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Gambling on natural gas
Buffett leads those who don’t believe shift to renewables will occur overnight
Gary Park for Petroleum News
Those looking for hope in the natural gas sector could do worse that hitch their wagon to famed investment leader Warren Buffet.
The so-called Oracle of Omaha has made a strong bet in the industry by launching a US$9.7 billion deal to buy the gas assets of Dominion Energy, rebuffing all the talk of a looming shift away from oil and natural gas.
Jim Shanahan, an analyst who covers Buffet’s Berkshire Hathaway, said the offer suggests Buffet does not expect the move to renewable energy “will come as fast as some people think.”
He said that although Berkshire Hathaway has an expanding clean-energy portfolio, the Dominion offer suggests the transition “is going to take time ... in the meantime, they have to be able to provide power generation to their customers.”
It also follows Buffet’s well-worn investing path, acquiring assets cheap in a buyers’ market.
Other purchases Joining that school of thought, Canadian Natural Resources, CNR, Canada’s largest gas producer, is scooping up a smaller rival to expand its Western Canadian acreage.
For C$461 million (including C$350 million of debt), CNR will acquire Painted Pony Energy, including production of 270 million cubic feet per day of gas and 4,600 barrels per day of natural gas liquids, estimated at a fraction of what it would have paid three years ago.
The transaction comes on the heels of ConocoPhillips’ US$375 million purchase of Montney assets from Kelt Exploration in July and CNR’s own acquisition last year of Devon Energy holdings for C$3.8 billion.
Montney, which straddles the British Columbia-Alberta border, was estimated in 2013 to have reserves of 449 trillion cubic feet of natural gas and 14.5 billion barrels of gas liquids. The formation has lately been outperforming its U.S. rivals such as Permian and Marcellus.
Painted Pony, whose share price has tumbled from a high of C$14 in 2014 to CNR’s offer of C$0.69 cash, has been weighed down by debt and long-term take-or-pay contracts and had only limited access to capital, restricting its ability to develop assets.
Michael Dunn, an analyst at Stifel, said the deal is an “opportunistic” chance for CNR to acquire high-quality drier gas to insulate the price of fueling its oil sands operations.
M&A activity The stock market crash in energy stocks has provided a chance for larger companies to scoop up smaller competitors in a muted environment that saw 18 merger and acquisition oil, gas and fuel deals valued at C$827 million in the first half of 2020 compared with 25 transactions worth C$6.78 billion in the same period of last year.
However, the early weeks of the second half has seen deals reach about C$961 million, including the ConocoPhillips-Kelt purchase.
Calgary-based Keyera, one of North America’s largest processors and shippers of natural gas, is unmoved by hints of more stable gas prices as it continues with plans to “optimize” its gathering and processing assets. That process includes closing and dismantling four central Alberta plants with 600 million cubic feet of capacity over the next two years.
A year ago Keyera launched the strategy by closing two other plants with 220 million cubic feet per day of capacity in the same area, although the company, after disposing of facilities that were built in 1950-60 will continue to operate 10 plants in Alberta.
“It’s really because of a lack of (upstream activity),” Keyera Chief Executive Officer David Smith told the Globe and Mail four months ago.
“We still believe there are decades of economically attractive natural gas and liquids-rich gas to be developed.
“But the commodity prices over the last five or six years have not supported the level of drilling activity to keep the volumes flat, which have declined to the point where we can’t justify keeping the plants open.”
Oil exploration budgets down Oil exploration budgets, which affect associated gas production, have been drastically curtailed across North America and could result in a gas rebound.
Calgary-based Birchcliff Energy has lowered its capital spending by C$7.2 billion in Canada and US$18 billion in the United States.
Birchcliff Chief Executive Officer Jeff Tonken said that move could “make it really good for natural gas producers such as ourselves, noting that sales contracts have recently been locked in above C$2 per thousand cubic feet for the rest of 2020, making the company’s production from its Montney wells in northeastern British Columbia profitable.
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