Canadian natural gas

[Cardboard]

Some of you may be familiar with what has happened to natural gas prices in Canada:

 

http://www.gasalberta.com/gas-market/market-prices?p=pricing-market.htm

 

If you look at the bottom chart, we have had days in April and May where natural gas delivered to the AECO hub was sold for $0! And the effect has been felt in the long term prices as well.

 

As a result, stock prices of Canadian natural gas producers have been decimated.

 

The key reason is continued growth in the Montney which has some of the most effective wells in the world to develop natural gas while shipment capacity has not kept up. And one of the reason why these wells are so attractive is that they also produce condensate which is in high demand in Canada by oil sands producers to dilute and ship their bitumen into pipelines. It sells for more than light oil and right now is $6 CAD above Edmonton light:

 

https://www.psac.ca/business/gmpfirstenergy/

 

Some producers including Peyto have announced cuts to their 2018 capex which should reduce the current glut. We also have inventories at the bottom end of the 5 year average which will have to be replenished and Alberta will start to consume a fair amount of its own gas as coal power plants are switching permanently to natural gas.

 

And while the LNG situation looked dire on the West Coast with many players having abandonned, we now have the NDP looking to forge alliances in Asia to bring them back on???

 

http://business.financialpost.com/commodities/energy/lngs-unlikely-saviour-b-c-s-ndp-premier-turns-cheerleader-in-asia-trip

 

Anyway, while it won`t be resolved overnight and that some discount to Henry Hub will likely remain, I think that there is a solid opportunity forming up here. All players have been sold very hard so you are able to pick and choose whomever at very low prices.

 

Cardboard

[petec]

Interesting, thanks. Might be a stupid question but what is the NDP?

 

Also can you give a few names worth looking at? I used to know the space quite well but that was a lifetime ago. I have always liked Peyto but that's based largely on the tone of the CEO letters!

[augustabound]

Interesting, thanks. Might be a stupid question but what is the NDP?

 

Our 3rd policital party, the New Democrats.

[Cardboard]

Horgan is the B.C. NDP leader. it is the 2nd party in the province.

 

Essentially, the guy stole power by associating with the Greens (3rd party) would had a few seats to gain a majority over the Liberals who had won the election. This association was based on following the Greens agenda which included stopping the construction of Site "C" hydro dam, blocking the TransMountain pipeline expansion and basically eliminating any LNG plant project on the West Coast. The NDP promised the same things during the election.

 

Maybe that the guy got a home visit from higher powers or his party finally came to grip that the Province needs to do more than attracting people from China to Vancouver real estate but, Site "C" is now going to be completed, TransMountain should proceed and he is now in Asia looking for LNG investors.

 

Regarding interesting natural gas companies BIR and BNP are very cheap and interesting IMO. BXE and CQE are two others that are much cheaper but, also much riskier.

 

However, the entire sector has been trashed so you could look at: PEY, TOU, CR, AAV, PONY and many others.

 

Cardboard

[TBW]

Interesting.

 

I think you can argue this should help pipeline or pipeline servicing companies as well, as this gas needs to go to more markets.  I own MCR, which should do well if TMX is built (same with KML) plus should see further benefits from increased pipeline activity, LNG related or not.

 

Transcanada has talked about expanding their western Alberta pipeline system too.

 

I will look at the producers, but I struggle to understand them with my limited E&P expertise.  Are their other service provider types that you think could also benefit from a reversal in this market?

 

On a separate note, why do you think TMX is going to proceed?  I haven't yet read anything about NDP opposition dropping.  I know KMI is waiting on the judicial appeal before proceeding.  I agree with you that it likely happens, but haven't really read much about political dissent from BC dropping.

[racemize]

I've heard that Peyto is best in class in this space, and if they all got hammered, it seems like that would be the one to consider for those of us that are not experts in the area--any thoughts there?

 

Also, when I started looking, it seems a lot of cash flow comes from the hedges--any simple tricks to figuring out what FCF is without hedging at current prices?  I realize that the idea is that prices will recover (and hence the point of the hedging), but knowing the cash burn helps indicate how long they can survive it seems like. 

[petec]

Thanks all.

 

BNP is dow3n by a factor of 8 from its highs. The others are down by a factor of 3. Is there an obvious reason?

[petec]

Thanks all.

 

BNP is dow3n by a factor of 8 from its highs. The others are down by a factor of 3. Is there an obvious reason?

 

Also what kind of demand might we get from Alberta power, and when? I'm vaguely aware of what's happening there via the Altius thread but not an expert. Are coal plants actually being converted to gas, or is it that new gas plants have to be built?

[StevieV]

I've mentioned elsewhere that I own Peyto and Pony.  They are relatively recent positions.  The risk is that the Canadian natural gas sector is just a bad place to invest.  That risk is not insubstantial.  On the other hand, I think both Peyto and Pony could double from where I bought them in relatively short order, certainly within a year or two.

[Cardboard]

If you want to make money, buy Cequence Energy in Toronto (CQE) at $0.05/share and thank me later!

 

The company has refinanced its $60 million loan with CPPIB a few weeks ago at 5% fixed for 4 years with no principal repayment until maturity. This is a very favorable arrangement and even larger companies could not get such terms or for example see Baytex.

 

At the same time, they raised $8.6 million through a rights offering/flow-through shares. However, unlike most flow-through which are issued at par or above current trading price, these were issued at $0.035/share which was well below current trading price when announced (around $0.10).

 

This seems to have created a very interesting dynamic, hence the opportunity, where holders are selling these for a small profit. There must also be holders who now have a too large position due to the mechanics of the rights offering and lightening up.

 

The upside with CQE is enormous. To trade at equivalent metrics to its peers, it would have to trade at around $0.20/share.

 

However, this does not take into account continued success at Dunvegan which is light oil and where they did hit some of the best wells in Alberta. Two more wells are planned to be drilled by the end of this year. There is also no value attributed for their gas treatment plant which they own 50% with Kanata.

 

And this does not take into account either AECO which is now trading well above $2 due to very positive inventory fundamentals both in Canada and in the U.S. and an earlier start to the winter out in Alberta. Then there is LNG Canada having been approved yesterday which will consume 20% of Canadian gas and more as they expand and more projects go ahead.

 

Cardboard 

[gary17]

 

The upside with CQE is enormous. To trade at equivalent metrics to its peers, it would have to trade at around $0.20/share.

 

Cardboard

where do you get this comparison and on what basis

company has equity value of about $200M mostly in equipment - not gas reserves ? i was quite excited about gas a few years ago but maybe this is outside my area of competency.  but never hurts to learn. 

would appreciate a few more pointers on how you value this type of business.

thanks

[Spekulatius]

Seems to me that Infrastructure is the bottleneck and one should go long Pipeline companies? I own a boatload if ENB, which is exceptionally cheap (imo) and pays you to wait. No need to overthink this and ness with E&P’s. That’s how I look at this. There might’ve good deals to be had in E&P stocks, but it’s hard to pick the winners, imo,

[Cardboard]

Key metrics to look at IMO not in order are:

 

1- Per flowing: EV/boe/d at $13,000. For natural gas weighted producers, around $20,000 - $25,000 per boe/d right now.

2- EV/DACF at 4.0 times. Around 6 times right now.

3- EV/PDP NAV at 1.03 times. Around 1-1.2 times. (Note that nothing is factored into PDP NAV yet for recent Dunvegan wells).

 

I prefer to use EV since it eliminates how a company is financed: through the eyes of an acquirer or private market value.

 

Good news is that CQE is now very well financed and has a ratio of Net debt/FFO of around 3.5 times.

 

If you do a some of the parts on this company: Montney gas, 50% of gas plant, NOL's, Dunvegan light oil, contracted access to Dawn, you will get a much higher value than $0.20/share or peer comparison.

 

Finally, this company has a 50 year reserve life based on 2P at current production rate. This is much higher than most in the 15-20 years range. Birchcliff is another one that score high on that or 35 years.

 

Regarding shipping these guys have full contracted natural gas egress and their light oil and condensates sell for a premium (not at all WCS).

 

Cardboard

[bizaro86]

Do you know off the top of your head - is the egress Tcpl or Alliance? The latter is obviously worth more, although a brief look suggests their production is relatively dry, which I think reduces the premium for getting gas on Alliance.

[petec]

Seems to me that Infrastructure is the bottleneck and one should go long Pipeline companies? I own a boatload if ENB, which is exceptionally cheap (imo) and pays you to wait. No need to overthink this and ness with E&P’s. That’s how I look at this. There might’ve good deals to be had in E&P stocks, but it’s hard to pick the winners, imo,

 

Surely the infrastructure bottleneck is only an opportunity for ENB in as much as they are able deploy a relatively small (relative to the base) amount of additional capital? That’s hardly transformative to profitability. Whereas if additional pipe causes the gas price to (say) double, that is definitely transformative for an E&P.

 

Would you mind sharing how you value ENB?

[Spekulatius]

Seems to me that Infrastructure is the bottleneck and one should go long Pipeline companies? I own a boatload if ENB, which is exceptionally cheap (imo) and pays you to wait. No need to overthink this and ness with E&P’s. That’s how I look at this. There might’ve good deals to be had in E&P stocks, but it’s hard to pick the winners, imo,

 

Surely the infrastructure bottleneck is only an opportunity for ENB in as much as they are able deploy a relatively small (relative to the base) amount of additional capital? That’s hardly transformative to profitability. Whereas if additional pipe causes the gas price to (say) double, that is definitely transformative for an E&P.

 

Would you mind sharing how you value ENB?

 

I value ENB on both EV/EBITDA and more importantly on DCF/share (similar to owners earnings). ENB trades at a 10% DCF yield currently, which is way too cheap, given their ability to growth the dividend in the high single digits (goal is 10% for a couple of years). Their assets have a high moat for the most part and the future cash flows can be estimated with a very high predictability.

 

I think even 8% DCF yield may be cheap given RNB asset quality and  their current growth profile, which gives you a 50% return potential within 2-3  years.

 

Note that ENB is more like a liquid play in Canada and most Ng transmission assets are in the US (from the SE/SEP merger), but the same logic applies.

[petec]

Thanks.

[Cardboard]

"In the third quarter, the Company advanced the start date of approximately 26 mmcf/d of natural gas transportation to December 17, 2017 from April 2018, increasing it total firm service from its Simonette property to AECO of 35 mmcf/d until March 2026. The Company will no longer rely on short term and interruptible service which is expected to improve the Company’s netbacks by approximately $0.20/mcf or $1.20/boe, with all other variables remaining consistent. The cost of this transportation will be reported as transportation expense and the Company expects its sales pricing to be at a premium to AECO based on its heat content.

 

In September 2017 the National Energy Board approved TransCanada Pipelines application for new transportation service from Empress, Alberta to Dawn, Ontario. The Company has contracted to ship 10,850 GJ/d of natural gas to the Dawn hub at a cost of $0.77/GJ for a period of 10 years beginning April 1, 2018. The transportation commitment provides market diversification for approximately 20 percent of its current natural gas production. Historically, pricing at the Dawn hub has been at a premium to AECO. As part of this commitment, the Company entered into a five year contract to transport AECO gas to Empress at an annual cost of approximately $750."

 

I cannot confirm on which system is the 35 mmcf/d to AECO.

 

At Simonette, they have a 200 mmcf/d meter station on TCPL and a 120 mmcf/d on Alliance so they have the option to ship non-contracted volume on both but, no need at the moment.

 

Cardboard

[bizaro86]

If it's going to AECO (which is in Southern Alberta) and then Dawn that is TCPL transportation.  Alliance goes to Chicago. Firm is better than interuptible, but Alliance is better than TCPL because gas is at a premium in the Midwest compared to Canada, although AB gas has been strong lately...