Natural gas takes beating

Long accustomed to living off scraps and facing the worst natural gas prices in 18 years, Canada’s gas sector is into full survival mode.

The result is a fight for limited market share among gas producers, with Seven Generations Energy and Tourmaline Oil emerging on top, followed by ARC Resources and Peyton Exploration & Development in a ranking of the top 20 producers by BMO Capital Markets.

The best performers have cash costs “well below current commodity prices,” said Greg Dean, who oversees C$2 billion of investment at CI Financial Corp’s Cambridge Global Asset Management. “They are winning a market share game,” he said.

Even though high-end producers Canadian Natural Resources, Abu Dhabi’s Taqa North and Centrica’s Direct Energy have curbed output as spot gas prices have fallen to C88 cents per gigajoule at Alberta’s trading hub, the lowest point in 18 years, Western Canada gas output has risen 5 percent from a year ago.

CNR, which remains Canada’s largest gas producer, has shut in about 40 million cubic feet per day and is trying to bring down half the costs of its remaining output while considering its options, said Chief Operating Officer Tim McKay.

But, as Canada exits the winter heating season, gas in storage stands at a record 511 billion cubic feet, up 90 percent from a year earlier, Enerdata reports.

Martin King, an analyst with FirstEnergy Capital, said some of the lower tier producers “are on the ropes and will go under or get swallowed up by other companies. There’s going to be virtually no drilling this summer, especially for gas.”

TD Securities said in a note to investors that companies have “generally prioritized the sale of lower-quality assets, resulting in either limited market interest or reduced transaction metrics.

“Given the continued uncertainty in commodities, elevated debt levels, the emergence of a number of new third-party infrastructure financing companies and the limited appetite for assets currently in the market, we expect to see an acceleration of infrastructure-focused transactions in 2016,” the report said.

TD noted that the 17 Canadian gas-weighted companies in its coverage area have spent C$8.3 billion over the past five years to build up pipeline and processing support for their operations, about 27 percent of their total capital outlay.

TS said the money has generally been well spent, dropping corporate operating costs to C97 cents for thousand cubic feet of gas equivalent from C$1.44 in 2011 and expects the infrastructure build up with see an improvement to C90 cents in 2016-17, with each C$1 billion spent translating into C7 cents in annual cost savings.

“He who controls his infrastructure controls all aspects of his business,” said Jeff Tonken, chief executive officer of Birchcliff Energy, disclosing that his company plans to allocate C$39 million or 30 percent of its 2016 budget on gathering pipelines and expansion of a gas plant.

“You can be a low-cost producer and own your infrastructure or you can be a higher-cost producer and go through third-party processing. But you can’t be both,” he said.

TD said it is difficult to predict how many companies will sell infrastructure over the next five years, given that stock markets don’t give gas-weighted companies credit for the assets they own.

It is estimated that current annual capital costs to service debt come from the C$8.3 billion infrastructure build would range from C$400 million to C$800 million.

TD said those investments helped its group of 17 producers grow output to 4.6 billion cubic feet of gas equivalent per day from 2.8 bcf per day over the past five years.

- GARY PARK