Southern Pacific almost ready to roll on new oilsands project

CALGARY - A $430-million thermal oilsands project proposed by Calgary-based Southern Pacific Resource Corp. is expected to begin construction this fall, after it ties up final regulatory approval and financing.

In the past few weeks, the company has bought out a partner to take 100 per cent control of its McKay project north of Fort McMurray, hired a former Suncor manager as chief operating officer and jumped from the TSX Venture Exchange to the senior Toronto stock market.

In April, it closed a bought deal financing that delivered $101 million.

“McKay is just around the corner ... we will be in first steam less than a year and a half from now,” predicted Byron Lutes, president and chief executive of Southern Pacific, during a presentation Thursday at the Canadian Association of Petroleum Producer investment symposium in Calgary.

The company has proposed a 12,000-barrel-per-day steam assisted gravity drainage project with production starting by mid-2012. It has plans to apply to build two similarly scaled expansions by summer of 2011.

Its shares have bounced from a 52-week low of 28 cents in August to $1.45 in April, a few weeks before it sold 84 million shares. On Thursday, the stock closed at $1.11.

Randy Ollenberger, an analyst for BMO Capital Markets, rates Southern Pacific a speculative outperform and said he thinks they will get regulatory approval and the $300 million in additional financing they need.

“One of the things that sets them apart from other emerging oilsands plays is their Senlac asset,” he said.

“They’ve got some cash flow on the go, just under 4,500 barrels a day. They bought that from Encana pre-split and really got it for a good price. It generates $40 million to $50 million a year of cash flow.”

The Senlac heavy oil project in west central Saskatchewan uses SAGD technology — Encana had used it to develop techniques used at Foster Creek and Christina Lake in situ oilsands projects, now part of spinoff Cenovus Energy.

When Southern Pacific bought Senlac last fall for about $90 million, it did so in part to gain access to the technology and the staff, some of whom have been seconded to work on McKay, Lutes said.

He added the company doesn’t plan to use any untried technology in its project.

“We’re too small,” he said. “We’ll let the big guys test the new technology. We think SAGD works very well.”

Richard Wyman, an analyst for Canaccord Genuity, rates the company a speculative buy and said the key question now is how it will line up its financing and how much it will have to pay.

During the presentation, Lutes said Southern Pacific plans to fund a $505-million capital budget over the next 18 months using $60 million in cash, $90 million from Senlac cash flow, a $55-million existing bank line and $300 million in a new debt facility which could include project financing, term loans or bond debt.

“Debt markets were virtually frozen in late ’08 and the first part of ’09, and they’re not that way today,” said Wyman. “There may be a cost but I’m pretty sure they’ll get it.”

Wyman said Southern Pacific and MEG Energy, which announced earlier this week it would do an initial public offering to finance its oilsands project, have the advantage of already having production to help pay the way while they build and commission their projects.

Another emerging company, Athabasca Oil Sands Corp., raised $1.35 billion in one of the largest energy offerings in Canadian corporate history earlier this year, although it has since lost nearly half of its market capitalization.

On June 1, Southern Pacific bought out the company that held a 20 per cent stake in its oilsands lands at McKay for $33 million.

Its new COO is Ron Clarke, who worked for the past three years on Suncor’s Firebag SAGD project.