Low-cost producers benefit during slump
Firms gain market share as natural gas competitors falter
CALGARY Seven Generations Energy Ltd. and Tourmaline Oil Corp. are coming out on top in a battle for market share in Canada’s natural gas industry as prices wallow near an 18-year low and drilling is forecast to reach a virtual standstill this summer.
The Calgary-based companies, along with Arc Resources Ltd. and Peyto Exploration & Development Corp., are among those growing gas supplies the fastest in Canada in a ranking of the top 20 producers by BMO Capital Markets. Meanwhile, competitors such as Canadian Natural Resources Ltd. and Centrica Plc’s Direct Energy are curbing output.
“Tourmaline, Peyto, Seven Generations, they have cash costs well below current commodity prices,” said Greg Dean, who oversees $2 billion at CI Financial Corp.’s Cambridge Global Asset Management in Toronto, including holdings of Tourmaline. “They are winning a market share game.”
As North American energy producers contend with a protracted downturn in oil, they’re also grappling with a gas slump as mild weather exacerbates a glut of the heating and power plant fuel, pushing storage to a record high in Canada.
Julie Woo, a Canadian Natural Resources spokeswoman, declined in an email to comment on the company’s drop in western Cana- dian gas output. The company is still both the nation’s largest producer of gas and heavy crude and has been focused on expanding its Horizon oilsands project in northern Alberta.
Direct Energy’s Canadian gas output fell slightly last year after it reduced drilling that’s uneconomic and turned off production from some wells, Wendy Tynan, a spokeswoman, said in an email.
Before the rout, Canada’s gas producers were already increasingly competing with cheap U.S. supplies, including rising volumes entering Eastern Canada from Appalachia. The lower prices are favouring those with the lowest costs and the cleanest balance sheets.
With a decline of 20 per cent, gas has performed the worst on the 22-member Bloomberg Commodity Index year to date, based on the return of underlying commodity futures price movements. Even oil is doing better, after prices rose from February lows in a slump that began in June 2014.
Spot prices for Canada’s AECO gas fell to 88 cents per gigajoule on March 31, the lowest since October 1997. A gigajoule is a unit of energy equivalent to about 27 cubic metres of natural gas.
The number of active rigs targeting gas in the country has dropped by more than half from a year ago, to 38 in the week that ended on April 1, according to Baker Hughes data compiled by Bloomberg. Still, western Canadian gas production is up about five per cent from a year ago as companies get more from each well, BMO analysts led by Ray Kwan said in a recent report.
As Canada exits the heating season, the country has record volumes in storage for this time of year at about 511 billion cubic feet, up more than 90 per cent from a year earlier, according to Enerdata Ltd. figures compiled by Bloomberg. The market can’t balance until storage levels normalize, which may take until December, TD Securities Inc. analysts led by Travis Wood wrote in an report.
Investors are betting gas producers likely to emerge strong from the downturn include Seven Generations, Birchcliff Energy Ltd. and Tourmaline, among the best-performing Canadian energy stocks this year. Seven Generations, the sector’s top stock of 2016, is up 46 per cent, Birchcliff has risen 12 per cent and Tourmaline has gained 11 per cent.
“In a lower commodity-price environment, those companies that are able to supply gas at the low end of the cost curve are going to be able to work,” said Scott Vali, who oversees $300 million at CIBC Asset Management in Toronto including holdings in Arc and Tourmaline.
Tourmaline boosted its output 37 per cent in 2015 while reducing drilling, completion and capital costs by 25 per cent and is targeting another 10 per cent reduction in capital costs this year, the company said last month.
Still, Canadian gas output is poised to fall. The median company needs an AECO price of more than $2 to cover cash costs alone, which doesn’t include paying royalties and finding and developing the land, Peters & Co. analysts say.
Some of the largest output declines in 2015 among the top 20 producers were attributable to Canadian Natural, Direct Energy and Taqa North Ltd., a unit of Abu Dhabi National Energy Co., according to BMO.
Some of the reductions come from turning off unprofitable wells. Canadian Natural has about 40 million cubic feet a day shut in and is trying to bring down costs for about half those volumes to consider its options, chief operating officer Tim McKay said last month on a conference call. Others that have disclosed shut-ins include Storm Resources Ltd. and Cequence Energy Ltd.
Alex Birkholz, a spokeswoman for Taqa, wasn’t immediately able to comment when reached on Monday. Representatives for Storm and Cequence didn’t return requests for comment.
Falling production in the industry is the start of a bigger shakeout, says FirstEnergy Capital Corp.
“Some of these guys are on the ropes and will go under or get swallowed up by other companies,” said Martin King, an analyst at FirstEnergy in Calgary. “There’s going to be virtually no drilling this summer, especially for gas.”