For the Canada-focused conventional oil and gas developer Calima Energy (ASX:CE1), the tough industry conditions following last year’s oil price collapse posed a glass-half full opportunity to expand its presence in the country’s  tier one, environmentally-friendly hydrocarbon provinces.

Calima chairman Glenn Whiddon says while fossil fuels have taken a back seat to renewables, Canada has led the world by imposing a price on carbon. The industry itself also abides by the strictest ESG (environmental, social and governance) standards.

“If you are going to invest in oil and gas in a cycle where people want to invest in renewables, you can invest in low emission oil and gas assets which are making a difference,” he says.

Against this backdrop, the ASX listed Calima has transitioned from developer to cash flow positive producer overnight, via the $C66 million ($62.7m) cash-scrip acquisition of the private Blackspur Oil Corp.

After a twelve-week suspension, Calima shares this month resumed trading after completing an accompanying $37.9 million capital raising.

In effect, the merger combines Calima’s “gassy” assets in British Columbia with Blackspur’s “oily” ones in neighbouring Alberta.

Until now, Calima has focused on its 60,000 acres of drilling and production rights in the Montney Formation, where it also owns the Tommy Lakes processing and pipeline facilities.

Under its own steam, the company shored up a contingent reserve of 192.1 million barrels of oil equivalent (BOE) but the economics did not stack up in the midst of a Canadian gas glut.

“We were a little too early in the cycle,” Whiddon admits.

The merger sees Blackspur’s entire experienced management team join Calima, with Blackspur founder and CEO Jordan Kevol heading up the enlarged entity.

Blackspur’s prize producing assets are the Brooks and Thorsby fields in Alberta, which boast a combined 2P (proven and probable) resource of 22 million barrels. Of that, proved, developing and producing (PDP) reserves account for 5.4 million barrels.

Between 2012 and 2020, the Blackspur team built production from a mere 80 barrels of oil equivalent per day (BOEPD) to 2600. But despite sinking $C200 million ($A190m) into exploration and development, the indebted Blackspur was not in a position to take advantage of the improving oil price.

“Our team built these assets from the ground up, we know them like the back of our hand,” Kevol says. “The beauty of our partnership is we now have access to capital to realise the opportunities.”

Management guides to calendar 2021 output of 3000 BOEPD, with oil – the most valuable component – accounting for 70 per cent of output.

The economics are compelling: the company cites an operating cost of $C10 ($US8) a barrel, with break even status at $US26 a barrel accounting for royalties and netbacks.

The relevant benchmark oil, West Texas Intermediate currently fetches $US64 a barrel, having recovered from a nadir of $US11 at the height of the pandemic.

At $US60 a barrel, the company expects to generate annualized earnings before interest tax depreciation and amortisation (ebitda) of $C25 million ($A23.8m)..

But management expects to increase output to 5550 BOEPD within the next 18 months, which lifts projected ebitda to $C58 million. Beyond that – and assuming adequate reserves – the company’s current infrastructure could support output of 10,000 BOEPD.

Anticipating oil prices to firm further, Calima has embarked on a nine-hole drilling campaign based around existing producing wells. Three have been completed already at Brooks, and a further three will be drilled at Brooks commencing late May, with three more slated in the Thorsby (Sparky) area in late June.

Beyond that, the company plans to drill one well a month over the next two years.

“We can bring a well to production within six weeks of drilling,” Whiddon says. “While energy prices are high and we can recycle our capital in 6 months, we will aggressively expand and bring forward our development plans.”

Meanwhile, rapidly improving gas prices improve the economics of the Montney project, which management is keen to “monetise”. Realising the project’s true potential could involve partnerships or a corporate transaction in a climate in which more than $C10 billion of merger activity has taken place in the basin.

Three LNG projects are planned in the region, the most advanced of which is the LNG Canada joint venture’s s two-train venture in Kitimat, British Colombia.

Costed at as much as $C40 billion, the Shell-led project will need adequate gas input to sustain production of 13-26 million tonnes.

“We will be re-rated over the next 24 months as LNG Canada comes on stream,” Whiddon says. The company is hoping for a repeat of the Queensland playbook, which saw local gas producers such as Queensland Gas and Arrow Energy consumed by the giants after a slew of Gladstone based LNG export projects were approved.

At face value Calima shares are lingering in the one cent ‘penny dreadful’ territory. But the seemingly lowly valuation is explained by the circa 10.2 billion shares on issue, including 2.46bn to Blackspur shareholders.

An eventual share consolidation is likely. In the meantime, Whiddon says, the ample free float will enhance liquidity.

In a recent report, Auctos Advisers dubs the Calima as “one of the cheapest Canada focused names”.

(Australian based research house Corporate Connect will be releasing research on the company in the near future).

According to Calima’s own comparisons the company is cheaper than its main ASX and TSX (Canadian) listed peers, as measured by the size of their resources.

On an enterprise value basis, Calima is worth 3.5 times its 2P resources, compared with an average 10 times for its closest ASX exemplars: Karoon Gas, Cooper Energy and Senex Energy.

The five most comparable TSX shares are valued at an average multiple of six times their resource.

On an alternative metric, Calima’s circa $76 million market cap is less than the deemed $85m replacement value of the Tommy Lakes asset alone.

Calima’s capital raising was by way of a $31 million institutional  book build and an underwritten retail offer, both at 0.7 cents per share.

Whiddon says the offer was well supported by high net worth institutions and small cap fund managers, with London-based investors chipping in $10 million.

Calima is also supported by a new $C25 million facility from the National Bank of Canada, $C12m of which has been drawn down. The company hopes to reduce this debt to less than $C5 million by the end of calendar 2022.

Whiddon expects Calima’s share price to be re-rated over the next six months on the back of news flows including new production wells and updates on the Montney project.

Kevol adds: “We love the assets, we believe in the assets and we feel we are just beginning to scratch the surface.”