Villanova field trip. Photo courtesy E. Craig Lothian

 

REGINA – Regina-based Keystone Royalty may now be reaching its own liquidity event, with an acquisition by publicly-traded Topaz Energy, but along the way, the company has spawned seven, yes, seven, exploration companies, one of which is still active.

It all was built on a relatively simple model. Keystone, the parent, had the royalty land, and they would launch exploration companies to drill on said land. Once enough was developed, it would be sold off, usually to a serial acquiring company, and they would start over.

Craig Lothian, president and CEO of Keystone Royalty, explained how it all worked in a wide-ranging interview on April 5 with Pipeline Online.

“We bought this land platform from the Allon family of Pittsburgh, Pennsylvania, and that’s why he called it Keystone Petroleums Ltd. as it was called when we acquired it. Pennsylvania is known as the Keystone State because of its shape.

“So we kept most of the name, but we used that Keystone brand to create two traditional oil companies, where we raised a bit of money and drilled some wells. Some of them were on our own mineral lands, which is always a good thing which you can drill a successful oil well in your backyard, to also have the some of the royalty on it. And then once we built those companies to a certain size, we would then sell the E&P company, but we always kept the land and used it again as a platform to create another one.

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“So seven E&P companies spun out of this platform that we built. And more recently, the last two or three Villanova companies, we had drilled up so much of the Keystone land or we had leased up so much of the Keystone land, that , when we sold the company, Crescent Point would own or hold the leases, or Legacy or Torc; each of those companies we sold to, so that there was less and less of our own land to be able to use to start the next one. So that it became kind of a more traditional (company); raise X amount of money, trying to drill wells, grow into 1,000-plus barrels a day and sell it.

“We did use it very much as a platform for the rapid growth of the first three exploration companies.”

Two of those exploration companies were under the Keystone name, and the next five were various iterations of Villanova.

The first went to Star Point. The second went to Crescent Point, he explained.

Regina headquarters

“And then we sold four Villanova companies, and every one of those were headquartered in Regina. And, you know, I’m really proud of that. We brought a big chunk of oil and gas investment, activity and the wealth creation out of the success of those companies, to Regina and to the province.”

He pointed out that it wasn’t just Regina where shareholders called home. “We have shareholders in Estevan and Weyburn, in Regina, Saskatoon, and a few, but not as many, outside the province in Calgary, Winnipeg, etc. To me, that’s the biggest upside or plus of all of that 20-year experience was providing an investment platform for people. Saskatchewan people don’t really get a chance to invest that often in the Calgary-based private companies or public companies. They’re not on the presidents’ lists. So, we gave an opportunity to a lot of people and they were astute enough to take it. And their returns are phenomenal.”

All of these companies were focused in southeast Saskatchewan.

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The Bakken-focused company was sold to Crescent Point for $139 million in 2009. “That was probably our biggest. We were 2,400 barrels a day of production at the time, and it had been right at the height of the Bakken boom in Saskatchewan, where everyone thought they had Bakken oil under their land in southeast Saskatchewan.

“I think we drilled 58 wells or something like that. We had only two that were unsuccessful. Both had oil, but we had a technical frack issue,” he said.

He recalled how oil peaked in the US$140 per barrel range. The process was launched while oil was still in the US$120-$130 range, but by the time there were in hand, oil had dropped to US$40 per barrel.

“We still sold it for that price, and then got the benefits, and our shareholders got the benefit anybody that held on to the Crescent Point units, seeing oil return very quickly into the US$80 to $90 range.”

That was Villanova 1. “Villanova 2, we sold in 2010. Villanova 3, in 2013. Villanova 4 was the only one where our shareholders didn’t get a great return on our investments,” he said. Those who didn’t buy in latter rounds lost money. That one was sold in July 2018, right in the depths of the seven-year oil downturn.

Same staff

Lothian explained that they kept using the same staff, generally speaking. “All the employees were employees of the mothership, which is Keystone Royalty Corp. And then we just had a contractual services agreement with the exploration company, which made it really easy for the acquirer, because they didn’t have to worry about assuming a bunch of employees or office. We own our office building in Regina, so we didn’t sell the office building.

“Every time we sold the company, and we actually did this a few times, where we had sold the company in May, and in April, we’d already incorporated, funded and leased some land in the next company. So employees had the benefit of making money on their options and getting a severance of some kind. But they also had the benefit of being able to stay in their office, sitting at the same chair, in front of the same desk, and the same computer screen, the day before the sale and the day off. So, we weren’t laying people off.”

There will be some changes now, as they’ve sold the primary entity, upon closing of the deal with Topaz.

Lothian said, “There is going to be some rationalization of employees, but we have some incredibly talented people.”

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Noting, because it isn’t Calgary, you can’t just let your land people or production accountant or geologist go, because it’s not easy to replace them if you start another company. “Chances are, there isn’t going to be another one out there,” he said. “So we’re working on a variety of steps. Some of them are interim steps, where we can bridge employees for a period of time, until we make a decision as to what’s next.”

Fortunately, they still have their two-storey office building at the Regina airport. It hosts Keystone Royalty Group, Villanova Energy and Lex Capital Management Inc., their private equity management company. “Between those two continuing entities, there’s going to be some take-up of some employees, and then we’re trying to find a way to keep the rest of them at least around until we can figure out what we’re doing.”

 

Villanova 5

Villanova 5, a.k.a Villanova Energy Inc., is the current active E&P company lead by Andrew Spagrud, as CEO. Lothian said, “We started from zero, essentially. We spun a few working interest assets out of Keystone, from an acquisition of an Alberta company about four years ago. We bought that company because it owned fee mineral title in Alberta, and a little bit in Saskatchewan, but predominantly in Alberta. And that was what we were after, the royalties in the land, the undeveloped land. But they also had been around for 50 years and during that time, they had drilled a few wells, gas wells in Alberta, oil wells in Saskatchewan. And we wanted to keep Keystone as a pure royalty player.

“So we spun those assets out to Villanova, in return for shares, which are now have been distributed out by way of return of capital to the shareholders of Keystone. Villanova then went out and raised another $10 million, but it essentially has gone from almost zero to I think they’re closing in on 1,000 barrels a day production. And they’ve drilled five wells to date in 2022. So, a very active Q1 drilling program in Saskatchewan. All southeast Saskatchewan.

“They’re going to drill probably another 10 wells in Saskatchewan before the end of the end of the year. All of their lands, that active lands, are in Saskatchewan. They have some legacy leases, wells, etc., in Alberta, but there’s nothing in the budget or in the forest about drilling in Alberta,” he said.

 

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Do you want to know what’s really going on in the Saskatchewan energy sector? Do you like the in-depth stories like this, that you won’t find anywhere else? Follow Pipeline Online on LinkedInTwitter or Facebook.

 

Keystone Royalty, Part 1: The deal with Topaz Energy

Keystone Royalty, Part 2: Lothian: “There’s no willingness to step in front of the woke green train that the Liberals have created”