Montney a hot play
Is the Montney spawning a new bubble in the Canadian oil and gas sector, inflated by optimism surrounding the country’s fledgling liquefied natural gas industry?
Operators focused on the basin such as Birchcliff Energy Ltd., Painted Pony Petroleum Ltd., NuVista Energy Ltd. and Paramount Resources Ltd. have seen their share prices jump about 50% year-to-date, compared to the S&P/TSX Capped Energy Index which is up a mere 8.32%.
“The Montney has got to be the hottest play right now,” says Brook Papau, vice-president energy research analyst at Calgary-based ITG Investment Research.
Straddling British Columbia and Alberta, the Montney is among the world’s largest shale plays — roughly the size of Greece — with reserves of 449 trillion cubic feet of natural gas, 14.5 billion barrels of natural gas liquids and 1.12 billion barrels of oil from its various dry gas and liquidsrich formations, according to the National Energy Board.
Investors are piling into the basin primarily to position themselves for the liquefied natural gas industry, with as many as 16 projects proposed along the West Coast in close proximity to the Montney.
“Sure, there is a lot of hype and maybe people exaggerate, but the bottom line is that the Montney does have extremely high value,” Jonathan Wright, president and CEO of NuVista Energy said in an interview.
However, the basin may see turbulence as Malaysia’s state-owned company Petronas Bhd., which is closest to finalizing its LNG project on the West Coast, has cast doubts on its development, citing regulatory delays and cost uncertainties.
Mr. Wright admits that while the basin will continue to garner interest, the growth “will be smaller if LNG does not happen.”
“Obviously people who have drilled for an LNG market and that market does not happen, then it would cause a short-term reduction, but it would eventually sort itself out.”
Analysts believe the Montney’s low-cost characteristics should continue to keep investors interested beyond LNG. More crucially, production elsewhere in Western Canada is falling. Montney is estimated to produce about six billion cubic feet per day by 2020, compared to 3.5 bcfd today, while non-Montney production is forecast to decline 15% during the period. By 2020, the Montney could make up 40% of Canadian production by 2020, from 2% in 2003, RBC estimates.
“With many years of drilling ahead and technology coming ‘up the curve’, we expect the Montney to remain top-ofmind for North American and global investors,” RBC Capital said in a report, noting that the low-cost natural gas basin has barely scratched the surface of its potential.
At cost-per-well of $4-million to $10-million, the Montney compares favourably to U.S. plays Eagle Ford ($6-million to $10-million), Marcellus ($6-million to $8-million) and competitive with Barnett ($3-million) and Fayeteville ($2.5-million), RBC data shows.
The low-cost nature of the Montney and the upside of a full-fledged LNG industry has transformed the basin into one of the largest and fastest growing natural gas resource plays in Western Canada. Drilling activity stood at 400 wells year-todate compared to 200 during the same period last year.
“Given the strong momentum in the play, and the capability of operators to increase their programs further, the Montney ... will continue to be a major driver of growth in the [Western Canadian Sedimentary Basin] and potential LNG supply,” Calgary-based Peters & Co. said in a report.
While the Montney has been a target of oil and gas exploration since the 1950s, the current surge in interest was triggered after Petronas bought Progress Energy Canada Ltd. in 2012 for $5.5-billion precisely to take advantage of its Montney acreage and as a first step to developing an LNG project. Petronas is the currently the second-largest Montney producer behind Encana Corp.
Many LNG consortiums that have proposed projects along the West Coast do not have their own feedstocks and may seek to either buy out Montney operators or secure joint ventures or long-term sales agreements.
“Almost every gassy operator in the Montney has a slide in their presentation that notes they are very close to LNG projects,” Mr. Papau said, adding that Painted Pony has the most “plausible” takeover potential.
Painted Pony could not be reached for comment.
M&A activity has been subdued in the Montney as companies look to the B.C. government to finalize its fiscal regime before the end of the year.
Most of the lucrative Montney acreage has already been acquired and new companies can only get a piece through the M&A route.
But companies are looking at other ways to capitalize on the Montney buzz. Seven Generations Ltd. which has a strong Montney position, recently filed for an initial public offering, said to be around $1-billion.
The company is currently engaged in “preliminary discussions regarding additional market and transportation opportunities related to regional, transcontinental and LNG export,” Seven Generations said in its prospectus.
Others are sharpening their focus, shedding non-core assets to become beefed-up Montney operators.
In August, NuVista Energy bought more Montney land for $35-million, and Mr. Wright says the company is open to acquiring more land “opportunistically”.
Crew Energy Inc. sold its assets in other basins for $150-million as it focused on natural gas processing infrastructure in the Montney, which would boost its natural gas processing capacity fourfold to 240 million cubic feet per day by late 2016.
But some analysts are signalling caution.
“The hype over these junior [Canadian] Montney gas stocks is unbelievable. Not going to end well....” tweeted Martin Pelletier, portfolio manager at TriVest Wealth Counsel Ltd, referring to the Seven Generations IPO.
“Companies are pushing 52-week or all-time highs,” Mr. Pelletier said in an interview, noting he has both long and short positions in some of the Montney-focused companies.
“There is going to be some disappointment when valuations are not realistic to match the risks,” Mr. Pelletier said.
Indeed, a lack of progress on LNG could take the wind out of the sails of the Montney.
“If your investment thesis is not totally reliant on other LNG facilities going forward, you should be sure that the asset itself exists in a climate without an LNG facility,” Mr. Papau said.