(Idea) Greenfire Resources
Note: Dollar references are to Canadian dollars unless otherwise specified.
Greenfire Resources (GFR) is the newest entrant to the public Canadian oil patch. The company was formerly a special-purpose acquisition vehicle called M3-Brigade Acquisition III Corp. that purchased privately held Greenfire Resources in a transaction that closed on September 20, 2023.
GFR’s short tenure as a public company means it has less analyst coverage and remains under the radar with most specialist E&P investors. As a former SPAC, the shares may be prone to selling off, as sentiment toward SPACs is in the dumps. The drawback is that GFR only has one quarter of operations as a public company under its belt, so public disclosures are scant and analysis is more challenging.
Overall, GFR is a lower-quality operator compared to its larger public oil sands peers, such as Suncor Energy (SU), Cenovus Energy (CVE), MEG Energy (OTCPK:MEGEF), and Athabasca Oil (OTCPK:ATHOF). The company’s small size limits its scale, thereby increasing its various operating costs per barrel. Oil sands are largely a scale game, so GFR is already at a disadvantage relative to peers.
That said, GFR has some desirable attributes. It has a proved and probable reserve life of 31 years, on par with CVE and longer than SU. Moreover, its shares have significant appreciation potential at WTI above US$85 per barrel, potentially more than peers. Investors who believe oil prices will remain above that level over the next few years should give GFR a closer look. However, they should be careful to balance the upside potential with the risks, particularly at lower oil prices.
Introduction
GFR’s assets—its Hangingstone oil sands facilities—are located in northeast Alberta. On a normalized basis, it produces 19,000 to 20,000 bpd of 100% heavy oil.
Source: GFR October 2023 Corporate Presentation.
The company is the operator of two in-situ SAGD oil sands operations: Hangingstone Expansion and Hangingstone Demo. It has a 75% and 100% working interest in each, respectively.
Hangingstone is a lower-quality oil sands asset than those operated by GFR’s public oil sands peers. For example, its steam oil ratio—a measure of in situ oil sands operating efficiency, where lower is better—is approximately 3.0-times, the highest among public oil sands operators.
The Hangingstone oil sands operation commenced in 2017 and produced approximately 20,000 bpd. It was originally owned by Japan Petroleum Exploration Company, which sold it to HE Acquisition Corp. in 2021 for $820 million, reportedly due to lower-than-expected profitability, tight pipeline capacity, and perceived lower demand for oil. After a series of transactions, HE Acquisition Corp. and certain affiliates formed Greenfire Resources Corp., which was subsequently purchased by the SPAC, M3-Brigate Acquisition III Corp.
On September 20, 2023, M3-Brigade Acquisition III Corp. completed its “de-SPAC” transaction to become a standalone public entity called Greenfire Resources. Since that point, its shares have traded on the NYSE under the ticker "GFR."
At its current $6 stock price, GFR's enterprise value currently stands at $780 million, below the $950 million its SPAC sponsors paid to acquire it. Its sponsors plan to hold onto most of their equity interests in the company, which amounted to 71% of the shares outstanding immediately after the deal closed, according to its offering prospectus filed with the SEC on August 11, 2023.
In the recent de-SPAC transaction, GFR refinanced its legacy term debt into US$300 million of newly issued 12.0% Senior Notes due 2028. It also entered into $50.0 million of additional credit facilities. Shortly after the de-SPAC transaction, it entered into a $55.0 million letter of credit facility to replace a former facility that had been collateralized with $43.2 million of cash. The transition released the formerly restricted cash.
Growth Objectives Face Challenges
GFR’s medium-term business plan is to accelerate the Expansion asset’s redevelopment through infill well drilling. The company expects to increase production to 30,000 bpd. Its longer-term objective is to get production up to Hangingstone’s nameplate capacity of 35,000 bpd. However, a long-term production increase to that level would shorten GFR’s proved and probable reserve life from 31 to 18 years based on its 2022 reserve report.
GFR’s production has been on a downtrend over recent quarters. Shortly after HE Acquisition Corp. and affiliates acquired the Expansion asset in September 2021, production peaked at approximately 33,000 bpd. Since then, production has consistently trailed lower.
During 2022, average production net of diluent was approximately 20,500 bpd. In the first half of this year, it declined to 19,300 bpd. Then, in the third quarter, production gapped down to an average of 14,670 bpd.
The third-quarter production drop was unexpected. Management had previously guided to an exit-2023 production rate of approximately 25,000 bpd. At the moment, it’s doubtful that production will end the year above 20,000 bpd.
The charts below show production through the second quarter of 2023. We’ve added the red stars and captions to represent the third-quarter production levels. The underperformance was particularly pronounced at the Expansion asset.
Source: GFR October 2023 Corporate Presentation. Red text and captions added by author.