In a recent report, EY observes that there have been a marked increase in the number of gas divestments taking place in Canada’s oil and gas sector. A number of forces are driving companies to shed assets and rethink their business strategies and portfolio management approach.
Driving these decisions are uncertain natural gas prices, sustained high oil prices, an increase in North American gas production, reduced gas demand from the US, and market access challenges.
According to EY, the majority of analysts agree that North American natural gas prices will continue to remain flat for the next several years. Henry Hub prices have hovered around US$ 4/million Btu – with the exception of an increase during Janaury - March due to cold weather across North America. The forward curve for AECO – the Alberta gas trading benchmark – for gas delivered within Alberta remains in the US$ 3.50 – US$ 4.00 range with no real significant gains in the high price scenario.
The massive gas resource base driven by the shale gas revolution unfolding in North America is in some part responsible for creating this downward pressure on gas prices. Increased well productivity in major plays across the continent is contributing to abundant gas supplies across North America. Marcellus, Horn River, Montenay and Utica are expected to grow 25% of North American supply.
Exacerbating this challenge of increased supply is decreased demand from the US – Canada’s principle export customer. In recent years, the country has increased domestic natural gas production at the expense of imports from Canada. Increased estimated ultimate recovery (EUR) and the discovery of new resource plays in the last five years has led to a resource base in excess of 1000 trillion ft3.
EY explains that abundant North American natural gas resources are spawning the creation of an LNG export industry in both the US and Canada. Export options are emerging on multiple fronts. Canadian companies are already in the process of securing new demand contracts, particularly in LNG. But realising the value of these assets is years away with several obstacles to be overcome in the meantime, including infrastructure constraints, gaining regulatory approval and First Nations support, work force constraints, and complex capital programs where execution challenges abound. In the meantime, Western Canada exports to the US are expected to stabilize in 2014 at an average of 5.5 billion ft3/d.
Canadian producers now face touch decisions in regards to whether to produce less, squeeze more capital and operating costs out of the system to remain profitable, sell assets, adopt a ‘wait and see’ approach’ while trying to maintain licenses, focus on liquids-rich gas, or stop producing all together and shut in wells.
The situation isn’t all doom and gloom. All time low prices for gas reserves are a buyers’ dream for companies with a long term outlook and approach to capital development and execution, bullish expectations for gas price recovery and confidence that LNG in Canada will move forward.
Furthermore, although companies have historically viewed divestments as a sign of distress, it is now being utilized as effective portfolio management. They are now seen as strategic transactions to raise or release capital and realign business objectives. But, too often companies devote inadequate resources to these transactions, potentially leaving money on the table or overlooking other strategic opportunities.
EY emphasises that sellers must be transparent about costs, prepare through and accurate financial statements, and provide sufficient and appropriate information in a timely manner to potential buyers. Buyers themselves face their own unique set of challenges: valuing the assets, performing diligence on the seller’s financial and operating statements, and maintaining and continuously updating their own deal analyses and models.
EY insists that by reviewing any transaction from the perspective of both buyer and seller, executives can avoid surprises, gain a clearer understanding of where value can be created or destroyed and, by following through, make a goo deal even better.
Adapted from a report by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/04092014/canadian-gas-divestments-1232/