National Post (National Edition)
Producers boost spending on natural gas
Prospects for fuel stronger than those of oil
CALGARY • Canada’s two largest natural gas producers plan for more drilling as the commodity’s outlook diverges from crude oil.
Canadian Natural Resources Ltd. president Tim McKay said Thursday the prospects for natural gas are stronger in the short term than for oil, as the COVID-19 pandemic continues to destroy oil demand, while the potential for liquefied natural gas exports and conversions of coal-fired power plants to natural gas has improved the outlook for that commodity.
“Natural gas is probably a little stronger in the short term relative to oil,” McKay said in an interview with the Financial Post, noting that “flights and vehicle travel is quite important on the oil demand side," but the ongoing pandemic is hurting demand for crude.
As a result, Canadian Natural, the largest oil producer in Canada, indicated in its third-quarter results that it had been shuffling money within its $2.7-billion capital budget from oil projects to natural gas drilling this year.
The company is not alone. Smaller rivals such as Advantage Oil and Gas Ltd. and Paramount Resources Ltd. have also been increasing their spending on natural gas drilling. Advantage announced on Oct. 8 “a modest increase in 2020 capital guidance” of $17 million to drill four additional natural gas wells this year.
But McKay said he's not concerned that higher capital spending by Canadian Natural and others could potentially flood Alberta's natural gas market and result in the type of natural gas price volatility that has plagued the market since 2017, when prices dipped into negative territory.
“It takes a lot of capital and a lot of activity to really increase the production substantially. Today, there are only about 70 or 80 rigs running in Western Canada. I don't have any concerns in the short-term,” McKay said.
Alberta's AECO natural gas benchmark has doubled over the course of the last month from roughly $1.50 per mcf at the beginning of October to over $3 per mcf on multiple days at the end of the month. The AECO price averaged US$2.22 per thousand cubic feet over the course of Wednesday, according to ATB Capital Markets data.
Canadian Natural is in a position to grow its natural gas production by 10 per cent this year to 1.6 billion cubic feet per day as the company is “capturing strengthening gas prices,” National Bank Financial analyst Travis Wood wrote in a research note Wednesday.
Other analysts expected a more modest investments in gas output from other producers.
“Strengthening gas prices likely won't move the needle on free cash flow considerably, though it does provide the ability of the company to deploy some modest capital at very attractive returns and should put a bit more focus on the company's considerable portfolio of gas-weighted assets in (Western Canada),” Raymond James analyst Chris Cox wrote in a research note.
Similarly, Canada's largest natural gas producer, Tourmaline Oil Corp., announced a $35 million increase to its capital budget as it reported earnings Thursday, which brings its total expected spending this year to $835 million.
More crucially, Tourmaline also announced two acquisitions of private-equity own natural gas producers this week for a total of $770
million, including debt. The Calgary-based company bought Apollo Global Management-backed Jupiter Resources Inc. for $626 million, a figure which includes $200 million of net debt, and ARC Financial-backed Modern Resources Inc. for $144 million.
Those two deals will add roughly 76,000 barrels of oil equivalent production to Tourmaline's daily output, which will now reach 400,000 boed.
In recent years, Tourmaline and Canadian Natural have traded spots as the largest and second-largest gas producers in Canada. Tourmaline reported natural gas production of 1.4 billion cubic feet per day on Thursday, beating Canadian Natural's gas production of 1.3 bcfd.
The Jupiter and Modern acquisitions should further cement Tourmaline's position
as the largest gas producer in the country.
Asked whether Canadian Natural is eyeing further opportunities in the natural gas business for acquisitions, following its $460 million purchase of gas-focused Painted Pony Petroleum on Aug. 10, McKay said the company is not currently interested in deal making.
“We're not looking at anything. Right now, we're trying to work those (Painted Pony) assets and create value there. We have no interest in any M&A,” McKay said, though he did note on a third-quarter earnings call Thursday that he expected further consolidation in the oil and gas industry.
The company posted $408 million in net earnings in the third quarter, which is down 60 per cent from the $1 billion it earned at the same time a year earlier.