Analysis: Montney shale patch merger shines light on Canada's premier play

Kelt Exploration

12/02/2021 11:00

By Nia Williams and Rod Nickel
    CALGARY, Alberta, Feb 12 (Reuters) - ARC Resources Ltd's
 ARX.TO  C$2.7 billion ($2.1 billion) bid to buy Seven
Generations Energy Ltd  VII.TO  will create the largest oil and
gas producer in Canada's Montney region, and  may re-energize
development in one of North America's top shale plays.
    The combined company will have more financial strength to
develop its 1.1 million net acres of land in a region that
investors and drillers say has so far struggled to meet its full
potential.     
    The deal could also spur further acquisitions in a play that
boasts attractive drilling economics and huge resource potential
as oil and gas prices tentatively recover.
    ARC's announcement on Wednesday is the latest in a wave of
consolidation that has swept the Montney as companies buckled
under collapsing oil prices amid the COVID-19 pandemic.
 urn:newsml:reuters.com:*:nL4N2KH02T urn:newsml:reuters.com:*:nL1N2FR1KG
    Some investors are betting that U.S. President Joe Biden's
decision to suspend oil and gas permitting on federal lands and
water could add to the Montney's appeal.
    "The Montney, you could argue, has some of the best
economics in the whole of North America," said Jeremy McCrea, an
analyst with Raymond James.
    The Montney straddles northeastern British Columbia and
north-western Alberta. It is expected to produce 1.4 million
barrels of oil equivalent per day (boepd) this year, according
to consultancy Wood Mackenzie, making it the fourth-largest
shale play in North America. 
    In terms of remaining resources, it ranks only behind the
Permian and Marcellus in the United States.
    But the play has struggled to showcase its full potential
because of limited pipelines and low oil and gas prices that
left producers highly leveraged and unable to invest in
drilling, McCrea added.
    
    CROWN JEWEL
    Deals last year included U.S. oil major ConocoPhillips
 COP.N  purchasing land from Kelt Exploration  KEL.TO ,
expanding its existing assets, and Canadian Natural Resources
Ltd  CNQ.TO  buying Painted Pony Energy, as big producers took
advantage of smaller companies' vulnerability to bolster their
positions.
    "There's no doubt that the Montney is one of North America's
best shale gas plays," said Jeff Tonken, Birchcliff Energy
 BIR.TO  Chief Executive. "(The deal) shows there's a lot of
interest in the Montney."
    ARC's acquisition of Seven Generations will accelerate
consolidation in the region among producers carrying too much
debt, Tonken said. Some are due for reviews of loans that are
based on their oil and gas reserves, and those inventories are
depleted after many cut capital spending, he said.
    Birchcliff does not see itself as a target and has ample
inventory of its own to grow without acquisitions, Tonken said.
    "We're just minding our own business, making money for our
shareholders."
    The Montney's fortunes could improve if U.S. gas development
declines under Biden, said Stephen Kallir, Vice-President of
Calgary-based BlueSky Equities, which manages shares of Seven
Generations and Tourmaline.
    Shares in both ARC and Seven Generations climbed in Toronto
on Thursday, signalling investor satisfaction with the deal.   
    More deals are likely as producers get larger to save costs,
Kallir said.
    "I think we'll see another headline-grabber this year."
    One of the jewels in ARC's crown is its liquids-rich
Attachie acreage that it has so far left undeveloped. On a
conference call, ARC chief executive Terry Anderson said the
combined company's priority would be repaying debt, but by next
year it could sanction Attachie development.
    Attachie has an estimated 8.9 billion barrels of liquids and
32 trillion cubic feet of gas resources in place, according to a
company presentation.
    "ARC now has a huge cash flow machine that should give it
the confidence and ability to develop Attachie," Raymond James'
McCrea said.

 (Reporting by Nia Williams and Rod Nickel
Editing by Denny Thomas and Lincoln Feast.)
 ((nia.williams@thomsonreuters.com; +1 403 531 1624; Reuters
Messaging: nia.williams.thomsonreuters.com@reuters.net))