Commodity Trade Mantra

‘Liquids-Rich’ North American Natural Gas Will Attract Capital

‘Liquids-Rich’ North American Natural Gas Will Attract Capital

‘Liquids-Rich’ North American Natural Gas Will Attract Capital

The “shale game is the future for oil and gas in North America,” we wrote a couple of weeks ago. Exploration and development is focusing on projects where natural gas carries with it a substantial volume of liquid hydrocarbons, which are very valuable. They increase profits substantially when they occur.

During a recent call, Alan Tambosso, President of Sayer Energy Advisors, a Calgary-based corporate advisor, took my questions on the outlook for oil and natural gas in Canada.

The Canadian oil and gas sector has in recent years disappointed many companies and investors. A recent report from Sayer highlights that many companies are attempting to sell assets to fund capital programs as a weak equity market has left them holding underfunded oil and gas projects. Lack of capital has slowed development.

As a result, drilling activity in the large Canadian shale formations – the Duvernay and the Montney — has lagged oil and gas basins in the United States, such as the Eagle Ford in West Texas.

Sayer suggests that participants with the capital to take over projects and develop production have been reticent to make acquisitions. The total value of mergers and acquisitions fell by 75% in 2013 from a year earlier. The amount of new money raised by companies to develop projects in Canada’s ‘oil patch’ fell by 22%. Part of the reason was uncertainty about the direction of natural gas prices:

Because of the rising prices [for natural gas] since October of last year, reserves evaluators are forecasting higher natural gas prices for 2014. This could create a problem for selling natural gas assets.

Due to current lack of capital in the industry, offers from purchasers have not been in line with the expectations of many vendors, creating a disconnect between buyers and sellers. The problem stems from the fact that buyers are not convinced that the price of natural gas will remain high over the long term, whereas the sellers suddenly see a much higher value. In several cases, we have seen management teams refuse realistic offers[…].Some sellers become more realistic with expectations of value after a sales process, which helps keep deals happening.

M&A activity has increased dramatically in 2014, with approximately $9 billion in total M&A value in the first quarter.  An indication that there is some acceptance of higher natural gas prices in the equity markets has led to more financings and increased M&A activity.

Mr. Tambosso says the capital is there, but its holders are biding their time before spending money on development. “There are highly-capitalized companies moving into the Basin, which are intent on developing the oil and gas industry there. There is an opportunity to apply existing technology to develop oil and gas assets here, for instance to unlock the ‘liquids-rich’ formations.

“The slower pace of development is due partly to a slower adaptation of technology and construction of infrastructure than in other basins. This has tempered expectations for the oil and natural gas industry here.”

With big companies entering the Canadian oil and gas projects, we should see this begin to change. Additionally, institutional Asian capital is investing heavily in oil and gas projects, and in liquid natural gas terminals that would enable natural gas to be exported globally, says Mr. Tambosso.

He believes we are likely to see more capital put to work in developing oil and gas in the Montney and Duvernay basins, because of the potential for using technology to unlock high returns, building infrastructure such as pipelines and LNG terminals.

He adds that the high level of interest from capital-rich Asian investors indicates that eventually, exports to Asia may become a major destination for oil and gas produced in Alberta and British Columbia.

Alan Tambosso joined Sayer Energy Advisors early in 2003. He has over 30 years of broad experience in the natural resource business.

 

Courtesy: Sprott Group

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