CALGARY (CP) - Western Oil Sands (TSX:WTO) tried to allay market concerns Wednesday over its plans to explore for oil and gas in northern Iraq, saying it fits nicely with the corporate strategy of developing "large, world-class hydrocarbon resources."
Interested in expanding from its current status as a pure-play oilsands company, Western said its deal with the Kurdistan regional government to explore for conventional energy reserves was "a significant achievement" for the company.
President and CEO Jim Houck told analysts Wednesday that while it remains committed to the oilsands business in Canada, "it is prudent and necessary to continue to look for additional ways to create additional shareholder value."
Investors seemed less convinced, with the stock dropping by as much as 7.5 per cent Wednesday before recovering somewhat to end the day, down $1.69 or more than five per cent to $30.99 in trading of nearly nine million shares.
Western admitted that it originally had "serious reservations" about going into northern Iraq, and said it would not undertake any work without ensuring that it could be conducted in a safe and secure manner for all employees.
Until Western's Iraq announcement after the close of markets Tuesday, the company's sole focus was its 20 per cent minority stake in the Athabasca oilsands project operated by Shell Canada (TSX:SHC).
The Iraq transaction is expected to close in the coming months, and Western expects to drill at least one exploration well within the next year.
The deal carries a minimum exploration commitment by Western of $45 million US over the first four years to explore a sizable block in the Zagros Fold Belt of Kurdistan.
"For Western to secure such an opportunity as we have in Kurdistan is a great achievement, for these opportunities are truly rare," said Houck.
He added that the cost was "prudently modest," noting it was only one per cent of Western's net market worth of $5.2 billion Cdn.
The exploration deal also has the potential to give the Calgary-based company a low-cost project which would balance off the relatively high cost of oilsands development and production, Houck said.
The decision to move into international exploration is a dramatic shift for the oilsands producer, whose stock has tripled in the past two years as production from the Athabasca oilsands project increased to 160,000 barrels per day in 2005 amid plans for major expansions to come.
Shell Canada is expected to make a final go-ahead decision in the third quarter of this year on aggressive expansion plans at Athabasca that would boost production by 100,000 barrels per day with an eye of reaching 500,000 barrels per day in the future.
Both Western and Chevron Canada Ltd. (NYSE:CVX), which also holds a 20 per cent stake, are expected to take part in the expansion, even though the pricetag was pegged at $7.3 billion last August.
Shell Canada CEO Clive Mather also warned in late April that intense cost pressures in northern Alberta could push the final bill even higher.
Energy analyst Mark Friesen, with FirstEnergy Capital in Calgary, said Western's decision to take on exploration work in Iraq can be seen in two very different ways by investors.
On the one hand, it represents "a very small financial investment" currently, equating to about 30 cents per share. "Not a very big commitment for what could be a significant opportunity," he said.
Friesen also noted that the Athabasca oilsands project, shepherded by Shell, was a very predictable, low-risk asset base.
"So adding something on the higher risk side, with higher reward opportunity, might be a nice balance," Friesen said.
"The other argument is if investors wanted to do that, they could have done that on their own accord, in their own portfolio. And maybe investors weren't investing in Western to go look at these types of opportunities."