National Post (National Edition)

Natural gas producers primed for good 2021

Following on heels of stellar 2020

- GEOFFREY MORGAN

CALGARY • 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 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.

Stifel First Energy estimates capital spending by Canadian natural gas companies to increase by 10 per cent in 2021, with potential for larger increases from Conoco Phillips and Canadian Natural.

Scotiabank expects a slight uptick in natural gas prices next year with the Henry Hub U.S. benchmark expected to average US$2.70 per mcf in 2021, up 27 per cent from an average of US$2.12 per mcf in 2020.

In Alberta, where much of the natural gas in Canada is produced, the AECO benchmark price is expected to average roughly 70 U.S. cents per mcf lower than that price (equivalent to $2.56 per mcf in today's exchange rate), according to Cameron Gingrich, managing partner, markets and strategy at Incorrys Informatio­n System, a Calgary-based gas consultanc­y.

“I think that certainly 2021 is going to be a positive year in our view,” Gingrich said. “We see the AECO basis, instead of that $1.50 horrendous (discount compared to U.S. benchmarks) that we saw in 2019, we see a 70 cent (discount) in 2021.”

Gingrich said the combinatio­n of oilsands projects running at full capacity for longer periods, natural gas production in the U.S. continuing to decline and new gas pipeline options out of Western Canada will lead to more capital spending and more drilling for gas in Western Canada.

“I think in our base case that we'd see production in Western Canada grow about 300 million cubic feet per day,” said Gingrich, adding that improved prices will help producers that have been struggling for years to repair their balance sheets.

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