Silvermere Energy: A CEO interview with a new oil stock

Andy Morrison, CEO, Silvermere Energy interviewed by Drake Lawhead from the Oil Council.

This interview appeared in the April 2012 issue of Drillers and Dealers - the magazine of the Oil Council.

DL: Tell us about Silvermere Energy – what kind of company is it and how would you describe your business model to a potential investor?

AM: Silvermere Energy PLC was established in 2011 with the acquisition of our first near-production asset in the shallow waters of the Gulf of Mexico. The Mustang Island 818-L field in which we participate is a substantial gas and condensate asset which was part-produced in the 1980s. We have a 16.66% working interest in the I-1 well that was re-entered in 2011 and 33.33% in all future wells. Together with the Operator, with whom we work closely, we are engaged in a field rehabilitation project to recover the remaining reserves.

As a Company, we are young and small, but we have big ambitions. We see ourselves focusing on appraisal and production in order to build a company that can sustain itself day-to-day through production revenues and can build value through the development of a significant reserve position. We expect to stay in the US for the time being, and to focus on conventional oil and gas on-shore or in shallow off-shore waters. We will look to take significant minority positions and over time we expect to build our resources to enable us to take on operatorships.

DL: You bought your Mustang Island asset in the Gulf of Mexico last summer. Have you faced challenges raising money to develop it?

AM: We have been fortunate to have a loyal band of shareholders who supported the Company before and during the re-admission last year. They have done so because they can see the value in the asset. With their help we have now developed the asset ready for initial production. We have not been active in capital markets since admission, but we have started to raise awareness amongst investors which we believe is important.

DL: Do you see the capital markets improving at all for small E&P investment companies like yourself?

AM: In short, yes, conditions have improved this year to date compared to last year, but the markets remain somewhat nervous and fragile. I would expect the trend to continue, but it is unlikely to be in a straight line. It helps that the oil business is underpinned by growing and inelastic demand.

Digging down a little, the toughest conditions have been faced by those who would normally have turned to debt markets, where some big lenders have exited and terms are much more demanding than before the credit crunch. Equity funding has been slightly less difficult – the money is there and it is more a matter of confidence. If confidence continues to improve, then equity funding should be available to companies with compelling business plans and teams to deliver them.

DL: You previously were CEO of Venture Capital firm turned E&P company Xtract Energy from 2007 – 2010. How has business changed for startup E&P firms in the last 5 years in terms of access to capital, investor appetite, and ease of doing business?

AM: The autumn of 2007 turned out to be a high-water mark for access to capital in E&P as well as other resource sectors such as mining. Certain segments of the London market still respond to blue sky potential, so there remains a place for companies with big and risky exploration ideas. Having said that, we also see a trend towards investors backing companies that can sustain themselves through production cash flow and that can build value through the hard yards of project delivery.

DL: Where are the greatest challenges or threats facing a company like Silvermere Energy and independent O&G companies coming from today, in your opinion? Are they chiefly financial, operational, regulatory, or something else in nature? Or all of the above?

AM: The challenge (and interest) for us and for other small companies in the sector is one of managing change. The constant evolution of shareholder positions, the overall funding environment, commodity prices, the outcome of operations on the ground and the regulatory framework means that “all the parts are moving all the time”.

DL: What, in your opinion, are the ingredients for success in growing a startup E&P firm? To what extent is luck a factor?

AM: Well, if the greatest challenge is in managing change, then the key ingredients for success for an E&P firm are having the corporate sensing mechanisms to spot the changes and the flexibility to respond to them. Governance has a key role to play here, in both its supportive and challenging guises. Of course no E&P firm is going to get far without some real technical insight into its assets or without talented management to deliver the strategy, so these are also key ingredient for success. Luck? Well yes, it is important, but to borrow a sporting adage, “the harder you practice, the luckier you get”.

DL: Do you think the UK’s E&P industry is more of a thriving or hostile environment for an entrepreneur, or somewhere in between? How has this changed since you’ve been in the business, and where do you see the trend heading?

AM: The UK is not an E&P environment where I have had deep personal experience. Looking at it objectively, the number of independent companies that have entered the business in the North Sea over the years suggests that it has been a generally friendly environment. Recent changes in the fiscal rules have generated unwelcome uncertainty for established players but these are perhaps of less concern to early stage companies. Moving on-shore, the UK has a reputation for being a difficult place to do E&P business, from the perspectives of permitting and public relations. Keeping the business moving off-shore seems a more likely picture.

DL: What is the next piece of news to look out for from Silvermere?

AM: We are busy on a number of fronts these days. We expect to have news flow around the installation of the platform at Mustang Island and the start of production from the I-1 Well that was re-entered and tested last year. We are also getting ready for a business development phase, and we hope to have more to say about that before long.

DL: Which other oil companies or investors do you admire currently, and can you explain why?

AM: Admiration I think requires a certain size and longevity. I admire Shell for its ability to sense changes around it and for its ability to respond to challenges and to adapt its business over time. I admire BG for its business model which has given it market-leading growth over almost two decades and which has been emulated (albeit quietly) by Shell and others. I admire the enterprise shown by several small companies who have together ensured that the UK market has produced a steady stream of mid-sized oil and gas firms.

DL: When you’re away from work, how do you enjoy spending your spare time?

AM: I enjoy travelling, seeing new places and thankfully there are still many more of those to go despite my being fortunate enough to have travelled a lot and lived abroad. By choice, I will find my way to open spaces with wide blue skies; and when that’s not on the cards? Well it’s down to the tennis club and/or spending time with family and friends.

DL: Finally, something we always ask: What three things would you bring to a desert island?

AM: Do you mean a desert idyll, or a desert death-trap? So long as it has water and food then I’d be in no rush to escape. A mosquito net might make a real difference to quality of life. A good knife would be a boon. Then I’d get bored, so I’d need a way of letting people know where I was so they could come and join in.

Read More about Silvermere Energy on Stockopedia

Read more investing articles & commentary from The Oil Council