Villanova field trip. Photo courtesy E. Craig Lothian

While Regina-based Lex Capital Management has never invested in Keystone Royalty Corp., it, too, is part of the success story coming out of Regina, a story that involves Keystone, the Villanova series of companies, and Lex.

Craig Lothian is the common element between the two, as former CEO and current executive chairman of Lex, and president and CEO of Keystone. He’s a shareholder in both. Pipeline Online spoke to him on April 5.

Between himself, personally and the Lothian/Irwin family office holding company, Lex Capital Corp., Lothian is the largest shareholder of Villanova 5, and also the executive chair. He’s also the largest shareholder of Lex Capital Management Inc., which Lothian teamed up with Dean Popil and Curtis Armstrong in 2009, to create.

Lex’s last fund raised $156 million. “That’s our fourth private equity energy fund. The bulk of that money came out of the States, into Saskatchewan, which is kind of nice, to see the capital flow go the other direction for a change,” he said.

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“We’re rolling out our fifth – Lex Energy V fund. It’s going to close in May, so within a month or two. We haven’t totally nailed it down yet, but it’s going to be somewhere in the range of $200 million, or maybe even a little bit more than that, again, for oil and gas.”

As for how much of that might be invested in Saskatchewan, Lothian said he can’t predict it right now, but maybe a third. That would be a historical average for their funds.

Cooking with gas

“For the first time ever, we’re probably going to have a bit of a gas focus in the fund. We’ve always been only oil, or predominantly we’re interested in investing in oil. We’re pretty bullish about the midterm outlook for Canadian gas as well as oil, right now,” Lothian said.

In the last five years, only three targeted gas wells have been drilled in Saskatchewan. Does Lothian see any prospects for natural gas drilling here?

He said he’s personally not an explorer, but surrounds himself with people who are. All of the Keystone and Villanova companies have been oil-focused, and gas was a by-product they didn’t particularly want to locate, because in southeast Saskatchewan, there wasn’t a lot of infrastructure to deal with gas.

Lothian said, “My guess is that the focus of the Lex Fund is going to be on bigger gas prospects, and that would be in Alberta. And the benefit of those is, are they gassy? Yes, but they’re usually fairly liquid-rich, as well. So you’ve kind of got that backstop. If gas prices are low at any given time, those liquids will carry the load until gas swings back.”

He recalled working as a lawyer when Renaissance Energy was drilling a lot of gas wells in southwest Saskatchewan, back when that was an active play. “That was a tremendous success story,” he said. But the difficulty would be in putting together enough land, and the pipe to put it all together.

“It’s a big plumbing project, you know.”

He explained, “Given the size of our fund, the target companies need to be raising significant capex (more than $100 million. We will want to invest $15-$25 million, in each company but we also don’t want to be the majority shareholder.

Usually not fracking

So while most of the focus is on oil, they’re not currently looking at frac plays. Except for some tight Midale wells, the last four Villanova companies have typically gone for conventional formations in southeast Saskatchewan. A large reason for that is the cost of fracking would eat up a large portion of funds raised for exploration.

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“If you’re going to drill conventional wells, you can take a number of shots before you’re going to run out of capital. But if you were to take $75 million or even $100 million, and go drill Duvernay wells at $5 to $10 million, you’d better get a good result in the first one or two, or you’re not going to be around very long.

“That’s why I think the southeast Saskatchewan basin still has significant amount of upside. It’s just for a different player. It’s for players like Villanova 5.

Lex’s “bite size” for investments is now in the $20 to $30 million per investment, and even then, they don’t want to be 100 per cent or even 50 per cent of the capital raised in a particular company. “We want to invest with a management team that is putting in a significant amount of their money,” he said.

“Because of the size of that raise. It’s probably going to have to look at unconventional plays. For deeper plays, the capital costs are higher, but hopefully they realize a higher rate of return as well.”

 

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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”

Keystone Royalty, Part 3: Keystone spawned over a half dozen companies

DEEP is taking its last steps towards a final investment decision and major financing