Natural gas producers upbeat about 2021
As their oil-focused peers languished this year, Canadian natural gas producers enjoyed high commodity prices for the first time in years — and analysts expect a repeat performance in 2021.
Alberta's natural gas benchmark AECO traded above $3 per gigajoule at the beginning of November but has since slid amid warmer weather in the province and struggled to rise above $2.50 per GJ so far in December — marking a muted end to a year that saw relatively robust activity for a commodity that has languished for much of the last decade. AECO has been trading around $2.26 per GJ on average this year, compared to $1.60 last year.
The price rally was even more remarkable as major sources of industrial demand for natural gas, including in the oilsands where gas is used as a heat source for cold bitumen and a power source, declined sharply in 2020 as producers reduced output amid a historic drop in oil prices.
Some analysts had also expected millions of additional people working from home through the COVID-19 pandemic — and heating their homes all hours of the day — to partially offset the drop in industrial demand for natural gas but, CIBC analysts said, “the data we have seen so far would suggest the shift to work-from-home had little impact on demand dynamics.”
“With many North Americans spending more time than usual in their homes, the past nine months have been an interesting experiment in natural gas consumption,” CIBC World Markets analysts wrote in a Dec. 15 research note.
Having thrived in an unsupportive environment, natural gas producers are now poised to see an improved 2021 as the market normalizes with the return of industrial demand and new gas pipelines being built out of Western Canada.
CIBC analysts believe the combination of higher oil prices, and the resultant increase in gas demand from oilsands operations, as well as Alberta power plants switching from coal-fired generation to natural gas, will boost prices. The electricity sector in Alberta alone could add 100 million cubic feet per day to 500 mcfd to the province's natural gas demand alone.
The bank lists two natural gas-focused producers, ARC Resources Ltd. and Seven Generations Energy Ltd., among its “top ideas” for 2021. The bank also has Canadian Natural Resources Ltd., which is both the largest oil producer in the country and the second largest gas producer, among its top picks for 2021.