Most Canadian E&Ps focus on modest production growth and pay a stable dollar dividend to enhance shareholder value. Bellatrix Exploration Ltd. elected to break that mold—instead maximizing shareholder wealth by redeploying cash generated from operations back into the ground to rapidly grow production and reserves in North America’s most economic plays. Its focus is the Deep Basin in west-central Alberta.

“Since our inception in 2009, our company was designed to be a drillbit-driven company that focused on profit rather than focusing on the type of hydrocarbon,” Ray Smith, Bellatrix Exploration’s CEO, said. “We’re more concerned with the profitability of our wells than the commodity mix of oil versus natural gas.”

Bellatrix was designed as a drillbit-driven company focused on profit rather than type of hydrocarbon, according to its CEO, Ray Smith.

The Calgary-based company’s track record of growth speaks for itself. By focusing on areas with proven hydrocarbon systems in tighter sand formations since 2009, Bellatrix has grown production and reserves 332% and 720%, respectively, while growing cash flow per share by 222%. A factor in that growth is the company’s focus on cost control.

“Since 2009, we’ve reduced our operating costs by more than 40%,” Smith said. “We expect to realize additional savings when our new gas processing facility comes online in mid- 2015.”

Deep Basin

The Deep Basin in west-central Alberta is reminiscent of the Permian Basin in West Texas or the Midcontinent region of the U.S. because of its numerous stacked pay zones. It has more than eight commercial, hydrocarbon-bearing zones, including formations with light-gravity crude oil and high-impact natural gas, which can also include a significant liquids component.

This once largely mature basin has been transformed as Canadian E&Ps have adopted drilling and completion techniques similar to those being used by their U.S. counterparts. One of the plays being transformed, the Cardium, is Canada’s second largest oil play, behind only the tar sands, with 40 billion barrels (Bbbl) of oil and 49 trillion cubic feet (Tcf) of gas in place. Porosities in the Cardium range from 3% to 15%, with up to 100 feet of pay, and it has low historical decline rates of about 6% from vintage production, making it one of Canada’s premier plays.

“Based on our type curve expectations, a C$3.75 million Cardium well generates a net present value of between C$4 million and C$6.1 million, with rates of return north of 100%,” Smith said. “These results compete with the best plays in all of North America.”

Bellatrix has more than 700 net locations in the Cardium left to drill.

The general play fairway for the upper Mannville (Spirit River) extends across west-central Alberta and through the Bellatrix land base.

It’s hard to believe there’s an even more exciting play developing in Canada—but there is, according to some observers. The Alberta Spirit River play garnered headlines when 14 of the best 15 wells in the province were drilled in the Spirit River. More than 82 wells have been drilled with initial production (IP) rates of 10 million cubic feet per day (MMcf/d) or more.

“We drilled the highest producing natural gas well in Alberta in 2013 in the Spirit River Formation,” Smith said. “In its first year, the well produced 5 Bcf of natural gas and 166,000 barrels of liquids.” The play is liquids rich with average yields of 35 barrels per MMcf of natural gas. “This provides a significant uplift in realized prices relative to AECO [the Alberta gas hub] and enhances the economics of the play relative to drier gas opportunities,” Smith added.

The Spirit River Formation includes sub-members such as the Notikewin and Falher, both horizons that Bellatrix targets. The names Spirit River and Upper Mannville are used somewhat interchangeably, depending on where in the Deep Basin an operator is active. Bellatrix drills the Spirit River at about 2,400 meters deep. Other operators actively pursuing the formation in the area include ConocoPhillips, Taqa (Abu Dhabi National Energy Co.), Peyto Exploration & Development Corp. and Tourmaline Oil Corp.

Although it is still early days in the Spirit River play, Bellatrix is demonstrating results with average estimated ultimate recovery (EUR) expectations of between 5 billion cubic feet equivalent (Bcfe) and 7.5 Bcfe, with rates of return topping 500%. The company has more than 380 net locations left to drill.

At press time, Bellatrix announced it had acquired 10 gross (5.7 net) sections of Mannville rights in the Alder Flats area with associated production of 2,200 boe/d, 80% natural gas, for C$118 million. The acreage is highly contiguous with the company’s existing operations and Bellatrix’s working interest will increase from about 40% to some 97% on the 10 sections being acquired. The company has identified 19 gross (9.5 net) low risk development drilling locations within the Notikewin and Falher B zones in addition to 16 gross (10.75 net) upside locations in the Falher A and Wilrich zones, according to a report by Northland Capital Markets.

The company increased its production guidance as a result of the acquisition with its 2014 exit rate increasing from 45,000-47,000 boe/d to 47,000-49,000 boe/d and 2015 average production guidance increasing from 48,000-49,000 boe/d to 49,000-50,000 boe/d. The revised 2015 production guidance also reflects a decrease in the company’s capital budget from C$450 million to C$400 million, due to the recent pullback in commodity prices.

Growing pains

Industry activity within the Western Canadian Sedimentary Basin has changed over the past few decades, as technological advancements have strained infrastructure and natural gas processing across Western Canada. Operators like Bellatrix have thousands of barrels behind pipe waiting on additional capacity. Not only are throughput volumes constrained, many Canadian midstream facilities were built in the late 1970s, rendering them unequipped to process and recover all liquids in the production stream.

With more than 5,000 barrels of oil equivalent per day (boe/d) behind pipe, Bellatrix had to take action.

“We recognized this potential bottleneck early, and we are currently constructing a large-scale, two-phase, 220 MMcf/d deep-cut gas plant, which anchors our near- and medium-term growth plans,” Smith said. “Additionally, we’ve entered into a series of firm service agreements with numerous third-party facility operators and creatively accessed underutilized plants by building pipeline access where possible.”

Current plants within its core area recover on average only 45 bbl of liquids per MMcf of gas. Bellatrix’s new plant is designed to recover 87 bbl of liquids per MMcf, resulting in an additional 5,100 bbl/d of value being realized. These additional volumes represent an incremental prize of around C$100 million per year in additional revenue potential with an additional $28 million of potential operating cost savings relative to existing plants. The two-phase plant is expected to cost Bellatrix approximately $200 million with a payout of less than two years.

“Our infrastructure plans allow Bellatrix to grow from our updated forecast 2014 exit rate guidance of between 47,000 and 49,000 boe/d, to being in a position with net processing capability in mid-2016 of approximately 80,000 boe/d,” explained Smith.

Outlook for 2015

Bellatrix has decreased its 2015 budget to C$400 million from its 2014 spending forecast of C$530 million. This change reflects lower relative infrastructure spending year-over-year and also the current commodity price environment.

“We want to maintain flexibility with our capital program, and our focus in 2015 will remain completion of the first 110 MMcf/d phase of our deep-cut gas plant by midyear as well as drilling plans that support our infrastructure and processing capability growth,” said Smith. “Despite the year-over-year decline in forecast spending, Bellatrix has announced updated 2015 full-year average production guidance of 49,500 boe/d [midpoint], representing year-over-year growth of 26% compared with our current 2014 full-year average outlook.”