Some producers left out of the gas boom
Depressed prices could lead to distress sales
It has come to this: Even though natural- gas spending in North America is estimated to decline by 40% and gas well drilling is set to fall by 50% in North America in 2012, ratings agency Moody’s expects overall naturalgas production to rise over 2011 figures.
Credit shale gas and naturalgas liquids for making their dry counterpart look unproductive, as the cost- effective drilling technique hydraulic fracturing ushers in a gas renaissance.
The glut has resulted in an embarrassment of riches across North America, bringing naturalgas prices to their lowest point in a decade, but leaving some producers out of the boom.
And there seems no respite, as virtually all analysts keep slashing gas- price forecasts. BMO Capital recently reduced its 2012 natural- gas estimate to $ 2.76 per million British thermal units from $ 3.80, and moved its 2013 estimate from $ 4.50 to $ 3.50. Moreover, driven by the ongoing structural decline in shale drilling costs, BMO also lowered its long- term natural- gas clearing price to $ 4 from $ 4.50.
While low natural- gas prices have helped North American businesses and households in a fragile economic environment, they are starting to take their toll on some producers — big and small.
“Some of them are going to be forced into selling just by virtue of the fact that their cash flow is not going to support the operations and the banks will start knocking on their doors, and that would be push them into distress selling,” said Kevan Holroyd, associate partner at Transaction Advisory Services Group at Ernst & Young.
“It’s the perfect anti- storm, isn’t it? If you are having significant cash- flow problems, you don’t have a strong balance sheet, and then all of sudden your main commodity price goes south. It does not, unfortunately, paint a picture that you can sustain for a long period of time.”
While there are long- term plans to ship Canadian gas in the form of liquefied natural gas to the attractively priced Asian markets, many are hurting in the interim. This is especially true for producers that do not have sufficient liquids or oil assets to move their resources.
This month, Moody’s placed two smaller Alberta gas- focused operators on negative outlook and downgraded one of them. Moody’s said it was concerned
Perpetual Energy Inc., a Calgarybased company with 90% of its production focused on gas, will need to sell assets to repay debt due at the end of June in an environment of tight liquidity.
“With limited financial resources resulting from a weak gas price environment it will be difficult for Perpetual to acquire to maintain reserve levels. Over the past three years Perpetual has only replaced about 55% of its reserves from the drill bit, relying heavily on acquisitions to achieve 100% reserve replacement,” Moody’s analyst Terry Marshall said in a report.
Similarly, Calgary-based Paramount Resources Ltd. is on negative outlook. “A gasweighted production profile and concentration in western Canada also exposes the company’s cash flow to the volatility and cyclicality inherent in the exploration and production of natural gas. A fundamental challenge for Paramount is its inability to grow reserves and production at reasonable costs.”
It’s not just the smaller players that are feeling the pinch.
“In Canada, the largest impact [ of low gas prices] is felt by
Transcanada [ Corp.] given its second derivative natural gas exposure from lower Alberta power prices,” BMO Capital said in a note.
Meanwhile, Encana Corp. said recently it will cut North American natural- gas output by 600 million cubic feet per day ( mmcf/ d), or 20% of production, to counter a huge U. S. supply glut.
“It is abundantly clear that a continued reduction of drilling activity will be required to restore market balance,” Encana chief executive Randy Eresman said in a conference call. “For the industry as a whole, near- term natural- gas prices are at levels below what it costs to add most new production.” Encana followed Chesapeake
Energy Corp., the second- largest gas producer in the United States, which announced cuts of 500 mmcf/ d in January, apart from other developers that have closed rigs or moved production to the more lucrative liquids or oil assets. The North American natural- gas rig count is at 28month lows.
To dig itself out of the low- price crisis, Encana sold a 40% stake in its Cutbank Ridge natural- gas development to Japan’s Mitsubishi Corp. for a cool $ 2.9- billion.
But smaller producers may not find the white knights they are looking for.
“For companies that have to sell it is difficult to try to marry enhancing and maximising shareholder value with what people are willing to pay given the current price metrics,” Mr. Holroyd said.