Wednesday, October 31, 2012

Companies buying up cheap gas, not expensive oil sands

Bloomberg has an article about how foreign investors are buying up Canadian gas projects recently, rather than oil sands projects. It notes three of the five biggest energy acquisitions this year have been gas deals, adding to $9.8 billion. The latest example is for ExxonMobil's $2.9 billion acquisition of Celtic Exploration, a gas producer in the Montney and Duvernay.

The apparent reason for this turnaround? LNG plants scheduled to start coming on over the next few years. Gas remains cheap, and bitumen remains expensive. Read on!

The price differential between North American and Asian gas prices has become almost comical. As the article reports, Canadian prices are currently about $3.20 per GJ, while Japan buys LNG for about $16 per GJ. Understandably, North Americans are falling over themselves to start selling in this obviously much better market. The article says 5 LNG projects are planned for BC, and are meant to start coming on-line over the next few years. The people building the LNG plants want to lock up reserves for them to contract for export, and presumably others are betting North American gas prices will rise drastically as these plants come.

I think this has spooked the federal government, and I think that's why they recently surprised everyone by rejecting the acquisition of Progress Energy by Petronas for $5.9 billion. I figure they might have thought a huge natural gas asset was being sold to the Malaysian state owned oil company at a low point in gas prices, and that in a few years it could be worth multiple times what it is now and the feds would look like total chumps for letting the deal go ahead. Ideally, the government is supposed to take a longer term outlook than private companies regarding the value of natural resources. Maybe the Canadian government is being quite savvy with this action, rather than backwards and protectionist as many appear to think. So why did the government let Sinopec buy Daylight Energy last year, or let PetroChina become the soul owner of Athabasca's MacKay river property? Because that was oil, and oil is at historically high prices right now. In my opinion there's a good chance the foreign buyers could end up being the chumps on some of these deals.

Green-lighting the ExxonMobil acquisition a little bit later puts some doubt on this theory, as does the fact that many people seem to think the Petronas deal will go ahead after all. Maybe I'm giving the government too much credit - maybe they just didn't like the idea of yet another Asian state owned energy company scooping up Canadian assets, but were happy with a private American one, even if it is reportedly an Evil Empire.

I know this article was pretty unrelated to the oil sands, but I thought it was too interesting not to talk about a bit. Although I've been saying this (incorrectly, or at least prematurely) for years, I think people should be buying shares in gas companies now, like Encana (which is trading at $22 on the NYSE, compared to its all time high of $94 during 2008, although that was presumably including the Cenovus assets that were spun out and are now worth more than Encana). I think we're at the tail end of a gas price trough roughly analogous to the price of oil during the 90s - irrationally low in hindsight. This has consequences for the oil sands: not only should smart money be investing in cheap gas companies rather than their bloated stocks (according to me), but when the price of gas does equalize with the rest of the world through the new LNG terminals (again according to me), their operations will get much more expensive because of their heavy reliance on natural gas, particularly for SAGD.

1 comment:

  1. This is a great article, way better than all that oil sands stuff!