Montney Oil Companies Combine, and Profits Grow

Profits are up as drilling is down in Canada’s Montney play where a merger this week highlighted the continued drive to increase profits, which are benefitting from rising natural gas prices.

A gas processing facility in the Montney Shale where companies are seeking to expand operations.
Source: ConocoPhillips

An acquisition this week making ARC Resources the biggest player in the Montney Shale draws attention to a play where profits projections are up along with gas prices, though growth is likely to remain slow and steady.

The purchase of Seven Generations Energy for shares worth $2.2 billion combines two companies with combined liquids rich gas production, which will total 340 BOE/D.

ARC, which is also in the Pembina Cardium play, will become the large producer of gas liquids in Canada and is third largest natural gas producer.

The reasons given for the deal are in lockstep with deals among big shale producers in the US—the efficiencies of running an operation that has more than double its production is expected to save $110 million a year by 2022. That, will increase the free cash flow which will allow it to reduce debt and “deliver incremental returns to shareholders.”

The added financial muscle will likely be used to begin realizing the enormous potential of the combined company’s nearly 1.2 million net acres in the play.

While the Montney produces 45% of the gas produced in western Canada, according to Wood Mackenzie, much of it remains to be developed.

ARC has been moving toward a decision this year on developing its Attachie project, which the company said holds an estimated 8.9 billion bbl of liquids and 32 Tcf of gas resources in place.

While the combined companies will spend $1 billion this year on development, the word growth was not used in the announcement of the deal which focused on the “significant free funds flow generation through a responsible and disciplined approach to development.”

For now, that is a winning message for investors. Both stocks bounced after the announcement Thursday and held their ground Friday.

Canadian independents working in gas plays are benefitting from rising prices for the fuel, which recently surged to more than $5 per gigajoule, which is nearly 1 mm BTU. That jump is largely due to frigid weather, the low for Saturday in Calgary was expected to fall to 20o F below zero.

While prices will dip as winter passes, those in the business see prices that remain in the money.

“Every quarter the gas prices are getting stronger, supply is falling, and demand is rising,” said Jeff Tonken, CEO of Birchcliff Energy, in an interview with Bloomberg News. He feels that so strongly that his company has hedged its production, which would reduce the risk of another price crash but also limit the upside for those who have kept a close eye on costs.

“The first thing you heard (from ARC and Seven Generations) is paying down dept you have not heard the word ‘growth’ from them, you have not heard the word ‘growth’ from me,” said Tonken. He expects US gas producers to also focus on maximizing cash flow over production growth for similar reasons.

Reserves have also been moving into the hands of bigger players. Last year ConocoPhillips expanded its Montney position by paying $340 million to Kelt Exploration for 120,000 acres adjoining its holdings. Also, Canadian Natural Resources acquired Painted Pony Energy for $344 million, allowing the oil sands producer to control its gas supply.

For the service sector this discipline is no cause for celebration. Winter is prime time for drilling in western Canada, but 126 rigs were working in Alberta and British Columbia as of Feb. 11, compared to 184 a year ago according to the Canadian Association of Drilling Contractors.

While some drilling in Alberta is related to huge oil sands operations, far more drilling is required to sustain production from shale.

Discipline production is required in the Montney because demand is limited there. While the Montney is compared to Marcellus when it comes to production potential, its location straddling the northern parts of Alberta and British Columbia limits means its access to markets lags far behind producers in the Eastern US.

One of Seven Nation’s positives is its contracts to sell its liquids production to oil sands producers who use it dilute the ultra-heavy oil they produce so it can flow through pipelines but talk of an LNG export terminal British Columbia has not materialized.