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Canada: gas gathers steam as asset values attract leading players
Gary Park for Petroleum News
The pace of natural gas development is quickening in Canada, led by a fresh round of corporate consolidation and a decision by Alberta’s largest power generation utility to accelerate its conversion to gas from coal to fuel two of its units.
The takeovers and switches from coal-to-gas are partly responsible for prompting Canada’s two largest gas producers to roll out plans for increased gas.
Tim McKay, the president of Canadian Natural Resources, told analysts that the prospects for gas are stronger in the short term than for oil, while the potential for LNG exports and conversions of coal-fired power plants to gas has improved the outlook for that commodity.
As a result CNR has shuffled C$2.7 billion of its 2020 capital budget to gas from oil.
But McKay said he is not concerned that hiking gas expenditures by CNR and other upstream companies could flood Alberta’s gas market, triggering even more price volatility than the sector has experienced since 2017.
“It takes a lot of capital and a lot of activity to increase production substantially,” he said. “Today there are only about 70 or 80 rigs running in Western Canada. I don’t have any concerns in the short run.”
Other capital reallocations Tourmaline Oil, Canada’s leading gas producer, has made similar moves by allocating an extra C$35 million of gas spending to its capital budget, raising its forecast total to C$835 million.
Even more significantly, Tourmaline took a sizeable plunge into the gas acquisition market on Nov. 4, buying two private gas producers for C$740 million, including debt of C$244 million, to boost its 2021 production target by 25% or 76,000 barrels of oil equivalent per day to 400,000 boe/d, raising its project cash flow for next year to C$2 billion.
“The acquisitions are way less expensive than they were even two years ago,” said Tourmaline Chief Executive Officer Mike Rose. “I think the trend will continue over the next 12 to 24 months.”
He said the current environment, in which many companies continue to struggle after the spring energy market collapse, has yielded big opportunities to hook assets in Tourmaline’s main operating regions in the Deep Basin and Montney plays of Alberta and British Columbia.
Rose said the takeovers of Jupiter Resources and Modern Resources will also allow his company to lower operating costs and generate strong free cash flow.
Previous M&A activity The deals come on the heels of several oil patch mergers and acquisitions this year, notably CNR’s C$461 million acquisition of Painted Pony Energy and Whitecap Resources purchase of NAL Resources for C$155 million, all of which were overshadowed by October’s blockbuster C$3.8 billion purchase of Husky Energy by Cenovus Energy.
Rose noted that a dozen years ago buyers were forking over C$30,000-C$40,000 per flowing boe for gas holdings in Deep Basin and Montney; today those price tags are in the range of C$8,000-C$15,000.
AECO benchmark On the flip side the AECO benchmark gas price in Alberta is close C$3 per thousand cubic feet, compared with C$1.61 in 2018.
ATB Capital Markets analyst Patrick O’Rourke said he is cautiously hopeful about the commodity prices in 2021 if producers stick to showing discipline and market fundamentals improve.
On the M&A front, he said financially robust companies such as Tourmaline are well positioned to enter the buying market, adding “we need larger and stronger entities that are more appealing to not only investors in Canada, but to bring back global investors.”
Chris Cox, an analyst at Raymond James, said in a research note that strengthening gas prices “likely won’t move the needle on free cash flow considerably, though (they will provide a company with the ability) to deploy somewhat modest capital at very attractive returns and should put a bit more focus on a company’s portfolio of gas-weighted assets in Western Canada.”
TransAlta conversions A further boost to the gas sector came from Calgary-based TransAlta, which announced it will move about four years ahead of schedule to end operations at a thermal coal mine west of Edmonton within the next year and switch to has at all of its operated coal-fired power plants.
But the conversions will see a sharp lowering of output capacity at the TransAlta units from 395 MW to 70 MW in two cases and from 406 MW to 113 MW at a third unit.
The move away from coal will also result in hundreds of layoffs at a company mine to about 40 or 50 people from a peak of about 1,500, said TransAlta Chief Executive Officer Dawn Farrell.
The company also confirmed it has closed a C$400 million tranche of a C$750 million investment by an affiliate of Brookfield Asset Management, with the proceeds to be used to advance its coal-to-gas conversion program.
Farrell said the company’s decision to speed up its conversions is related to the economics of producing power in Alberta as the government raises in tax on carbon emissions from C$30 per metric ton this year to C$40 in 2021 and C$50 in 2022, making coal plants less flexible in a merchant market.
The percentage of power generated from coal in Alberta has tumbled from more than 80% since the 1980s to less than 33%.
She said TransAlta’s greenhouse gas emissions will be under 11.5 million metric tons a year by the end of 2022, down almost 70% from 2005.
To date, TransAlta has delivered 10% of Canada’s goal of reducing its GHGs by 220 million metric tons a year by 2030.
- GARY PARK
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