MGM Energy Corp. will be closing its doors forever within the next two months, but who will be taking over its shares - and leases in the Northwest Territories - has yet to be determined.
The oil and gas junior is hoping to have its remaining shares not already owned by former parent company Paramount Resources Ltd. returned to the mothership by June, pending shareholder approval.
MGM president Henry Sykes said the decision is in the “best interest” of the company, which has struggled for a decade attempting to make its mark in the territory’s Beaufort and Central Mackenzie regions.
“Our experience has not been a positive one. Obviously we’ve spent hundreds of millions of dollars, drilled 11 wells and have nothing really to show for it today in terms of any cash flow-generating ability,” said Sykes, who predicted similar outcomes for other companies.
“Until there’s infrastructure in the North, until people can see a clear path to investment and return on investment, I think you’re going to find activity is going to be delayed, if not eliminated altogether,” he said.
MGM has been inactive in the Canol shale play since drilling its single vertical well with Royal Dutch Shell in the winter of 2012-13, but continues to hold six leases in the Sahtu region around Norman Wells, Tulita and Colville Lake totalling approximately 318,000 hectares.
Two of MGM’s Sahtu leases are owned in partnership with Shell, while another lease is split 50/50 with an unnamed private company south of Tulita. Apart from its stake in the Canol, MGM also has a string of properties in the Beaufort Delta.
Shell pulled out of its partnership with MGM in late 2012 after their application to complete exploratory horizontal fracking in the Sahtu was referred to environmental assessment. Both companies determined it was too early in the game to finance a full public review.
“We and Shell still own land together, and we’ll continue to work together, but you’re not going to see any activity on those lands at least in the next year, I would suggest,” Sykes said.
Shell will now have the option of advancing exploration with a company backed by larger finances, but whether or not that will be Paramount is uncertain.
The $50-million deal on the table right now for MGM – one share of Paramount for every 300 shares of MGM Energy – has full board approval, though MGM has until three days before the June shareholders meeting to strike a superior deal, in which case it would have to reimburse Paramount up to $400,000.
Paramount was unavailable to comment on future plans for the Sahtu if its bid is successful.
MGM was created in 2007 to bring stranded oil and gas resources to market via the Mackenzie Valley pipeline, but when the pipeline was put on hold because of market conditions, the company decided to focus on its Canol properties.
MGM president predicts rough go for stranded Northern resources
Sykes said the unfortunate reality is that investors are reticent to back exploration projects in the North, even if those companies are sitting on trillions of cubic metres of oil or gas, which is due to lack of pipelines and other ways to get resources to market.
“We’re sitting on billions of barrels of oil in the Sahtu, but there’s no where to take any of it, and nobody can tell you when there might be a way to get any of it out of there,” he said.
“(Investors) want to see that it’s actually happening, that somebody’s actually starting to put infrastructure in the ground, before they start making commitments, otherwise they just don’t believe it. So that makes it impossible for companies like ours to raise money for Northern exploration, and I think that’s really quite regrettable.”
The struggle also stretches to bigger companies like ConocoPhillips and Husky Energy, both currently drilling in the Sahtu, Sykes said: “Almost everybody involved in the Sahtu is looking for partners to spread their risk around because it’s too much money with no imminent prospect of return.”
Sykes predicts spending will slow down once companies meet their initial spending commitments, as exhibited this month by ConocoPhillips. While the company plans to apply to drill up to 10 more wells in the Sahtu, it decided not to allocate any capital funding to winter drilling in 2014-15.
Although he sees great strides being taken by the territorial government and the private sector to improve the energy investment situation in the NWT, Sykes said there’s no contest for investors when a turnaround on profits in a well-developed area like the Bakken shale play takes months compared to years, or even decades, in the North.
“It’s very hard for the North to compete with that. In fact, I would say that today it’s impossible for the North to compete with that,” he said. “Stranded resources are of no value to anybody.”