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Two Canadian firms betting long-term on gas Canadian Natural Resources, Encana lead charge back into gas sector, investing in both producing and exploration properties Gary Park For Petroleum News
Canadian Natural Resources, or CNQ, a bellwether of Canada’s natural gas sector over many years, was one of the first to shut-in production and scale back exploration in response to the Alberta government’s since-revised gas royalties as well as low commodity prices.
Now, despite unresolved aspects of Alberta’s royalty regime and its view that more robust gas prices are not likely before 2012, CNQ is leading a charge back into the acquisition market.
Joining CNQ in taking a longer-term view is Encana, which has spent the last two years quietly assembling almost 250,000 acres in the Collingwood shale play in northern Michigan, paying an average US$150 an acre, only about one-tenth of what was paid at the state’s most recent land sale.
Similarly, with no fanfare, CNQ disclosed it has spent about C$1 billion so far this year assembling mostly-gas and mostly-conventional properties in northeastern British Columbia and northwestern Alberta.
No public announcements None of the transactions was deemed large enough to make a formal announcement and the entire package rated only passing mention in the company’s first-quarter report, but it stirred the interest of analysts, who wanted to know why CNQ was so eager to spend money on gas assets in light of bleak price forecasts as well as what gas price would be needed to generate a financial return.
CNQ President Steve Laut said the properties – part of a “tremendous” quantity on the street in Canada – were the type that “only go by once.”
If CNQ waited it would either miss the chance or face paying a much higher price, he said.
The break-even question On the “break-even” question, he said all of the assets would generate positive returns when gas prices topped C$5 per thousand cubic feet.
The acquisitions, which are expected to close this quarter, currently produce 28,000 barrels of oil equivalent per day (about 75 percent gas) and do include some unconventional prospects.
No estimates of reserves or land holdings and no information on the sellers were disclosed.
“We don’t really disclose much on normal property acquisitions because that’s ongoing business,” Laut said.
“Although we believe we will not see a robust gas environment in 2010 or 2011, for that matter, we believe it’s prudent at this time to preserve additional expiring land and to make these property acquisitions in our core areas,” he said.
“When gas prices return, these acquisitions won’t be there. Somebody else will have bought them. So we will have another player in our core area that we have to compete with and the land will expire,” Laut said.
Analysts weigh in on CNQ’s actions Mark Friesen, an analyst at Versant partners, said the deals were typical of CNQ, by making a counter-cyclical deal when the right chance came along and giving itself a chance to reduce costs.
Phil Skolnick, an analyst at Genuity Capital Markets, said he is not enthusiastic about the timing “right now, but in three years it could look genius.”
However, he noted that CNQ has done little to develop the land it gained in its C$4.1 billion takeover of Anadarko Canada more than three years ago.
In addition, the company drilled a mere 49 gas wells in the first quarter, down from 87 in the same period of 2009 and 250 in the opening quarter of 2007. For the current quarter it has scheduled just 11 gas wells compared with 113 oil wells.
The slowdown in drilling and capital reinvestment has seen CNQ’s gas production drop to 1.23 billion cubic feet per day from 1.4 BCF per day a year earlier and 1.7 BCF per day in the January-March period of 2007.
EnCana’s Michigan shale play Encana Chief Executive Officer Randy Eresman said his company’s substantial Michigan shale position is in keeping with its strategy of building large land holdings on promising unconventional plays.
He said the first well drilled by subsidiary Petoskey Exploration to a vertical depth of about 9,500 feet — flowed at 2.5 million cubic feet per day — is a first to step toward adding “meaningful future resources and production to our North American portfolio of prolific resource plays.”
Eresman said it is still too early to gauge the economic potential of the Collingwood play, but additional exploration wells are planned for the balance of 2010 to determine the play’s ultimate potential.
The oil and gas leases in Michigan, which has a history of natural gas and oil development dating back to the 1930s, have terms of seven years. Current output in the state is 400 million cubic feet per day.
The May 4 lease auction netted US$178 million, closer to the total sales over the past 81 years, a government official said.
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