadian markets Chris. Last year we saw a record number of oil and gas related financings take place and comparative to other international markets Canada has proven to be exceptionally robust. What’s your take on this dynamic and why are your markets have held up so well?

CM: I truly believe that the Canadian markets are the best place in the world to list public exploration companies. Our regulation is so front-end heavy [compared to other international markets] that only companies with viable chances are listed. In "lean times? our investment community has shown that it can direct capital into our markets and into companies they trust. The reporting processes of Canadian E&P companies and our regulatory framework have allowed that capital to be raised even in the markets? darkest hours.

RSC: Looking at recent investor and financier sentiment in Canada what trends have you noticed regarding the types of company and projects that are getting most interest and most backing? Is it across the oil and gas spectrum, or, for example, are exploration-focussed companies winning more market interest? Following on from this point are investors and financiers looking more favourably at companies operating domestically or internationally?

CM: Throughout the latter half of 2009 there was a substantial increase in pure exploration financings, with Kurdistan and Columbia being the big recipients of this initial capital flow. I do think that new capital is now starting to be a little more adventurous, looking towards East Africa, Central Australia and Europe. Furthermore by applying recent developments in heavy oil recovery techniques (perfected of course in Western Canada) many marginal fields in Europe have now opened up. Multi-stage fracs are now being applied to prospects globally and management teams who are raising capital with these processes continue to attract attention as they move onto other basins. Like most things once the perceived risk is removed then capital is willing to follow – with the jurisdictions spreading out further and further from domestic basins.

RSC: Stonechair works primarily with private and public exploration companies on an equity partnership basis, how important have strategic investors and partners like Stonechair become in the last few years to oil and gas companies? What are the advantages to this approach over companies working directly with investment dealers and banks?

\CM: The equity partnership approach aligns the common interests of the exploration company and the advisors it works with. Rather than a fee-based approach that rewards short-term goals the equity partnership model ensures that management has a voice when working with the fee-based community. Helping management and boards that have little or, no capital market experience ensures that they make choices that have long and short-term benefits for their company. For example: A private company looking towards the public markets would traditionally call on an investment dealer and look for support to raise the capital required. Once agreed upon the dealer develops a marketing story to raise the capital. The actual „going public? process is often then referred to legal counsel to “paper up the deal” and management is left to figure it out alone.

Having an equity partner that has been thought this entire process ensures that the dealer, the lawyer and the company keep the primary objective in mind. Different investment banks have reputations and skills in different areas; the same holds true for legal counsel. It does matter whether your legal counsel knows the regulators and has a dialogue with them. A Partner just saying their firm has done the work doesn?t cut it. Working with strategic and equity partners can provide access to a network of intellectual capital that is not easily found and extremely important.

RSC: You’ve witnessed the good, the bad and the ugly Chris when it comes to how companies approach the Canadian markets. What pitfalls do companies often make when approaching the Canadian regulatory system, capital markets and investor pools?

CM: The biggest pitfall is underestimating the time it takes to complete the entire process. Most companies come to Canada looking for quick equity needs and get lost in the process. The Canadian markets are a permission-based system versus a reporting-based system. Our regulators take keen interest in management, board members and controlling shareholders. This is perhaps the most important element to consider when approaching the Canadian system. People are what investors look for; assets are the tools they use. All that being said a company should look to the public markets in Canada 6-8 months ahead of their need.

RSC: Is there a limit to what a company should seek to raise from the market at any one given time?

CM: Take the money. Take all the money. Take it now. Junior exploration companies get lulled into thinking that they can always come back to market to raise capital. 2008-2009 has shown us that this is not always the case. Look ahead at least one year for a Capex program and G&A – this should be a starting point. Investors are willing to commit to exploration but you are going to need to demonstrate tangible results.

RSC: You’ve worked recently with Black Marlin Energy to help raise capital for their East African operations, what lessons from that capital raising can you share with the wider market?

CM: Again, take the money, take all the money and take it now. Windows of capital open and close with amazing speed. Black Marlin Energy was fortunate to be going to market in one of those open windows at the start of the year but it was preceded by a couple months of preparation groundwork on behalf of the dealer and management.
I would encourage management teams that are passionate about their projects not to take rejection personally. Often portfolio managers need time to understand new plays and want to see management more than once. After all they are really buying into management that has a good idea so finding the right team is not a quick decision.

RSC: A lot of private companies are now looking at moving some of their equity onto the public markets to raise capital for new development. Of course managing a private company and managing a public company are two different beasts entirely. How tough a transition – from being private to going public – is this for the management and the boards of private companies, particularly within today’s market dynamics?

CM: This is probably where the biggest misconceptions about being public appear. Going public is not about raising equity, raising corporate profile, or a CEO?s ego. Going public is about starting a second business that has nothing to do with your primary business – finding oil and gas. The second business has new compliance requirements that your Chief Financial Officer perhaps has never experienced; your board has new responsibilities to a shareholder base that extends past the founders, friends and early venture capital; and timely results matter. The second business is a tool of the primary but cannot be neglected for the sake of the first. Being a public company is more than “creating shareholder value”. No one asks, “value for which shareholder?” This is the art of being public.

RSC: “Management is the key to success!” Is management the defining quality of a world-class oil and gas company today? And also Chris what role must a Board and its Non-Executive Directors play in the growth and development of an oil and gas company today?

CM: Management is what early stage investors in exploration are buying. The asset, the play, the interpretation, are all tools that allow the management team to do what makes them excited to get out of bed in the morning.
This brings me to another topic that is passionate to me. I truly believe that there is a generational gap in corporate experiences that needs to be filled. Senior management in oil and gas have been heavily recirculated in the last 10-15 years. Because of this there is a gaping hole in experienced board members and younger executives that have had experience in their 30?s and early 40?s. I would highly encourage senior executives reading this to consider mentoring younger executives.
This would make an immense contribution not only to the future health of boards and executive suites but also the oil and gas industry as a whole.

RSC: When assessing the strengths and weaknesses of the various management teams you’ve worked with Chris are there specific management styles, strategies and traits that have proved more successful when working within the Canadian markets? What makes for the ultimate marketable management team?

CM: Hmmm...Two things come to mind. A President/CEO that understands that it is their main job to stay in constant communication with the market. This person understands that exploration never happens on time and rarely happens on budget but isn?t afraid to pick up the phone, get on a plane, or eat another rubber chicken lunch to let his investors know what?s going on. The second is an executive suite comprised of a CFO and VP Exploration that are not order takers but creative thinkers in their own right. They can come to a management meeting and press the matters that need attending and keep the company on track. To me this is the perfect management setup for junior exploration companies – the dreamers are kept in line, the analysts are forced to find other ways to solve problems and no single person is left in charge.

RSC: If I may Chris I’ll wrap up by asking your one- word opinion (bullish, bearish or uncertain) on the future of the following. Bullish, Bearish or Uncertain? Natural Gas E&P companies operating in North America?

CM: Bearish

RSC: Canadian Royalty Trusts?

CM: Uncertain

RSC: Columbia as a major area for oil and gas growth?

CM: Bullish with a caveat . . . . look to see other South American countries start to raise their profile as they see the irresistible draw of oil revenue.

RSC: The TSX-V?

CM: Bullish

RSC: Chris many thanks for your time and of course your insight