From bust to boom, Key Petroleum (ASX:KEY) has been a quintessential reflection of the economic turnaround in WA's mining sector. Only last October it was looking down the barrel of financial disaster and forced to cut staff numbers and its own 100% onshore oil production interest in the UK to raise money or lose some of their interests entirely.
Like so many mining success stories, Key Petroleum has rallied from its A$0.01 share price, undergoing radical changes within only four months. Already expanding its staff and restructuring its board, Key Petroleum has moved from a dwindling international player with production interests to an Australasia-based explorer.
By any stretch it's a remarkable turnaround yet according to Kane Marshall, who was recently appointed as managing director, this is not a backwards move. He said the key to success was to "keep things lean and mean", moving away from scattered global assets and instead focusing locally. This also meant its shareholders could keep track of deals and stop wondering where their money was going.
Yet it took a seismic event within the company for this change to happen. Marshall said that the A$0.01 share price was just the tip of the iceberg of a company that was unfocused. He surmised that industry veteran and Key founder Ken Russell's exit and a subsequent board reshuffle was due to unhappy shareholders.
"There was some shareholder dissent and no apparent light at the end of the tunnel. Share prices were A$0.01 and shareholders wanted to know where the money was being spent. I think it was a combination of everything - the company needed new blood, a new direction and what was in place obviously wasn't working. I think it got to a point where unless something changed the company was not going to go anywhere", Marshall said.
The company is now in the extremely prospective Canning Basin through a deal with Empire Oil & Gas (ASX: EGO) and is currently reviewing all its international interests while seeking more deals elsewhere in Australasia.
The deal with Empire saw Key acquire Empire's subsidiary Gulliver Productions, and with it came three exploration permits, a production license and a retention license in the Canning Basin, whilst Empire gained 22.25% of the northern Perth Basin permit EP-437, which the Warren Buffett-backed CalEnergy operates.
Though admitting that the Canning Basin is highly prospective, Empire's executive director Dr Bevan Warris has no regrets about offloading Gulliver.
"We understood the Canning's great potential but it's still a distraction. The Perth Basin is so much easier, so much lower-risk and there's all the infrastructure. We feel that the shale gas stuff is fairly long-term and we've got so much to do in the Perth Basin. That's where our management time will be spent", Dr Warris said.
"Ultimately, the West Kora oilfield (in one of Gulliver's permits) is a nice bit of cash flow but it's not a 'company maker'. It's not a huge field and its reserves are minuscule compared to Red Gully, and what we're hoping to find additional oil and gas fields in the Perth Basin".
The deal with Empire was no coincidence, as the company will be instrumental in Key's future. Empire's managing director Craig Marshall is now chairman at Key, which relocated its office from West Perth to Nedlands to share Empire's office late last year. Dr Warris, who also has extensive Canning Basin experience, will provide technical advice to Key.
While the Perth Basin EP-437 permit is in the process of being reviewed, the interest for Key – and the eyes of much of the industry – are on the Canning Basin, especially after Buru Energy's (ASX: BRU) historic oil discovery at Ungani-1 in October last year. Through Gulliver, Key is now involved in three Buru-operated permits: L15 (West Kora) and EP 104/R1 (Stokes Bay-1) and EP-438 (Buru 5%, earning 75%).
No commercial hydrocarbons were found when two wells were drilled in EP-437 early last year and they were plugged and abandoned – though Key said that one of them, Dunnart-1, had "good oil shows". The joint venture is now reviewing the remaining prospectivity in the block.
Key also operates EP-448, for which it is seeking farm-in partners to progress exploration. It's hopeful that ConocoPhillips' farm-in with New Standard Energy (ASX: NSE) in the Canning – whereby the US unconventional specialist provides 100% of exploration funding of up to $109.5 million – will be replicated with another company.
"The EP-448 permit is particularly prospective as it includes rich oil source rocks of the Goldwyer formation, which are considered some of the richest source rocks in Australia", Marshall said.
Additionally, industry sources say ConocoPhillips likens the Goldwyer play to the "red-hot" Bakken oil shale play in North Dakota, USA, which is one of the most highly productive shale formations in the world.
Meanwhile, the prospectivity of the Broome Arch area in EP-438 has been identified as containing potential mid to large size oil and gas prospects. As a result, Key and its joint venture partners plan to drill a commitment well at Cyrene-1 in late 2012. Previous wells in the area have encountered significant oil and gas shows. The drilling location already has easy access points due to its proximity to the Great Northern Highway, enabling continued work into the early part of the wet season and provides for the cost effective transport of oil and access to gas pipeline infrastructure in the event of a discovery.
In the near future the joint venture intends to test the Stokes Bay-1 well in Retention Lease R1, drilled in October/November 2007. This was to test the Anderson formation, which Key believes has potential recoverable gas of up to 100 Bcf.
The primary change in focus for Key has meant that its two production licences in the UK are being reviewed as part of its future restructuring. These licenses include the Lidsey and Brockham oilfields that are producing 100 bpd. Although last year Key was considering drilling another well to improve production, it is being reviewed in addition to South America, Italy and Tanzania interests.
"It looks like in the UK the production is relatively low – 100 barrels per day (bpd) from both fields. If we drill another well and get another 50bpd which costs $2 million, will that really add value to the company, in particular to our shareholders, and the image of the company? I'd say not, speaking on behalf of all the people who have invested in our company", Kane Marshall said. "We're better off spending the money on technical work in the Canning and trying to farm-out a block which can unlock a resource."
The company's West Sardinia offshore asset has been a costly exercise. Russell said prior to his departure that Key was working towards an exit. Marshall said this position didn't appear to have changed with the new management.
Evidently, shortly after the permit was awarded in April 2010, the Italian Government temporarily halted offshore drilling in its territorial waters following BP's Macondo tragedy. It then proposed the enactment of drilling exclusion zones close to environmentally sensitive areas and suspended the awarding of new acreage, including Key's long-standing other applications. This has meant a complete halt in any potential drilling and any financial viability in the asset.
Similarly, viability in its offshore Tanzania interest (5%) in the Kiliwani North gas development has also struggled with the company unable to reach settlement on a reasonable gas sales contract.
In Suriname, South America, Key has been participating in a drilling program in two areas adjacent to the sovereign state's main producing oil fields Tambaredjo and Calcutta. Yet this is also under review, especially with more favourable conditions on a number of fronts in Australia.
"We will be focusing on conventional opportunities, probably in mature basins in Australia. We'll look at a bit of frontier stuff and maybe the Asian arena offshore in Commonwealth waters", he said.
"It only makes sense to do business in Australia where we can get the joint venture partners in through the people we know who we can work with, including the state and federal regulatory bodies. This is preferred rather than going to uncharted waters, which has not favoured the company historically.
"It's all well and good to drill a discovery well in Tanzania for gas, but unless you can actually make money out of it, you've got a good operator and you're there for the longer haul and you have a big acreage position, then it's worth it. But we're not going to be there in the longer term for gas. We don't have the resources and funds to do it.
"You've got to learn a lesson from what's happened in Africa with Key and look after your shareholders and say 'this is where we see value: in Australia'. That's what we know, that's what our management team knows, and we should keep it nice and simple rather than having all these minor global interests incurring huge overheads, which don't really generate anything for our shareholders. There's no breadwinner in that."
It appears that the sporadic nature of its overseas projects potentially contributed to its December 2011 Half Yearly Report, which painted a grim picture. The data showed that $2 million was lost from general business activities for the half-year, including the write-off of just over $1 million in exploration expenditure. This was after a potential $7 million loss in 2010. With a net capital position of $1,447,434 and a half-year net decrease in cash of $746,037, Key was faced with losing assets if it could not raise the necessary money and was unable to pay for its work commitments.
"Should the group not be successful in its planned capital raisings, it may be necessary to sell further assets and reduce exploration expenditure by various methods including surrendering or withdrawing from less prospective tenements", the report stated.
Marshall, who was brought in to help the company move in a new direction, said it's all changed now.
"Those words about Key don't reflect where we are now", he said of the 2011 Half Yearly Report. "Things have changed quite significantly since then."
With the majors involved in the Canning and Buru's success, the future is bright for the company, that was truly on the ropes.
"I think we're significantly undervalued with respect to the other companies but with our focus on the Canning I think people are starting to cotton on to the fact that we can be a significant player in WA", Marshall said.
"We're optimistic that we have the right blend of new experience and older heads, it's now just a matter of time and patience until people on the Terrace know that Key is more than just something used to unlock the door."
Sourced from PESA News.