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Last Trade - 21/09/18

Small Cap
Market Cap £232.0m
Enterprise Value £366.7m
Revenue £135.3m
Position in Universe th / 6713

ANALYSIS-'Enough is enough': Canada's Montney producers swap oil and gas assets for cash

Fri 11th September, 2020 12:00pm
By Rod Nickel
    WINNIPEG, Manitoba, Sept 11 (Reuters) - A wave of
consolidation is underway in Canada's Montney oil and gas region
as small companies struggling to weather the impact of
coronavirus on the energy industry sell their holdings in what
just a few years ago was a booming patch.
    Lockdowns and sharp contractions in economic activity have
hammered global oil demand in 2020, pushing prices so low that
producers worldwide have made record output and spending cuts.
    Canada, the world's fourth-largest oil and gas producer, was
already struggling as investors and foreign companies left to
invest in production elsewhere that is cheaper and less
    The Montney, which straddles Alberta and British Columbia,
has seen at least nine significant deals worth some C$2.3
billion ($1.75 billion) in the past year. 
    It produces 1.5 million barrels of oil equivalent per day,
including 45% of Western Canada's gas supply, according to
consultancy Wood Mackenzie. The firm expects the Montney's gas
production to grow to 57% of Western Canadian output by 2025 and
65% by 2030.
    As smaller companies leave, assets in the Montney are being
concentrated in the hands of large oil firms.
    Two of the largest deals were Canadian Natural Resources
Limited's  CNQ.TO  purchase of Painted Pony Energy  PONY.TO  in
August, and an acquisition of assets by U.S. major
ConocoPhillips  COP.N  from Kelt Exploration  KEL.TO .*:nL4N2FC266*:nL2N2ET293 
    "It's been six years since the downturn (started) and some
guys are saying 'enough is enough,'" said Jeremy McCrea, analyst
at Raymond James, referring to smaller names looking to sell. He
expects more deals into 2021. 
    Eighteen Canadian companies tracked by Wood Mackenzie saw
the amount of their loans based on the value of reserves reduced
by some C$1.8 billion, or 22%, as of early August, said Mark
Oberstoetter, director of upstream Canadian research at the
consultancy. Reserve-based loans allow companies to borrow based
on how much their future oil and gas production prospects are
    As oil prices have fallen, the value of reserves has tumbled
with them, reducing credit available to energy companies.
    Smaller producers may have been willing to persevere through
losses, but "banks and financial backers are now calling the
shots," Oberstoetter said.  
    Natural gas prices have rebounded from rock-bottom levels,
boosting interest among larger companies. Gas stored in Alberta
 NG-ASH-ALB-SNL  was recently trading around C$2.31 per
gigajoule, up 10% year to date.
    Consolidation may be limited, however, because there are few
potential buyers with the balance sheets and access to capital
to make deals, Oberstoetter said. U.S. shale, where companies
are struggling due to overpriced deals they made during better
times, is struggling with the same issue.*:nL1N2FX0KQ  
    Advantage Oil and Gas  AAV.TO , one of the Montney's
earliest gas drillers, would be open to combining with others,
Chief Executive Andy Mah said. His company sold a stake in its
Glacier gas plant in July for C$100 million to raise cash.
    "If there's an opportunity where something bigger can be
done, I don't think we would shy away," he said.
    Tourmaline Oil Corp  TOU.TO , which bought two Montney
producers and land in February, Canadian Natural and ARC
Resources  ARX.TO  are three companies that could make further
buys, Cormark Securities said. 
    Ovintiv Inc's  OVV.N  Montney focus is on producing more
condensate, the light oil blended with heavy crude for
transport, said Brendan McCracken, executive vice-president of
corporate development at the Colorado-based company, one of the
play's biggest gas producers. Canada imports much of its
condensate from the United States. 
    Analysts believe gas provides much of the Montney's current
upside after several years of low prices. Natural gas supplies
look tight for the peak winter season, improving the price
outlook, according to CIBC, because producers shut in gas
produced as a byproduct of oil production. 
    Construction also continues on Royal Dutch Shell-led
 RDSa.L  LNG Canada, a liquefied natural gas export terminal on
the Pacific Coast planned for the mid-2020s that has not yet
secured all of its gas supplies, according to TD Securities. 

($1 = 1.3134 Canadian dollars)

 (Reporting by Rod Nickel in Winnipeg, Manitoba
Editing by Marguerita Choy)
 ((; Twitter: @RodNickel_Rtrs;
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