‘Virtually no drilling this summer’: Canada natural gas players fight for market share

Seven Generations Energy Ltd. and Tourmaline Oil Corp. are being released on top inside a battle for market share in Canada’s natural gas industry as prices wallow near an 18-year low and drilling is forecast to achieve a virtual standstill come july 1st.

The Calgary-based companies, along with Arc Resources Ltd. and Peyto Exploration & Development Corp., are the type of growing gas increases the fastest in Canada inside a ranking of the top 20 producers by BMO Capital Markets, even while competitors such as Canadian Natural Resources Ltd. and Centrica Plc’s Direct Energy curb output within the rout.

“Tourmaline, Peyto, Seven Generations, they’ve 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.”

Related

‘We’re not at the bottom yet’: Canada’s ever-shrinking oil industry braces for more layoffsPlains Midstream buying Empress NGL for $200 million from Westcoast EnergyCanada’s oil dealmakers just had their finest quarter in 20 years, try not to let the numbers fool you

As United states 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 full of Canada.

Julie Woo, a Canadian Natural spokeswoman, declined in an e-mail to discuss the business’s stop by western Canadian gas output. The company is still both nation’s largest producer of gas and high crude and it has concentrated on expanding its Horizon oil-sands project in northern Alberta.

Direct Energy’s Canadian gas output fell slightly last year after it reduced drilling that’s currently uneconomic and turned off production from some wells, Wendy Tynan, a spokeswoman, said within an e-mail.

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 favoring those with the cheapest costs and also the cleanest balance sheets.

With a decline of 20 per cent, gas has performed the worst on the 22-member Bloomberg Commodity Index year up to now, based on the return of underlying commodity futures price movements. Even oil is doing better, after prices rose from February lows inside 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 meters of gas.

The number of active rigs targeting gas in the united states has came by more than half from the 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 expires about five per cent from a year ago as companies get more from each well, BMO analysts led by Ray Kwan said inside a March 30 report.

As Canada exits the heating season, the nation has record volumes in storage for this season at about 511 billion cubic feet, up a lot more than 90 percent from a year earlier, based on Enerdata Ltd. figures published by Bloomberg. The market can’t balance until storage levels normalize, which might take until December, TD Securities Inc. analysts led by Travis Wood wrote within an April 4 report.

Investors are betting gas producers likely to emerge strong in the downturn include Seven Generations, Birchcliff Energy Ltd. and Tourmaline, one of the best-performing Canadian energy stocks this season. Seven Generations, the sector’s top stock of 2016, expires 46 percent, Birchcliff has risen 12 per cent and Tourmaline has gained 11 percent.

“In a lower commodity-price environment, those firms that are able to supply gas in the low end of the cost curve will be capable of working,” 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 decrease in capital costs this season, the organization said recently.

Still, Canadian gas output is poised to fall. The median company needs an AECO cost of more than $2 to cover cash costs alone, which doesn’t include paying royalties and finding and developing the land, Peters & Co. analysts wrote inside a March 29 report.

Some of the largest output declines in 2015 one of the top 20 producers were due to Canadian Natural, Direct Energy and Taqa North Ltd., a unit of Abu Dhabi National Energy Co., based on BMO.

Some of the reductions come from turning off unprofitable wells. Canadian Natural has about 40 million cubic feet each day shut in and it is trying to bring down costs for around 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 in a position to comment when reached on Monday. Representatives for Storm and Cequence didn’t return requests for comment.

Falling production in the market may be the start of a larger shakeout, based on FirstEnergy Capital Corp.

“Some of those guys take presctiption the ropes be going under or get swallowed up by other companies,” said Martin King, an analyst at FirstEnergy in Calgary. “There’s likely to be without any drilling come july 1st, especially for gas.”

Bloomberg News