National Post (National Edition)

The lure of the Montney region

- NIA WILLIAMS AND ROD NICKEL

ARC Resources Ltd's $2.7-billion bid to buy Seven Generation­s Energy Ltd will create the largest oil and gas producer in Canada's Montney region, and may re-energize developmen­t in one of North America's top shale plays.

The combined company will have more financial strength to develop its 1.1 million net acres of land in a region that investors and drillers say has so far struggled to meet its full potential.

The deal could also spur further acquisitio­ns in a play that boasts attractive drilling economics and huge resource potential as oil and gas prices tentativel­y recover.

ARC's announceme­nt on Wednesday is the latest in a wave of consolidat­ion that has swept the Montney as companies buckled under collapsing oil prices amid the COVID-19 pandemic.

Some investors are betting that U.S. President Joe Biden's decision to suspend oil and gas permitting on federal lands and water could add to the Montney's appeal.

“The Montney, you could argue, has some of the best economics in the whole of North America,” said Jeremy McCrea, an analyst with Raymond James.

The Montney straddles northeaste­rn British Columbia and northweste­rn Alberta. It is expected to produce 1.4 million barrels of oil equivalent per day (boepd) this year, according to consultanc­y Wood Mackenzie, making it the fourth-largest shale play in North America.

In terms of remaining resources, it ranks only behind the Permian and Marcellus in the United States. But the play has struggled to showcase its full potential because of limited pipelines and low oil and gas prices that left producers highly leveraged and unable to invest in drilling, McCrea added.

Deals last year included U.S. oil major ConocoPhil­lips purchasing land from Kelt Exploratio­n, expanding its existing assets, and Canadian Natural Resources

Ltd. buying Painted Pony Energy, as big producers took advantage of smaller companies' vulnerabil­ity to bolster their positions.

“There's no doubt that the Montney is one of North America's best shale gas plays,” said Jeff Tonken, Birchcliff Energy Chief Executive. “(The deal) shows there's a lot of interest in the Montney.”

ARC's acquisitio­n of Seven Generation­s will accelerate consolidat­ion in the region among producers carrying too much debt, Tonken said. Some are due for reviews of loans that are based on their oil and gas reserves, and those inventorie­s are depleted after many cut capital spending, he said.

Birchcliff does not see itself as a target and has ample inventory of its own to grow without acquisitio­ns, Tonken said.

“We're just minding our own business, making money for our shareholde­rs.”

The Montney's fortunes could improve if U.S. gas developmen­t declines under Biden, said Stephen Kallir, Vice-President of Calgary-based BlueSky Equities, which manages shares of Seven Generation­s and Tourmaline.

Shares in both ARC and Seven Generation­s climbed in Toronto on Thursday, signalling investor satisfacti­on with the deal.

More deals are likely as producers get larger to save costs, Kallir said.

“I think we'll see another headline-grabber this year.”

One of the jewels in ARC's crown is its liquids-rich Attachie acreage that it has so far left undevelope­d. On a conference call, ARC chief executive Terry Anderson said the combined company's priority would be repaying debt, but by next year it could sanction Attachie developmen­t. Attachie has an estimated 8.9 billion barrels of liquids and 32 trillion cubic feet of gas resources in place, according to a company presentati­on.

“ARC now has a huge cash flow machine that should give it the confidence and ability to develop Attachie,” Raymond James' McCrea said.

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