Arrow Exploration is riding the rising tide of oil demand
Arrow Exploration is continuing to progress its projects in Columbia
By Don Hauka
It's been a hard, slow climb back for oil producers from the darkest days of the COVID-19 crisis. During this time, the OPEC basket price plummeted to U.S. $17.66 per barrel, and futures prices for West Texas Intermediate nosedived to negative territory in April 2020.
Now, with economies around the world recovering from the pandemic shock, global oil demand is rebounding with a tight balance between consumption and supply.
Forecasters like the International Energy Agency and the U.S. government's Energy Information Administration see world oil demand rebounding back about 100 million barrels per day, a level last reached in 2019. The Organization of the Petroleum Exporting Countries' recent 2021 World Oil Outlook forecasts oil use will rise by 1.7 million barrels per day in 2023 to 101.6 million barrels per day, pushing demand back above the pre-pandemic 2019 rate.
"Energy and oil demand have picked up significantly in 2021 after the massive drop in 2020," OPEC Secretary-General Mohammad Barkindo wrote in the foreword to the report. "Continued expansion is forecast for the longer term."
Calgary-based Arrow Exploration is poised to profit from rising oil demand by growing its production from a diversified portfolio of assets
That's the kind of forecast that puts the spotlight on companies like Calgary-based Arrow Exploration Corp. (AIM: AXL | TSXV: AXL), which is well-positioned for growth in a reinvigorated oil and gas sector.
A junior oil and gas company engaged in the acquisition, exploration and development of oil and gas properties in Colombia and in Western Canada, Arrow has a high quality, self-funded portfolio of underexplored, high growth Colombian oil assets.
"We're fortunate to have a diverse portfolio of assets, not only across two countries but also across different basins in Colombia," says Max Satel, EVP Corporate Development and Investor Relations.
"We can easily pivot and exploit opportunities from one to another one of our assets because each of them presents us an attractive and unique opportunity set in its own right."
With oil accounting for over 30 per cent of its exports, Columbia is an oil and gas industry-friendly jurisdiction. Arrow's business plan is to expand oil production in some of the country's most active proven basins.
Arrow already has a solid Colombian footprint, with a portfolio of premier oil assets that promise high-potential growth. The company offers an attractive entry point into tightly held, historically high-producing regions. It is currently producing assets focused on the Middle Magdalena Valley as well as the Llanos Basin – the most prolific oil-producing basin in Colombia.
Arrow has a 50 per cent working interest in the 65,000-plus acre Tapir Block, a Llanos Basin property that has existing production and significant exploration potential. The RCE-1 well restarted operations in December 2020 and is currently averaging 140 bbls/d. The operation features a high working interest land base, low operating costs, and organic growth opportunities.
With quality assets and strong netbacks per barrel, the company also has the prospect of generating significant near-term, high ROR growth. This is coupled with a focused program through improved efficiencies, low-risk tie-ins, development wells, and high-impact exploration.
Arrow enjoys multiple near-term value catalysts in oil-producing friendly jurisdictions
Capitalizing on increasing oil demand and rising energy prices, Arrow Exploration is moving forward with ambitious value transformative drilling and tie-in activities.
"We have multiple, near-term catalysts in a jurisdiction that is extremely supportive of our industry, is under-explored, and has existing infrastructure in place," says CEO Marshall Abbott.
"Our portfolio contains both development wells, providing low-risk immediately cash-generative growth opportunities, but also higher risk exploration opportunities, which we look forward to drilling."
As part of that program, Arrow has recently tied-in the behind-pipe natural gas from the 3-26 Well located at West Pepper, Alberta. The $1.3 million project added over 1,000 boe/d and takes advantage of the strong gas price environment in Alberta.
In Colombia's Llanos Basin, Arrow is preparing to drill the RCE-2 well at the Rio Cravo Este discovery, where the company has existing light oil production from the RCE-1 well. Drilling and results of the RCE-2 well are forecast for Q1 2022. Drilling and results from the RCE-3 well are forecast for Q2 2022.
Tanks at Rio Cravo Este (Colombia)
The Tapir Block will also be the site of another drilling program when work commences on the Carrizales Norte-1 well in 2022. Arrow sees the potential for four to five development wells in the prospect and estimates a high percentage chance for commercial success.
"We've laid out a busy drilling program, especially with our Colombian assets, to the end of next year and heading into 2023," says Satel. "Our objective is to continue moving towards our production goals."
One move that will help Arrow get to its stated goal is the potential extension of the Oso Pardo license (100% Arrow), which would give the company the rights over the entire potential development area. Overall development estimates as much as 4,000 bbls/d of additional production. Arrow's current production at Oso Pardo is approximately 120 bbls/d.
"The real upside for us is that none of that potential production from an extension of the Oso Pardo license is captured in any of our forecasts, and that's something that hasn't received a lot of attention from the market," says Abbott.
"That could materially change the picture for us because that's a development that could eventually add up to another 4,000 barrels a day of oil production."
New management team making all the right moves
The positive outlook for Arrow represents a dramatic turnaround brought about by a new management team that came on board in April 2020.
"The management team that took control of the company about 18 months ago basically rebuilt it and have done a good job," says Stephane Foucaud, a research analyst for Auctus Advisors in the UK who follows the company.
"There's been a pretty big increase in price in the share value and they've put a lot of other pieces in place."
Among the steps the new management team took was terminating an onerous off-take contract at no cost, completing the sale of the non-core, higher cost LLA-23 Block for $12 million to COG Energy in December 2020 and rebuilding the company's relationship with Petrolco (50 per cent partner on the Tapir Block) while restarting production from RCE-1 well. The team accepted below-market salaries to help turn the company around.
"We have a great management team that has over 150 years of combined experience in the industry – a number of the people have been in oil and gas for over a generation," says Satel.
"We've operated in excess of 15 different jurisdictions globally and we have a very capable and dedicated team on the ground in Columbia. We're supported by a very strong board of directors as well."
West Pepper wellhead and piping (Alberta, Canada)
In addition to restarting production at the RCE and Oso Pardo fields, the management team reduced the company's annual general and administrative costs by over 40 per cent, from $7.2 million in 2019 to $4.3 million in 2020. They further bolstered Arrow's position by raising approximately C$15 million via a placing of common shares as well as gaining admission to the AIM market of the London Stock Exchange. In the process the Company significantly expanded its shareholder base, and trading volumes in Arrow shares have increased.
Arrows benefits from a perfect environment for growth
Buoyed by a resurgent demand for oil and rising prices, Arrow Exploration offers investors a stake in consistently producing regions poised for continued growth. The organic growth opportunities in company's properties like those in the historically high-yield Llanos Basin are bolstered by a stable, supportive Colombia government and an industry tied to the influential Brent light oil price index.
"The fiscal terms in Colombia are quite attractive. It has a highly competitive royalty rate regime in the bottom-quartile globally, with royalty rates generally ranging from about 8 to 14 percent and that is an attractive percentage," says Satel.
By adding in the proximity of good in-country infrastructure that can support the development of new projects, Arrow has a growth environment in which to expand its operations and presents an attractive package for investors.
"For investors, I think it's an opportunity to invest in a company that's a tight ship with a good management team that has a lot of room to grow at a good price," says Foucaud.
To learn more about Arrow Exploration, visit their website here.